In Realtrium Holdings Pickering Inc. v Simpson,1 the Ontario Superior Court of Justice ("ONSC") considered whether an underwriter of a statutorily mandated insurance program was entitled to recover from its own insured for amounts it paid to third-party claimants. This recent decision clarifies the boundaries insurers' subrogation and assignment rights.
Realtrium arises from a fraudulent real estate scheme that resulted in brokerage clients losing their deposits. The Court held that the insurer was not permitted to exercise its subrogation and assignment rights to recover payments from its own insured for losses that the policy was intended to cover.
Background
Wynn Realty Corporation ("Wynn") was a licensed real estate brokerage owned by Wayne Simpson, the broker of record. Wynn also employed Mr. Simpson's wife, Courtney Simpson (the "Simpsons"). The Real Estate Council of Ontario ("RECO") requires all Ontario brokerages to maintain policies providing coverage for brokerage clients who paid deposits but were unable to retrieve their deposits due to fraud, misrepresentation, or other misconduct by the brokerage or its registrants. Wynn maintained a policy issued by a coverholder, 3303128 Canada Inc. (the "RECO Policy").2
The Simpsons were found to have perpetrated a real estate fraud by misappropriating millions of dollars of client deposits held in Wynn's trust accounts. After the discovery of the fraud, one of the victims, Realtrium Holdings Pickering Inc. ("Realtrium") commenced a lawsuit against the Simpsons and Wynn. The Simpsons sold their house and paid the residual proceeds into the Court. The Court then appointed Grant Thornton Limited ("GTL") as receiver of Wynn's assets, which included approximately $633,000.00 from the sale of the Simpsons' house (the "Funds").
GTL brought a motion for, among other things, approval of a Proposed Distribution of the Funds to creditors and/or claimants who initiated GTL's appointment. The Insurer opposed the Proposed Distribution and sought to include a distribution to the Insurer for amounts paid out to claimants. The Insurer argued that it was entitled to participate in the distribution through its subrogation rights or assignment of claims.
The Court's Analysis
Subrogation
Justice Kimmel reaffirmed that at common law, insurers are generally prohibited from exercising subrogation rights against their own insureds. While subrogation enables insurers to recover amounts paid by the insurer, these rights do not extend to suing the insured whose liability the policy was intended to cover. Under the RECO Policy, Wynn and Wayne Simpson were "Registrants" and therefore, insureds. Continuing, the Court held that the coverage contemplated losses caused by:
"acts of theft, misappropriation or wrongful conversion committed directly or indirectly by a Registrant."
Justice Kimmel found that this provision was unambiguous: the RECO Policy intended to protect insureds by providing coverage for precisely the misconduct committed by Wynn and Wayne Simpson.
The Insurer argued that the RECO Policy contained a provision that expressly carved out the common law prohibition discussed earlier. The Court found that an insurer can include express overrides of the common law prohibition, provided that the language is clear and unambiguous. Since a clear and unambiguous override was absent in the RECO Policy, the Court rejected the Insurer's argument.
The Insurer also invited the Court to create a "fraud exception" to permit recovery from dishonest insureds. Justice Kimmel observed that the Supreme Court of Canada ("SCC") has consistently found that the basis for an insurer's subrogation rights is to avoid overpayment to the insured, and an exception permitting subrogation against an insured does not reflect this rationale.
Subrogation
As part of the payment of claims under the RECO Policy, the Insurer required some of the claimants to sign assignment agreements to transfer all rights and claims relating to their deposits to the Insurer. The Insurer posited that these agreements resulted in the Insurer stepping into the shoes of the claimants, so they could then pursue the insureds. As a result, the Insurer would be entitled to participate in the Proposed Distribution. GTL countered, arguing that the Insurer should not be able to avoid the subrogation issue through assignment agreements.
Justice Kimmel accepted GTL's argument, characterizing these agreements as an attempt to circumvent the common law subrogation prohibition. The Court returned to the SCC rationale for subrogation and concluded that the Insurer should not be permitted to do indirectly what it is prohibited from doing directly. Justice Kimmel held that the policy basis for the common law prohibition on insurers advancing subrogation rights against insureds should also apply to insurers relying on assignment of those same claims against their insured. Permitting the Insurer to claim against the limited pool of funds would undermine the consumer protection purpose of the RECO program. Therefore, the Court found that the assignments were ineffective to the extent that they permitted the Insurer to recover from Wynn and Wayne Simpson.
The Proposed Distribution
The Court found that the Insurer was not entitled to participate in GTL's Proposed Distribution. However, through the subrogation and assignment analysis, the Court found that the Proposed Distribution excluded some clients who may not have been fully compensated yet. Justice Kimmel ordered GTL to prepare a Proposed Distribution that included all such clients, including those that were not involved with GTL's appointment, to ensure equal treatment regardless of whether the clients were involved with GTL's appointment.
Conclusion
Through this decision, the Court reinforced the boundaries of insurers' subrogation rights. Subrogation is intended to prevent double compensation. Where subrogation is exercised as intended, insurers seek recovery from third parties for payments to their insureds. By stepping into the shoes of the insured, the insurer prevents the insured from receiving a payout of a claim and turning around and suing a third party liable to the insured.
The Court found that expansion of subrogation rights to permit an insurer to seek recovery from its insured is contrary not only to preventing double recovery but to the insurer's assumption of risk, which forms the backbone of every insurance policy. However, the common law prohibition is not absolute. In this decision, the Court reaffirmed that insurers are permitted to override the common law prohibition through clear and unambiguous policy language.
Experienced coverage counsel can assist policyholders navigate questions concerning subrogation and assignment.
Footnotes
1. 2025 ONSC 5605.
2. For clarity, the coverholder, 3303128 Canada Inc. trading as Alternative Risk Services and the insurer Lloyds/Trisura Guarantee Insurance Company will be collectively referred to as the "Insurer".
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