By David J. Smagata
Vice President Claims, Chief Legal Officer
In Peter B. Cozzi Professional Corporation v. Szot, CanLII - 2019 ONSC 1274 (CanLII)
, the court examined whether a priority of payment can be sought by a third party.
Quoc Nguyen, through his litigation guardian, was represented by Peter Cozzi with respect to a civil action against Jerzy Szot for injuries Mr. Nguyen sustained in a motor vehicle accident. In the civil action, Mr. Szot was found liable for the accident; however, the damages award did not exceed the statutory deductible, and Justice Archibald found that Mr. Nguyen’s injuries did not meet the statutory threshold. Mr. Nguyen was ordered to pay $161,790 in legal costs to Mr. Szot.
Mr. Nguyen had acquired a DAS ATE policy, which provided $100,000 in coverage for adverse costs and for disbursements incurred on his behalf. Following submission of the claim to DAS, $100,000 was paid to Mr. Nguyen’s lawyer in trust, in accordance with the policy.
Applications for Direction
Mr. Szot’s automobile insurer brought an application seeking priority of payment of the ATE insurance proceeds for the $161,790 in legal costs, over payment of the plaintiff’s disbursements. Mr. Cozzi brought an application to confirm that the written direction made by Mr. Nguyen directed Mr. Cozzi to pay the plaintiff’s disbursements first.
In order to determine entitlement, the Court reviewed agreements between the parties, including the policy wordings, the Contingency Fee Agreement (CFA), and the written direction regarding payment.
Because of the specific facts of this case, which include Mr. Nguyen having been under a disability at the time of signing the CFA, the Court found the CFA to be defective and, as a result, invalid. This consequently rendered the direction for payment void and unenforceable.
DAS had advised the Court that, in the event of a finding that the CFA or direction were invalid, it would not seek the return of the insurance proceeds, given the circumstances of Mr. Nguyen’s incapacity.
The court found that Mr. Szot’s automobile insurer had no legal basis for the proceeds under the ATE policy. In her finding, Justice Nishikawa found the following:
- the ATE policy is between DAS and Mr. Nguyen;
- there is no issue of priority of payment because the only beneficiary of the ATE policy was the insured – Mr. Nguyen;
- the ATE policy contained no ambiguity in respect to payment of costs and disbursements, as it clearly states the policy responds to both;
- a claim by a non-party against DAS, under sections 132 and 258 of the Insurance Act, was not available in the circumstances with respect to the ATE policy;
Justice Nishikawa found that DAS’s payment of the insurance proceeds to Mr. Cozzi, in trust, was not a breach of its duty of good faith, as alleged by Mr. Szot’s automobile insurer. DAS had met its obligations, under the terms of the ATE policy.
The Court found that Mr. Nguyen, as the only beneficiary to the policy, is the only person entitled to the insurance proceeds, and has the right to determine how the proceeds are to be used. Due to Mr. Nguyen’s disability, Justice Nishikawa ordered that the insurance proceeds remain in the trust account, until the issue was addressed at a subsequent date before the Court.
The Court distinguished prior decisions regarding security for costs motions. Justice Nishikawa noted such decisions did not create an entitlement on the part of an adverse party to the policyholder’s insurance proceeds. Rather, one would need to look at the specific policy wordings.
Takeaways from this Decision:
- The insured plaintiff is the only beneficiary to the ATE policy. Under the DAS policy the plaintiff is the named beneficiary to the policy.
- If a DAS ATE policy is to be used in lieu of payment into court for security for costs, an endorsement would be added to the policy, naming the third party as an insured and stating they have priority of payment of insurance proceeds.
- It is up to the insured plaintiff to decide how the ATE insurance proceeds are to be paid, there is no priority of payment.
- This does not rule out an agreement between the insured and their counsel that creates priority of payment for disbursements over adverse costs, whether part of the CFA or a written direction. However, as the Court indicated, such documents must be clear, unambiguous, and completed appropriately.
- In the absence of specific wording within the policy to the contrary, neither the defendant nor their insurer has a legal basis to assert a claim to the ATE insurance proceeds or priority of payment.
- It is important to ensure that CFA is drafted in a manner that is compliant with the Solicitors Act.