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By: Dylan J. Cox, Partner |
Introduction
With every passing year, the expenses plaintiffs incur to prosecute civil claims increase, such that the cost of litigation is now beyond most individuals and many small businesses. Even those who represent themselves must often incur significant expenses to bring their claims to trial, including costs for examination transcripts and independent expert witnesses often necessary to prove the claim. Moreover, if a claim is dismissed, a court will generally require the plaintiff to pay a portion of the defendant’s legal costs, which are often significant. Increasing litigation expenses and costs Judgments have led to legal expense insurance becoming more prevalent.
In Spencer v. Omega[1], an Ontario judge addressed recoveries under a legal expense insurance policy obtained by a lawyer who acted for a plaintiff. The judge found the policy did not permit the plaintiff to recover under the policy for nearly $60,000 the plaintiff owed their lawyer. The insurer was directed to pay the entire $100,000 policy limit to the defendant and the defendant’s insurer, under the defendant’s costs Judgment.
Facts
In 2012, the plaintiff, John Belton, brought a personal injury lawsuit against the defendant, Katie Spencer. Mr. Belton was represented in that lawsuit by Martin & Hillyer Associates (MHA). Before the trial of Mr. Belton’s claim, MHA obtained a legal expense insurance policy from Omega General Insurance, with a $100,000 policy limit.
In 2020, a trial judge dismissed Mr. Belton’s claim, ordering him to pay nearly $470,000 to Ms. Spencer, on account of her legal costs.
MHA claimed that in representing Mr. Belton, they incurred nearly $60,000 in disbursements that Mr. Belton now owed them.
Ms. Spencer and her insurer, Elite Insurance Company, brought an Application seeking among other relief, an Order that they were jointly entitled to the full $100,000 payable under the policy. Initially, MHA argued that the policy limits should first be paid to satisfy the nearly $60,000 in disbursements owing to it. However, MHA later elected to not claim these disbursements under the legal expenses policy, instead choosing to sue Mr. Belton in separate proceedings. For his part, Mr. Belton argued he was entitled to the full $100,000 payable under the legal expense insurance policy, which he could use to pay (or not pay) MHA and/or Ms. Spencer, as he wished.
The Policy
The “policy holder” of the Omega policy was MHA. Omega agreed to pay the “Insured Liability” for “Defendant’s Costs” and “Own Disbursement”, following any unsuccessful outcome (e.g., a dismissal) in any claim litigated by one of MHA’s clients. The policy defined “Defendant’s Costs” to mean litigation costs owed by a “Claimant” to the “Defendant”. There was no dispute that Mr. Belton was a “Claimant” under the Omega policy. The Omega policy defined “Defendant” to not only include any person opposing the Claimant (e.g., Ms. Spencer) but also the insurer for any such opponent.
As for “Own Disbursements”, the Omega policy defined this to mean amounts that MHA incurred on behalf of any Claimant (e.g., Mr. Belton) to advance Mr. Belton’s claims.
Policy Limit to Be Paid Entirely to Spencer and Elite
After summarizing the policy provisions set out above, the judge considered Peter B. Cozzi v. Szot, a 2019 decision in which an Ontario judge found that amounts owing under a legal expense insurance policy were payable solely and directly to a lawyer’s client. The client could then choose whether to use those amounts to discharge his liability to other parties. Mr. Belton relied on Cozzi in support to his claim that he was solely entitled to the $100,000 Omega policy limit, and he could use those funds as he wished.
The judge in Spencer explained that although the Omega policy and the policy in Cozzi both did not expressly address the issue of priority of payments, Cozzi was still distinguishable. First, in Cozzi, the lawyer’s client was the policyholder. In Spencer, the policyholder was MHA, not Mr. Belton.
Second, unlike in Cozzi, the Omega policy indicated that the funds were meant to be used to pay down a client’s legal cost liability to his/her lawyer and/or opponent. The policy made it clear that unlike in Cozzi, the funds were not meant to provide a cash award to an unsuccessful client. Here, the judge relied on the language in the Omega policy requiring Omega to “pay the Insured Liability for Defendant’s Costs and Own Disbursements”.
If MHA was seeking to collect under the Omega policy for the nearly $60,000 owing to MHA, the judge would have ordered the $100,000 policy limit split pro rata between MHA and Ms. Spencer/Elite. However, because MHA was making no claim under the policy, the entire $100,000 would go directly to Ms. Spencer and Elite, to pay down the nearly $470,000 in costs owing to them.
Conclusion
Spencer confirms that as is the case with any insurance policy, when interpreting a legal expense insurance policy, the language used in the policy is critical to deciding competing claims under the policy. Some language will permit a client with liabilities to his/her lawyer and/or opponent to recover the entire limits payable under the legal expense policy, as was the case in Cozzi. The client can then choose to use those limits to negotiate a settlement with his/her lawyer and/or opponent, or he/she may be able to invest those insurance funds into assets that may be exempt from seizure by his/her lawyer and/or opponent. In Spencer, different policy language prevented Mr. Belton from doing just that. He could not access any of the $100,000, which was payable directly to his opponent.
Footnotes
[1] 2025 ONSC 1022
Dylan Cox is a Partner at Theall Group LLP. He maintains a general civil and commercial litigation and alternative dispute resolution practice, specializing in insurance coverage and product liability matters. He has appeared before the Ontario Superior Court of Justice, Ontario Court of Appeal, and the Manitoba Court of King’s Bench, as well as in private arbitrations.
For more information, visit https://theallgroup.com/
Photo courtesy of Pina Messina on Unsplash