Third Parties

• Author: Denis Boivin
• Pages: 578-620

578

CHAPTER 13

THIRD PARTIES

A. INTRODUCTION

There are two parties to any insurance contract: the insurer and the

person or entity named in the 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 principle 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 privity 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 the reasonable expectations of policyholders and insurers.

These departures are the subject matter of this chapter.

In some circumstance s, a third party may acquire r ights or interests

directly from the named insured and essentially buy into the doctrine

of privity of contract. In other circumstances, a third party may enjoy

the benef‌its of an insur ance policy without ever joining the contractual

relationship. In the f‌irst scenario, the newcomer to the agreement is

called an “assignee,” whereas in the second scenario, the recipient of

the benef‌its is called a “third-party benef‌iciary.” 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 with 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 sections deal with the rights and

duties of third-party benef‌iciaries — third parties 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).

B. ASSIGNEES

A voluntary assign ment is a transfer of ownership in property, rights, or

interests that operates with the knowledge and consent of the owner.2

Simply put, under an assignment, the “assignor” transfers something

of value to the “assignee.” In insurance law, the term is used in differ-

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 rightto recover damages from the insurer or from

someone else. In the following paragraphs, we will review the require-

ments and consequences associated 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 than the assignor and so cannot make

a claim either — whether or not this person 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.

INSURANCE LAW580

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 transfer.4

In order for the insured object to remain covered after the transfer,

the assignee must purchase 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 exists at the time of loss.5 In the alternative, the as-

signee must obtain a so-called 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 case involved a motor vehicle liability policy.

In July 1935, the named insured (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 purchase price and undertook to pay the balance in due

course. The assignee did not purchase any 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 arguments: (1) the policy had

been assigned, and (2) in any event, Mr Pope was driving the 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 diff‌iculty 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 the 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].