If laws are supposed to be legislated by the legislature, and interpreted by the judiciary, what happens when the judiciary is of the view that the legislature is dropping the ball?
This philosophical conundrum was implicitly considered by two different levels of court in Ontario, with different results.
In Ernst & Young Inc. v. Chartis Insurance Co. of Canada,  O.J. No. 416 (C.A.), the plaintiff obtained a judgment against a bankrupt insured and then looked towards the insurer to satisfy judgment pursuant to section 132(1) of the Insurance Act. Under section 132(1), where a person incurs a liability for “injury or damage to the person or property” of another, and is insured for that liability, the judgment creditor has a direct cause of action against the person’s insurer, “subject to the same equities as the insurer would have if the judgment had been satisfied.”
The challenge Ernst & Young faced was the Court of Appeal decision in Perry v. General Security Insurance Co. of Canada (1984), 47 O.R. (2d) 472. In that case, the Court of Appeal held (with Houlden J.A. dissenting) that section 132(1) does not permit a direct cause of action against an insurer under a policy of lawyers’ professional liability insurance. Essentially, the Court of Appeal in 1984 looked at the language of section 132(1) and held that “property” as defined in the Insurance Act cannot be taken to mean economic loss unrelated to physical damage to property.
Both the majority and dissent in Perry had pleaded for legislative action to correct what they perceived to be an injustice, at least in the context of errors and omissions claims against lawyers. However, the legislature had not responded and the law remained unchanged.
The plaintiff in Ernst & Young asked the Court of Appeal to find that Perry was wrongly decided. The Court resisted the temptation to overturn Perry and permit an end-around the ordinary meaning of section 132(1). Justice Strathy, writing for the unanimous Court of Appeal, succinctly stated as follows:
31 No legislative action has been taken and Perry remains good law — it has been followed in other cases. As it has stood and been relied upon by the insurance industry for over 25 years, I would be disinclined to overrule it, even if it were open to us to do so in these proceedings…
In my view, the Court of Appeal correctly declined to read into the legislation words that were not there. Predictability and consistency, especially at the appellate level, are vital for the judiciary to function properly and for litigants to reliably assess risk – not to mention for lawyers to advise clients accordingly.
Compare the judicial restraint exercised by the Court of Appeal in Ernst & Young with a lower court’s 2013 decision which appears to have bypassed the Court of Appeal and legislature completely. In ReiPLANcorp, 2013 ONSC 5945, the court considered lifting a stay of proceedings in order that the litigants could have access to the bankrupt’s insurance policy. Re iPLANcorp is a decision from mid-2013 that pre-dated Ernst & Young. In that case, Master Short addressed the concern that the legislature has failed to amend the legislation despite being urged to do so almost 30 years ago. Counsel for the insurer argued that there was no legal basis to gain access to the subject insurance policy, and cited section 132 of the Insurance Act.
The court noted the historical interpretation of section 132 of the Insurance Act and the insurance industry’s reliance on Perry, but took an extraordinary leap over the Court of Appeal and the legislature, stating the following:
 However, notwithstanding the view of the full panel of the Court of Appeal in Perry almost 30 years ago that immediate action should be taken by the Law Society or the Legislature, or both, so that the “ present unfairness to innocent clients of insured solicitors can be ended” no amendment has been forthcoming. Thus this is a case where I understand why the third parties could feel justified in relying upon what appears to have been a long standing and generally accepted position regarding the law in this area.
 Justice Houlden observed that the prime purpose of obtaining errors and omissions coverage was to protect members of the public who suffer damage from the acts or omissions of professionals. He sought to justify a means of enforcing that coverage in Perry. Although I am at a lower level in our courts, I feel we have waited long enough for correction of this inequitable situation by other institutions. It is my hope that by approaching the problem from a new perspective, utilizing the court’s inherent jurisdiction, it is now possible to properly achieve a realization of Justice Houlden’s desire for making available, meaningful professional negligence insurance coverage in insolvency situations in Ontario.
Master Short ultimately granted the order lifting the stay of proceedings, noting that “notwithstanding the decision in Perry, which in my view still ought to be reversed by legislation, the plaintiffs ought to be placed in a position to endeavour to prove their entitlement to the insurance which was purchased by the bankrupt specifically to provide recovery in the event of a proven negligent act.” In doing so, he granted leave to amend the statement of claim, which would effectively assign the rights of the bankrupt under the insurance policy to the plaintiffs by the trustee.
Of note, the court began the judgment with a quotation from Arnup J.A., who stated the following in the 1984 Perry decision: “Finally, I heartily endorse the view of MacKinnon A.C.J.O. that immediate action should be taken by the Law Society or the Legislature, or both, so that the present unfairness to innocent clients of insured solicitors can be ended.”
It may very well be true that there is not a reasonable explanation for why a party can have a direct claim against an insurer when it involves a property loss, but not when it involves pure economic loss. Respectfully, unambiguous legislation that has been consistently interpreted by appellate and lower courts should be followed in order for our judicial system to function properly. Bypassing the will of the legislature, evinced in the wording of section 132(1), may lead to unsettled and unpredictable application of our laws. The veracity of this notion is strengthened by considering two decisions out of British Columbia.
In British Columbia, the applicable legislation has been amended to account for the limitation found in s. 132(1) of the Insurance Act. What follows is an example of two cases, one being decided before the legislative amendment, and the latter being decided afterwards.
In Starr Schein Enterprises Inc. v. Gestas Corp.,  B.C.J. No. 803; 13 B.C.L.R. (2d) 85, the British Columbia Court of Appeal quoted section 26 of the Insurance Act, R.S.B.C. 1979, c. 20, which is functionally equivalent to section 132(1) in the Ontario Act. The Court of Appeal of British Columbia concluded “… that the loss of a pecuniary benefit cannot be said to be damage to property as those words are used in the Act”. It went on, and after referring to Perry, stated:
My difficulty with the reasoning of Houlden J. [in Perry] is that to arrive at his conclusion the words ‘for injury or damage to the personal property of another’ must be ignored. If the legislature had intended to cover all losses it would simply have said: ‘where a person incurs liability and is insured against that liability …’ But it did not do that. It inserted the words ‘for injury or damage to the person or property of another’ and thereby limited the scope of the section. We have no right to ignore those limiting words.
Significantly, the relevant section of British Columbia’s Insurance Act was considered again in Pope v. Talbot Ltd. 2011 CarswellBC 1033. In the interim, section 26 of the Act had been amended and the word “property” had been removed. This cleared the way for a finding that a direct claim against the insurer existed.
The fact that the Court of Appeal for British Columbia waited for legislative action underscores the strength of the decision of the Court of Appeal in Perry, as well as Ernst & Young.
If the existence or wording of a provision is giving rise to what some (or many) perceive to be injustice, then the appropriate remedy lies with the legislature, not the courts. If the legislature had wanted to amend the Insurance Act and/or its regulations, it certainly could have done so, in the same way it has amended many other statutory provisions in response to concerns from the judiciary, the bar, special interest groups, and society as a whole. Legislative inaction with respect to section 132, in other words, should not be misunderstood as legislative atrophy.
The Court of Appeal in Ernst & Young recognized this fundamental fact, and we can only hope that its decision will serve to continue to interpret legislation that has been clearly and correctly followed for 30 years.