Insurance Subrogation in Ontario

The Equitable Right of Subrogation

Subrogation is an equitable doctrine that allows an insurer who has indemnified an insured for a loss caused by a third party to step into the insured's position and pursue the third party for recovery. The doctrine prevents the insured from receiving a double recovery — full indemnity from the insurer plus full recovery from the tortfeasor — and ensures that the responsible party ultimately bears the economic cost of the loss.

The foundational statement of the subrogation principle in Canada comes from Ledingham v Ontario Hospital Services Commission [1975] 1 SCR 332, affirming Lord Cairns' formulation in Castellain v Preston (1883): the insurer is entitled to every right of the assured which can be, or has been exercised, so as to diminish the loss about which the insurer complains. The insurer stands in the shoes of the insured.

Subrogation rights arise automatically upon payment of the loss — the insurer need not take any formal assignment. However, in practice, insurers routinely obtain a signed subrogation receipt or assignment to formalize the right and avoid disputes about whether the insured retains any residual interest in the action.

Statutory Subrogation Under the Insurance Act

Ontario's Insurance Act, R.S.O. 1990, c. I.8 supplements equitable subrogation with statutory provisions specific to different insurance lines.

Property Insurance — Section 148

Section 148 of the Insurance Act provides that on payment of a loss under a property insurance contract, the insurer is subrogated to the rights of the insured against any person responsible for the loss. The insurer may bring an action in the name of the insured or in its own name (where statute permits) to the extent of the indemnity paid.

The statutory right does not enlarge the equitable right — the insurer can recover no more than what the insured could have recovered from the third party, and no more than the insurer actually paid. If the insurer paid only 80% of the loss (e.g., due to co-insurance or a deductible), it is subrogated only to 80% of the insured's rights.

Accident Benefits — SABS and Subrogation

Statutory Accident Benefits under the Statutory Accident Benefits Schedule (O. Reg. 34/10) have a complex relationship with subrogation. Under s. 267.8 of the Insurance Act, an insurer who pays accident benefits to or on behalf of an insured is subrogated to the insured's right of action against a tort defendant to the extent of those benefits paid.

The AB insurer's subrogation rights are exercised through the tort action — the defendant's liability is reduced by the collateral benefits received, and the AB insurer's claim is against the tort defendant's insurer through inter-company arbitration under the Fault Determination Rules and the Direct Compensation — Property Damage regulations.

The Made-Whole Rule (Complete Indemnification)

The most important limitation on insurers' subrogation rights in Ontario is the "made-whole" rule, also called the complete indemnification or full indemnification rule. The principle: where the total recovery from all sources is insufficient to fully indemnify the insured for the total loss, the insured's claim takes priority over the insurer's subrogation claim.

The Supreme Court of Canada affirmed this principle in Somersall v Friedman [2002] 3 SCR 109. The insurer cannot share in a partial recovery until the insured has been made whole — that is, until the insured has received compensation equal to the total loss suffered, including amounts not covered by the insurance policy (deductibles, uninsured losses, non-pecuniary damages).

In practice, the made-whole rule matters most when the third party is judgment-proof, underinsured, or when settlement proceeds are limited. In those situations, any recovery must first go to fill the insured's uncompensated losses before the insurer receives anything.

Parties frequently negotiate around the made-whole rule in settlement discussions, agreeing to split recovery proceeds between the insurer and insured in proportions reflecting their respective interests. Courts have approved such negotiated allocations.

Limitations on the Insurer as Subrogee

The insurer's rights as subrogee are derivative — the insurer can stand in no better position than the insured. This has several important consequences:

Defences Available to the Defendant

The defendant can raise against the subrogating insurer any defence that would have been available against the insured directly — contributory negligence, voluntary assumption of risk, limitation periods, releases, and contractual limitations. The insurer takes the insured's cause of action as it existed at the time of payment, warts and all.

No Action Against the Insured

An insurer cannot subrogate against its own insured. A property insurer who pays for damage caused (even partly) by the insured cannot use subrogation to recover those amounts from the insured. This is a fundamental principle: the insured must not be worse off from the insurer's subrogation exercise than from not having insurance at all.

The issue becomes complex where the insured and the third party are co-insureds under the same policy. Ontario courts have generally held that a co-insured is treated as the insured for subrogation purposes — the insurer cannot subrogate against a co-insured. See T. Eaton Co. v Smith[1978] 2 SCR 749.

Limitation Periods

The insurer's subrogation claim is subject to the same limitation periods applicable to the insured's direct claim — the basic two-year period under the Limitations Act, 2002, s. 4, running from the date of discoverability. The insurer's own discovery date (typically when it paid the claim and learned of the third party's involvement) may differ from the insured's. Ontario courts have generally held that the limitation period runs from the insurer's date of discoverability as subrogee, not the insured's original discovery date.

Waiver of Subrogation

A waiver of subrogation is an agreement — either in the insurance policy itself or in an underlying contract — that the insurer will not exercise subrogation rights against a specified party. Waivers of subrogation are extremely common in:

• Construction contracts — CCDC 2 standard form contracts include mutual waivers between owner, contractor, and subcontractors for losses covered by the project property insurance
• Commercial leases — landlord and tenant waive subrogation rights against each other for insured losses
• Joint venture agreements — co-venturers waive subrogation rights to prevent inter-party claims from disrupting the project
• Equipment leases and service contracts — waiver of subrogation against the counterparty for certain insured losses

The effectiveness of a contractual waiver of subrogation depends on the insurer's agreement. If the underlying contract contains a waiver but the insurance policy does not also contain a corresponding waiver endorsement, the insurer may not be bound — it could argue that the insured agreed to compromise the insurer's rights without authority, potentially breaching the cooperation clause.

Best practice for commercial transactions: ensure the insurance policy contains a blanket waiver of subrogation endorsement (or specific named-party waiver) that matches the contractual waiver. Ontario courts have enforced contractual waivers of subrogation where the insurer was on notice or the policy endorsed the waiver. See Agnew-Surpass Shoe Stores Ltd v Cummer-Yonge Investments Ltd [1976] 2 SCR 221.

Subrogation in Construction Disputes

Construction disputes generate complex subrogation issues. Under the CCDC 2 standard form contract, the owner is required to maintain property insurance covering the work, and all parties — owner, contractor, subcontractors — are named as additional insureds or beneficiaries. The policy includes a mutual waiver of subrogation among all named insureds.

The leading Ontario case is Commonwealth Construction Co. v Imperial Oil Ltd [1978] 1 SCR 317, establishing that subcontractors are entitled to the benefit of the owner's property insurance as unnamed co-insureds where the contractor-subcontractor relationship is within the contemplated insured risk. The insurer cannot subrogate against a co-insured subcontractor.

Post-Commonwealth, the question has shifted to whether particular subcontractors are co-insureds under the policy. Modern CCDC contracts address this explicitly through named insured endorsements and subrogation waiver clauses. Disputes still arise where non-standard contracts are used or where coverage terms are unclear.

Subrogation and Settlements

A critical issue for Ontario insurance counsel: the insured cannot settle with the third party in a manner that prejudices the insurer's subrogation rights without the insurer's consent. If the insured releases the third party before the insurer has recovered its subrogation claim, the insured may be liable to reimburse the insurer for the lost subrogation.

This creates a practical conflict of interest in negotiations: the insured wants a global settlement of all claims (direct and subrogated); the insurer wants to preserve its right to pursue the third party separately or control the settlement to protect its subrogation interest.

Ontario courts have held that the insured can settle claims that are personal and unrelated to the insured loss without implicating the insurer's subrogation rights — the insurer's rights attach only to the claims arising from the loss for which it paid indemnity.

The insurer must be joined or given notice of settlement negotiations involving the insured loss once the insurer has exercised subrogation rights. Failure to give notice can result in the insurer being bound by a settlement it had no opportunity to participate in.

Health and Disability Insurance Subrogation

Subrogation in health and disability insurance is governed by the Insurance Act and the specific policy terms. Publicly funded health care providers — OHIP — have a statutory right of subrogation under the Health Insurance Act, R.S.O. 1990, c. H.6.

Under the Health Insurance Act, the Province of Ontario is subrogated to the rights of a person who has received insured services if those services were required as a result of a tort or breach of contract by a third party. In personal injury litigation, OHIP's subrogation claim for past and future health care costs must be resolved — either by payment or contractual assumption — as part of any global settlement.

Private group benefit plans similarly include subrogation clauses. Employees receiving disability benefits under a group plan who also recover tort damages from a third party must reimburse the plan insurer to the extent of the disability benefits paid, subject to the made-whole rule.

Frequently Asked Questions