Defending Intermediaries

The Accidental Defendant

By John D. Strung

Some of you may remember the movie "The Accidental Tourist" starring William Hurt and Geena Davis, or perhaps have read the book by the same name. The character played by William Hurt was a writer who wrote travel books for business travelers who would have rather stayed home. They were people who were tourists despite themselves. They didn't want to be tourists, shouldn't have been tourists, and shouldn't have been treated as tourists.

Over the last few years a large part of my practice has been defending "intermediaries", people like real estate agents and appraisers, insurance agents (both general and life) and insurance adjusters. Many of them fall into the category that I call "accidental defendants". They didn't want to be defendants, they shouldn't have been defendants, and if they are going to be defended effectively and efficiently, they should be defended differently from other defendants.

About 75% of the intermediaries which our firm is called upon to defend have done nothing wrong. They are dragged into a suit between a vendor and a purchaser (in the case of real estate intermediaries) or a suit between an insured and an insurer (in the case of insurance intermediaries). The same thing can happen with other intermediaries. Lawyers, for instance, get dragged into suits between clients, salespersons into suits between customers and manufacturers. They are often in these law suits either because the plaintiff's lawyer has sued everyone in sight out of an abundance of caution, out of a hope by the plaintiff's solicitor that having a sufficient number of deep pockets in the law suit will encourage settlement, for discovery purposes, or to access the intermediary's file.

The remaining 25% of the intermediaries fall into one of two categories. In the first category, there is an arguable issue as to the intermediary's negligence or fault. In the second category, the intermediary has done something truly awful and there is no hope on liability.

Defending the "Accidental Defendant"

Those of you who write intermediaries' errors and omissions insurance will know that, compared to most other types of insurance, the defence costs for this type of coverage can be disproportionately high compared to the amounts insurers are called upon to pay for damages. As a result, defence counsel can do the insurer a great service if they can reduce defence costs by extricating the insured from the law suit early in the game or by positioning the insured to recover substantial costs when it is all over.

In order to do this, it is essential to do a very thorough initial investigation to determine the facts and make a quick assessment as to which of the three categories the intermediary falls -- whether he or she is one of the "accidental defendants", whether the case falls into the category of one with a genuine issue of liability, or whether liability is a lost cause. If the determination is made that this is a case of an "accidental defendant", defence counsel should take a very aggressive posture right from the beginning. To this end, I recommend the following steps:

1. Immediately upon receipt of the file, make sure a proper investigation has been done and meet with the insured to establish the factual background. It is particularly important to make sure that you have the client's entire original file and it is often a good idea to visit the client in his or her office to make sure that you are given the entire file.
2. If the file appears to be one in which there is no real liability on the insured, obtain instructions to make a time limited offer to accept a dismissal without costs.
3. Serve the offer on other counsel together with a detailed explanation of why the claim cannot succeed against your client and copies of any applicable case law. Make it clear that the offer to go out without costs is time limited and that you will insist on your costs if the matter proceeds. Include a copy of McCullough v. Bursey (1985), 25 O.R. (3d) 655 and Shier v. Fium (1991), 6 O.R. (3d) 759 and point out that according to these cases, you may be entitled to solicitor and client costs if the plaintiff fails to accept your offer at this point and is ultimately unsuccessful.
4. If you are unable to persuade other counsel to agree to a dismissal, you should look very carefully at whether or not your case is strong enough that you can succeed on a motion for summary judgment. Judges are becoming more and more willing to grant such motions. In the last year or so, we have been able to dispose of a number of cases by motions for summary judgment at an early stage of the litigation at a considerable cost saving to the insurer. (See for instance Dynes v. York Region Board of Education et al [1995] O.J. No. 3398 (Gen. Div.), in which we were successful in extricating our client before discoveries. I understand the action is still proceeding today against at least some of the other parties).

Defending Where There is a Real Issue of Liability

Even in the cases where there is a real issue of liability, or even worse, where the intermediary clearly has been negligent, it is often possible to raise a successful defence. Defence counsel must keep in mind that intermediaries are in a different position from the principal litigants (the vendor and purchaser, or the insurer and insured). In the first place, defence counsel should look very carefully at the relationship between the insured intermediary and the plaintiff. It may be that, although the insured was negligent, the insured owed no duty to the plaintiff and can be defended successfully on that basis. (See for instance Hamilton v. Chris Marion Holdings, [1981] I.L.R. 1-1398 (Ont. H.C.) and Sulzinger v. Alexander [1972] 1 O.R. 720 (H.C.) , where an insured sued an insurance adjuster and the court held that, since the insurance adjuster was the agent of the insurer, he owed no duty to the insured, or 673592 v. First Canadian Realty, (unreported decision July 6, 1995 of Coo, J. Ontario Court General Division - Court File #93-CQ-45463/93) where it was held that the agency relationship had expired before the events complained of took place.)

Cases against intermediaries, more often than not, are framed as cases for negligent misrepresentation. Even if the insured did negligently misrepresent something, a successful defence can still be mounted if the plaintiff cannot prove one of the other elements of the tort of negligent misrepresentation, for instance, that the plaintiff reasonably relied on the misrepresentation to his or her detriment. (See for example Peoples' Trust Co. v. Colliers Macaulay Nicholls Inc. [1995] O.J. No. 1651 (Gen. Div.) or Todd v. Haslhofer (1983), 41 O.R. (2d) 409 (H.C.))

It is even more important from the standpoint of defending intermediaries to realize that the measure of damages against an intermediary is different from the measure of damages against the principals in the transaction. As an example, suppose that a purchaser agrees to buy a house from a vendor for $250,000 by reason of a negligent misrepresentation by the real estate agent that the property is a legal rooming house. After the sale is concluded, the purchaser discovers that the zoning actually permits only single family residential use. The purchaser sues the vendor and the agent. As against the vendor, the purchaser is entitled to the difference between the value of the property he got and the value of the property he bargained for (the "expectation loss"). This probably would be calculated by the court as the loss of the future rental revenues. The measure of damages against the agent, however is the difference between the market value of the property the purchaser got and the price he paid for it. I f the agent can demonstrate (through a real estate appraisal) that the property in fact was worth $250,000 as a single family residential dwelling, there would be no damages arising from the agent's misrepresentation. (See: Hauck v. Dixon, (1975) 10 O.R. (2d) 650 (H.C.) and Parna v. G. & S. Properties Ltd., [1969] 2 O.R. 347 (C.A.) and [1971] S.C.R. 306). Providing this case law to the plaintiff's solicitor at the outset often can persuade the plaintiff to drop the suit against the agent and proceed only against the vendor since proof of damages against the agent can be difficult and expensive (it would require a real estate appraisal costing thousands of dollars) with no guarantee of success.

This argument can be equally effective in cases of latent defects in the property, such as termite or water damage. The purchaser's damages against the vendor are easily quantified as the cost of repairs, but to succeed against the agent, the purchaser has the much more difficult task of proving that the market value of the property at the time of purchase was less than the amount the purchaser paid for it. We have found this argument very effective in reducing the agent's liability or eliminating it altogether.

Another way to say essentially the same thing is that the vendor must put the purchaser in the position the purchaser would have been in had the representation been true, whereas the agent must only put the purchaser in the position the purchaser would have been in had the representation not been made. It is interesting to note that the measure of damages is the same even if the misrepresentation is fraudulent rather than merely negligent.

Another example of the importance of careful analysis of the measure of damages is found in Talwar v. Ineson, [1987] O.J. No. 1223 (H.C.). In that case, one of the defendants in an action arising out of a motor vehicle accident third partied her auto insurer and her insurance agent on the ground that the agent had not passed along her request to the insurer, prior to the accident, to increase her policy limits from $500,000 to $1,000,000. The court found that the agent had been negligent in failing to pass this information along to the insurer, but as the agent was the agent of the insurer, he bound the insurer to the coverage. The claim over by the insurer against the agent failed on the ground that there was no evidence that the insurer would have declined the risk had the agent passed the information along as he was bound to do and therefore the insurer suffered no loss by the agent's negligence. In other words, the insurer was no worse off after judgment than if the agent had done his job properly.

Summary

Cases involving the defence of intermediaries, such as real estate or insurance agents, should not be treated routinely. Extra attention and an aggressive defence early in the proceedings often can pay big dividends in an early favourable resolution of the matter, or a recovery of substantial costs in the end. Careful attention to subtle legal issues often can result in a favourable outcome even where the intermediary has been admittedly negligent.

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© Rogers Partners LLP - 1997

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