Third Parties

AuthorDenis Boivin
There are two parties to any in surance contract: the insurer and t he
person or entity named in t he contract as the insured. According to
contract theory, only parties to a contract are bound by its obligations,
and parties to a contract are the only ones who may reap its benef‌its.
This elementary pri nciple is known as privity of contract. However, as
noted by the Supreme Court of Canada on two separate occasions in
the 1990s, the doctrine of priv ity is not intractable.1 In fact, in the f‌ield
of insurance law, privity of contract is subject to many statutory and
common law exceptions that are designed to promote justice, while
safeguarding t he reasonable expectations of policyholders and in surers.
These departures are t he subject matter of this chapter.
In some circumstance s, a third party may acquire r ights or interests
directly from the named i nsured and essentia lly buy into the doctrine
of privity of contract. In other circumstances, a third par ty may enjoy
the benef‌its of an insur ance policy without ever joining the contractual
relationship. In the f‌irst scenar io, the newcomer to the agreement is
called an “assignee,” whereas in the second scenario, the recipient of
the benef‌its is cal led a “third-party benef‌iciar y.” The f‌irst four sections
1 London Drugs Lt d v Kuehne & Nagel International Ltd, [1992] 3 SCR 299 [London
Drugs]; Fraser Rive r Pile & Dredge Ltd v Can-Dive Services Ltd, [1999] 3 SCR 108
[Fraser River].
Third Partie s 579
of this chapter deal w ith assignments — those that occur voluntar-
ily (Sections B and C) and those that occur by operation of the law
(Sections D and E). The last three sect ions deal with the rights and
duties of t hird-party benef‌iciar ies — third partie s mentioned in the
contract by name or designation (Sections F and G) and those who are
not specif‌ically mentioned, but have a legal claim or judgment against
the insured (Section H).
A voluntary assign ment is a transfer of ownership in property, rights, or
interests that operate s with the knowledge and consent of the owner.2
Simply put, under an assignment, the “assig nor” transfers something
of value to the “assignee.” In insurance law, the term is used in d iffer-
ent ways, depending on the subject matter of the alleged assignment.
In particular, there are four things that a policyholder may attempt to
transfer to a third party: (1) the object covered by the insuring agree-
ment, (2) the insurance policy itself, (3) the right to recover benef‌its under
the policy, and (4) the right to recover damages from the insurer or from
someone else. In the following paragraphs, we will review the require-
ments and consequences ass ociated with each type of transaction.
1) Assignment of the Object
Whether it is a sale or a gift, an assignment of the subject matter in-
sured has straightforward implications for both the assignor (that is,
the named insured) and the assignee. For all intents and purposes, an
absolute assignment of the subject matter puts an end to the insurance
contract. The insured no longer has an insurable interest vis-à-vis the
object and thus cannot make a clai m for loss or dam ages sust ained after
the transfer. As noted in Chapter 4, with respect to indemnity insur-
ance, the relevant time for determining the existence of an insurable
interest is the time of loss, not the time of contract formation.3 The as-
signee is not in a better position tha n the assignor and so cannot make
a claim either — whether or not this per son provided consideration for
2 See, generally, Craig Bro wn, Insurance Law in Canada, 7th ed (Toronto: Carswell,
2010) ch 15 at 1–7.
3 See Chapter 4, Section C(3)(e). With res pect to non-indemnity insur ance, the
subject matter in sured is typically a p erson — something that ca nnot be the
object of an assig nment.
the transfer. Indeed, as noted in Rayner v Preston, an insurance con-
tract is a personal contract between the insurer and the policyholder;
as such, the contract does not automatically follow the subject matter
insured in the event of a tra nsfer.4
In order for the insured object to remain covered after the transfer,
the assignee must purcha se insurance — ideally, prior to the trans-
action in order to avoid any gap in coverage. Subject to the rules of
disclosure, insuring future property is not problematic as long as the
insurable interest exi sts at the time of loss.5 In the alternative, the as-
signee must obtain a so-c alled assignment of the policy with the con-
sent of the insurer, a process known as “novation.” Failure to adopt
either alternative leaves the assignee without coverage.
Consider, for example, Peters v General Accident Fire & Life Assur-
ance Corporation.6 This c ase involved a motor vehicle liability policy.
In July 1935, the named in sured (Mr Coomber) sold his automobile for
£10 to a third person (Mr Pope). The insured had paid the premiums
in full until the end of September. He handed over his policy, vehicle
registration, and an application for a new policy. In return, Mr Pope
paid half the purcha se price and undertook to pay the balance in due
course. The assignee did not purchase a ny insurance and, at the begin-
ning of September, he injured another person in an accident. After the
accident, Mr Pope paid the balance of £5 to Mr Coomber. The following
year, the injured person obtained a judgment totalling £504 against
Mr Pope and brought an action to recover this sum from the insurance
company that issued the policy to Mr Coomber, invoking the statutory
right of action discussed in Section H(2), below in this chapter. At trial,
this action was dismissed.
On appeal, the claimant raised two argument s: (1) the policy had
been assigned, and (2) in any event, Mr Pope was driving t he auto-
mobile with the consent of the named insured, within the meaning
of the policy’s liability coverage. With respect to the f‌irst point, the
Court of Appeal had no diff‌icult y concluding that this contract was
not assignable at the volition of the insured. The insured risk was fun-
damentally different, depending on who owned the vehicle; thus, a
new contracting party could not be imposed upon the insurer without
its assent. The answer to t he second argument, according to Wilfred
Green MR, was equally “short and clear”: on the date of the accident,
4 Rayner v Preston (1881), 18 Ch D 1 (CA). This case is r eviewed in Chapter 11,
Section B(1).
5 See Chapter 4, Section C(3)(e).
6 [1938] 2 All ER 267 (CA) [Peters].

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