Forestex Management Corp. v. Lloyd's, 2004 FC 1303

Date: 20040922

Docket: T-1287-02

Citation: 2004 FC 1303

BETWEEN:

                                         FORESTEX MANAGEMENT CORP. and

                                           J.M.C. FOREST MAINTENANCE LTD.

                                                                                                                                            Plaintiffs

                                                                           and

                  MR. DORNOCH ON BEHALF OF UNDERWRITERS AT LLOYD'S,

                                  MEMBERS OF LLOYD'S, LONDON, ENGLAND,

                        CANADIAN NORTHERN SHIELD INSURANCE COMPANY

                             and COMMERCIAL UNION ASSURANCE COMPANY

                                                                                                                                      Defendants

                                                        REASONS FOR ORDER

HARGRAVE P.

PROLOGUE

[1]                 Many years ago, when small boys wore suspenders and ships had gender, my father's friend, a marine engineer, came by for usual Saturday morning coffee. He asked if I wished to see an interesting vessel at a nearby shipyard. She was about 100 feet in length and narrow, with two large 12-cylinder diesel engines. My father's friend showed me a cabin with a diagonal row of holes in the lining: he hold me they were machine gun bullet holes and that he knew for certain she had been a rum runner, owned by Al Capone.

[2]                 The vessel was built and registered in Nova Scotia in 1930, schooner rigged and powered by a modest 6-cylinder engine, in keeping with fishing vessels of her type. In 1931 the vessel was registered foreign in Newfoundland. Somewhere along the way she was re-powered, perhaps in Newfoundland, where some of the locals being in the trade had an understanding of such matters, with the two 12-cylinder diesel engines, a fact that various government surveyors, over the years, never felt it necessary to note in their certificates of survey: perfect cover for a rum runner.

[3]                 Following the end of prohibition the vessel was transferred to the Vancouver Shipping Registry. In about 1945 the vessel was purchased by Robert Webb, a marine surveyor who, on 18 October 1945 wrote, in part, to the registrar of Ships in Vancouver:

Diesel fuel consumption was not a large concern in the rum running trade.

[4]                 The vessel, renamed Texada, grounded and became a constructive total loss in a passage in the Queen Charlotte Islands. The British Columbia Pilot, Volume II, first edition, 1930, the year she was built, describes the passage as one which "... cannot be recommended as a passage for any craft larger than [an open] ... boat or canoe.".

[5]                 There is more to this tale, but it is time for some relevant facts by which to deal with the present motion to strike out the Statement of Claim.

BACKGROUND

[6]                 Following the grounding of the Texada on 4 August 2000 in the Queen Charlotte Islands (the vessel subsequently became a constructive total loss) owners gave notice of the casualty to underwriters on 8 August, with underwriters subsequently denying the claim because they believed the Texada to have been outside her trading limits: underwriters advised the Plaintiffs to act as if they were prudent uninsureds.

[7]                 Just short of the anniversary of the grounding, on 3 August 2001, the owners, as plaintiffs, sued on the hull and machinery policy in an earlier action, T-1421-01. That action, although not absolutely clear on the pleadings, is for both the insured value of the Texada and also, under the policy, for costs associated with salvage services, wreck removal and pollution control. The Statement of Claim was amended 7 November 2001 to include an additional underwriter. I will refer to this initial action as the action on the policy. Underwriter filed their defence on 8 November 2001, relying upon breach of the trading limits, referred to as a trading warranty in the policy, the loss occurring, in the view of underwriters, in an excluded area north of Cape Calvert and beyond "inside passage waters".

[8]                 The action on the policy, following a 29 October 2002 Notice of Status Review, was dismissed for delay on 9 January 2003.

[9]                 Owners appealed the dismissal for delay on 7 February 2003, but failed to serve the Notice of Appeal on the respondents. On 31 October 2003 the owners applied, ex parte, to the Federal Court of Appeal for an extension of time within which to serve the notice of appeal. By Order of 6 November 2003 the Federal Court of Appeal refused to deal with the motion on ex parte basis, adjourning the motion so that the owners might serve the respondent underwriters. There was no further activity on the part of the appellant owners, despite follow-up by a registry officer. The Federal Court of Appeal's Order of 13 January 2004 recited some of this, concluding: "The appeal is dismissed for undue delay, with costs in favour of the respondents.". Thus the action on the policy remained dismissed for delay, but without a decision on the merit of the claim.

[10]            The decision of the Supreme Court of Canada in Whiten v. Pilot Insurance Co., [2002] 1 S.C.R. 595 has provided some impetus to insureds to sue both on the policy and for breach of the duty of good faith, which the Supreme Court viewed as an implied term under insurance contracts. Sometimes both causes of action are contained in one statement of claim, with the good faith aspect subsequently being bifurcated and stayed pending the determination of coverage and at other times there may be a separate actions. The Plaintiffs commenced this present action, T-1287-02, which I will call the bad faith action, on 9 August 2002. The Statement of Claim in both the action on the policy and in the bad faith action are parallel to a substantial degree, with the pleading in the bad faith action going on to alleged a failure on the part of underwriter to act in good faith. Here the catalogue of perceived failures includes taking the position that the Texada went beyond her trading limits, a failure to clearly define the trading limits, failing to investigate and failing to send a marine surveyor to the Queen Charlotte Islands to investigate, all sounding in general, special, aggravated and punitive damages.

CONSIDERATION

[11]            The Defendants move to strike out the bad faith action on several grounds, however because the Defendants have pleaded to the Statement of Claim without reservation I need only consider whether there is a reasonable cause of action: see Proctor and Gamble Co. v. Nabisco Brands Ltd. (1985), 62 N.R. 364 (F.C.A.) at 366.

[12]            In testing for a reasonable cause of action I may not look at affidavit material. However there is no bar of which I am aware preventing me from considering the record in another related proceeding, involving the same parties and the same incident. If a court could not look at another proceeding, on a motion to strike out or dismiss, the doctrine of res judicata would become meaningless. Thus I have considered the outcome in the action on the policy, both in the Trial Division and in the Court of Appeal.

[13]            The thrust of the Defendants' motion to strike out the Statement of Claim is that if there is no initial finding of coverage under the policy, there is no foundation for a claim of bad faith against underwriters and thus no cause of action.

[14]            In the present instance, despite able argument by counsel for the Plaintiffs, I need not consider the scope, clarity and effect of the trading limits provision in the policy: a consideration of the meaning of the trading limits would be a substantive matter for a trial judge to determine, perhaps with the assistance of experts. Rather, I must first decide whether there is or can be any foundation for the bad faith action, given that coverage has been denied and the action on the policy dismissed for delay. Here counsel for the Plaintiffs submit that the bad faith action is a separate cause of action and can stand alone in the absence of any underlying insurance coverage. If a bad faith action requires an underlying valid insurance claim, this leads to a second issue, the effect of the dismissal for delay a consideration of the running of time. Here I have in mind Lord Denning's reasoning and the case law he sets out in Hart v. Hall & Pickles Ltd. [1969] 1 Q.B. 405 (C.A.). There he pointed out that a procedural interlocutory order does not affect substantive rights; it is not a final decision; and "[the] plaintiff can start another action for the same cause, so long as he does so within the period allowed by the Statute of Limitations: ..." (page 411).

Foundation for the Bad Faith Action

[15]            It is trite law that a contract of insurance is a contract of utmost good faith. What is more interesting and currently relevant is the use of the concept of breach of good faith by an underwriter as a cause of action and here I note the observation of Gordon G. Hilliker, on Insurance Bad Faith, 1^st edition (Toronto: LexisNexis Canada, 2004) at page 2, that there has been little analysis of the area.

[16]            In the present instance a number of the principles to which counsel referred have their genesis in American law, which includes sensible analysis and conclusions which are reflected, but sometimes not overly clearly, in the Canadian law cited by the counsel. A useful American case is Bartlett v. John Hancock Mutual Life Insurance Company 538 A.2d 997 ®.1. 1988), a decision of the Supreme Court of Rhode Island: Bartlett involved production of documents, but provides some sound insight into principles of the American law of bad faith on the part of insurers, principles which are useful in the present instance.

[17]            To begin, the American law requires that the insured must establish a breach of duty under the insurance contract before there is a cause of action against an underwriter for bad faith:

In this passage Justice Shea makes it clear both that there is no cause of action for bad faith until the insured establishes a breach of duty by the insurer under the policy and that there cannot be tort liability for bad faith if there is a valid question of coverage. At the same page of Bartlett Justice Shea referred to National Savings Life Insurance Co. v. Dutton, 419 So. 2d 1357 (Ala. 1982), a decision of the Supreme Court of Alabama, therein referring to National Security Fire & Casualty Co. v. Bowen, 417 So.2d 179 (Ala. 1982) for the proposition that:

The above passage goes on to set out additional requirements, all burdens on the insured which, while interesting are not relevant in the present instance. In Bartlett, at page 1000, the Supreme Court of Rhoda Island summed up the area referring to Dutton:

Here Justice Shea, in Bartlett, accepts the concept that the onus is on the plaintiff to establish that there is no factual or legal defence to the insurance claim itself.

[18]            As I observed earlier, the Supreme Court in Whiten looked upon good faith as an implied term in an insurance contract. In Whiten the case was presented and accepted by the Supreme Court of Canada as a claim in contract, with the majority of the court accepting the analysis of the contractual nature of the claim, however the Supreme Court went on to point out that the good faith obligation was separate and apart from the obligation to pay under policy. In effect, and this is a contractual approach, there are two distinct causes of action, one upon the policy and the other upon an implied term of the contract contained in policy.

[19]            That there is a second line of earlier case law in Canada which looks upon the action for breach of the duty of good faith as an action in tort arising out of the relationship of insured and insurer: see for example Burdan v. Progressive Casualty Insurance Co. (1993), 20 C.C.L.I. (2d) 126 (Ont. General Div.), Norris v. Lloyd's of London (1998), 8 C.C.L.I. (3^rd) 216 (N.B. C.A.), and Spiers v. Zurich Insurance Co. (1999), 45 O.R. (3^rd) 726 (Ont. S.C.J.). However there is clearly a need for a foundation for any bad faith action against underwriters and this differs not as between a contractual approach and a tort approach. Under the former approach, if there is no contractual liability under the policy there is no foundation for an implied contractual claim for breach of good faith; and under the latter approach, if there is no contractual liability under the policy by reason of a failure of the insurance brought about by a breach of the trading warranty by the insured, there can scarcely be a relationship between insured and insurer sufficient to support a duty owed in tort on the part of underwriters to make expenditures in the present action, including on-site surveyor's assistance, pollution abatement, salvage, wreck removal and the like, sounding in various categories of damages.

[20]            At this point it is useful to refer to various Canadian cases which adopt a view parallel to that in Bartlett (supra), that there can no bad faith cause of action unless there is an obligation under the contract insurance itself. Wonderful Ventures Ltd. v. Maylam (2001) 91 B.C.L.R. (3d) 319 (B.C.S.C.) is a decision in which Justice Garson relied upon Bartlett (supra). Justice Garson went on to point out, in the context of severance of the claim under the policy, from the bad faith claim, that if the insured " ... Wonderful Ventures does not succeed on the [insurance] contract claim, there will be no subsequent trial on the bad faith claim." (paragraph 34), a clear finding that a bad faith claim requires the underpinning of a valid claim on an insurance policy before it can become a cause of action.

[21]            A case relying upon and to the same effect as Wonderful Ventures is Sovereign General Insurance Co. v. Tanar Industries Ltd., [2002] 3 W.W.R. 340 (Alta. Q.B.), a decision involving production of documents by American Home Assurance Company bearing upon the subsidiary bad faith claim, which were privileged under the action on various insurance bonds. Justice Clackson followed both the American practice and Wonderful Ventures, holding at paragraphs 53 and 54 that although privilege might be maintained in relation to the contractual claim, the privileged material need not be produced until the contractual claim had been decided, that is if decided in favour of the defendants, in which case there would be no privilege in relation to the bad faith claim.

[22]            Wonderful Ventures was also followed in Sanders v. Clarica Life Insurance Co. (2003), 30 C.P.C. (5^th) 371 (B.C.S.C.), a 14 March 2003 decision in which Justice Hutchinson referred to Lawrence v. Insurance Corp. of British Columbia (2001), 96 B.C.L.R. (3d) 375 (B.C.S.C.) for the proposition that if the two claims, one on the policy and the other as to bad faith, remained joined together and if the plaintiff failed on the claim under the policy, the bad faith action could not succeed (paragraph 38 of Lawrence).

[23]            Several other passages from Lawrence (supra) are pertinent:

Justice Taylor, in the Lawrence case, commented upon the nature of the bad faith claim:

Justice Taylor, went on to reiterate that if the plaintiff did not succeed on her action under the insurance policy the bad faith action could not succeed (paragraph 38) and more particularly:

[24]            While counsel for the Plaintiffs correctly points out that the bad faith claim is a separate cause of action, there is nothing in the case law to which I have been referred which would allow the present Plaintiffs to maintain their bad faith action unless there is a valid claim pursuant to and liability arising out of the policy. The effect of the case law to which I have been referred, in the present instance, is that there must be a valid and favourably decided action on the policy before the ongoing bad faith claim will crystalize so that it may be pursued.

Effect of Dismissal for Delay

[25]            I now turn to the question of whether the action on the policy is completely defunct, for it was not terminated on its merits, but rather for delay, with the Federal Court of Appeal dismissing an application for an extension of time within which to appeal the initial dismissal. Thus we have dismissal for undue delay in prosecuting an action, an interlocutory determination. Here I must keep in mind a caution, as to the effect of such determinations, for example as set out in Kok Hoong v. Leong Cheong Kweng Mines Ltd., [1964] AC 993, 1 All E.R. 300 (P.C.), a decision of the Privy Council. There, at page 1012, Viscount Radcliffe, writing for the Privy Council observed that default judgements may be capable of giving rise to estoppel, however they should always be scrutinised with extreme care in order to ascertain the bare essence of what has been decided and that such decisions "... can estop only for what must 'necessarily and with complete precision' have been thereby determined.". This statement of the law as to res judicata and default judgements was referred to in Pople v. Evans [1969] 2 Ch. 255, [1968] 2 All E.R. 743 (Ch.D.) in which, after examining a number of decisions to which the principle in Leong Cheong Kweng Mines Ltd. was applicable, determined that res judicata could not be founded upon dismissal for want of prosecution: see pages 268 and 269.

[26]            I shall now return to Hart v. Hall & Pickles Ltd. (supra), in which Lord Denning considered the situation in which a claim had been dismissed for want of prosecution. At page 411 he observed:

[27]            In the present instance and leaving aside for the moment the time bar arguments of the Defendants, there is no estoppel which would bar the Plaintiffs from re-instituting their action on the policy as a basis upon which they might, following a successful conclusion, crystallise and pursue their bad faith cause of action.

Time Bar

[28]            I now turn to whether or not there is an absolutely certain time bar to an action on the policy which would plainly and obviously prevent the Plaintiffs from re-establishing an action for insurance proceeds under the hull and machinery policy underwritten by the Defendants.

[29]            While policy may contain a one-year time for suit bar, running from the date of denial of the claim, neither the policy nor that provision are before me. However counsel for the Defendants refers to section 39 of the Federal Courts Act which imports provincial statutory limitation provisions. Section 22(1) of the Insurance Act, R.S.B.C. 1996, c. 226 provides for a one-year limitation running from the time at which the insured furnishes "reasonably sufficient proof of a loss or claim under the contract and not after.". However I am not convinced that the British Columbia Insurance Act extends or ought to be extended to marine insurance, a federal undertaking.

[30]            Counsel for the Plaintiffs quite correctly points out that the federal Marine Insurance Act, 1993, c. 22 contains no time limit for bringing an application to determine coverage.

[31]            Counsel for the Defendants refers to section 3(2) of the British Columbia Limitation Act, R.S.B.C. 1996, c. 226 which provides that:

[32]            I do not accept the submissions of counsel for the Plaintiffs that the applicable limitation ought to be open or that, absent a limitation in the Marine Insurance Act, a limitation on an action on marine insurance policy ought not to be governed by a possibly different limitation period in each province. A two-year limitation, imported from the British Columbia Limitation Act by Federal Courts Act section 39, is appropriate in this instance. But this limitation of two years does not end the matter, even though the accident to the Texada took place some four years ago. A limitation is a defence, for the defendants to invoke when the merits of the case are considered and ought not to be applied on a motion to strike out for want of a cause of action: see BMG Music Canada Inc. v. Vogiatzakis (1996), 67 C.P.R. (3d) 27 (F.C.T.D.) at 33 and following, Watt v. Canada (Transport Canada), [1998] F.C.J. No. 49, a 21 January 1998 Federal Court of Appeal action, A-448-97, leave to appeal to the Supreme Court of Canada refused (1998), 231 N.R. 396 (note) (S.C.C.), and Kibale v. Canada (1990), 123 N.R. 153 (F.C.A.). This is all the more the situation when it is possible to add a cause of action to an existing action after time has run, so long as the new cause of action arises out of substantially the same facts as an existing application brought in a timely manner: in such a situation amendment to add a new cause of action has been allowed: see Fox Lake Indian Band v. Crowther & Partners Ltd., [2003] 1 F.C. 197 (F.C.T.D.) at 212 ff.

CONCLUSION

[33]            To dismiss for want of a cause of action it must be plain, obvious and beyond doubt that the action cannot succeed. Here, an appropriate amendment, if granted, could allow the Plaintiffs to continue, although this is not to say that the Plaintiffs will succeed, for an action on the insurance policy may well be difficult in view of the trading limit warranty contained in the policy.

[34]            In this instance the bad faith action of 9 August 2002 was brought within two years of the denial of coverage, which took place on 10 August 2000. Because of the possibility of amendment of the present bad faith action, to add a supporting cause of action claiming on the policy, I am unable to say, even though there is at this time no existing action on the policy, on which to found the bad faith cause of action, that the bad faith action, T-1287-02, plainly, obviously and beyond doubt cannot succeed. This is so, even though the present state of affairs may seem vexatious or frivolous. However, as I have said, grounds for striking out, other than for want of a reasonable cause of action, are not available as the Defendants have filed the defence, and have not in the defence excepted or pleaded any of the usual grounds for striking out and are thus barred from utilizing allegations of a frivolous or immaterial action.

[35]            The motion is dismissed. As to costs, even though the Defendants have not succeeded, the general failure of the Plaintiffs to pursue this action in a diligent manner is a reason to deprive them of their costs. Costs shall be in the cause.

[36]            To move matters along, the Plaintiffs shall file a motion to amend their Statement of Claim within 30 days, returnable in not less than 14 days but within 21 days of filing, failing which the present action shall be and be deemed dismissed for delay.

(Sgd.) "John A. Hargrave"

                                                                                          Prothonotary

Vancouver, British Columbia

22 September 2004

                                                             FEDERAL COURT

                           NAMES OF COUNSEL AND SOLICITORS OF RECORD

DOCKET:                                         T-1287-02

STYLE OF CAUSE:                       Forestex Management Corp. et al v. Mr. Dornoch on Behalf of Underwriters at Lloyd's, Members of Lloyd's, London, England et al.

DATE OF HEARING:                     24 June 2004

REASONS FOR ORDER:            Hargrave P.

DATED:                                           22 September 2004

APPEARANCES:                         

SOLICITORS OF RECORD: