Forestex Management Corp. v. Lloyd's Underwriters, Lloyd's, London [2004] F.C.J. No. 1576 Federal Court Vancouver, British Columbia

The application of the Defendant Insurers ("Lloyd’s") to strike the Plaintiff’s Statement of Claim was dismissed where the court held it was not obvious that the Plaintiff’s bad faith action could not succeed where it remained possible for the Plaintiff to add a supporting cause of action on the insurance policy.

The Plaintiff ("Forestex") owned a vessel named the Texada, which was grounded and became a constructive total loss in a passage in the Queen Charlotte Islands. Forestex gave notice to Lloyd’s but the claim was denied on the basis that the Texada was believed to have been outside her trading limits. Less than one year later, Forestex sued on the hull and machinery policy for the insured value of the Texada and for the costs associated with salvage services, wreck removal, and pollution control. The action on the policy was dismissed for delay on January 9, 2003.

On August 9, 2002, Forestex commenced a separate action alleging that Lloyd’s had acted in bad faith in taking the position that the Texada went beyond her trading limits and failing to investigate the claim. Lloyd’s brought an application to strike the Statement of Claim on the basis that as there was no initial finding of coverage under the policy then there was no foundation for a claim of bad faith and, therefore, no cause of action.

The court indicated that the issue before it was whether or not there was a reasonable cause of action. In addressing this issue, the court stated that it must first decide whether there was or could be any foundation for the bad faith action, given that coverage had been denied and the action on the policy dismissed for delay. If it was determined that a bad faith action required an underlying valid insurance claim, the court must then consider the effect of the dismissal for delay and whether or not a procedural interlocutory order affected a Plaintiff’s substantive right.

In reviewing the foundation for a bad faith action, the court referred to the US decision of Bartlett v. John Hancock Mutual Life Insurance Company, 538 A.2d 997. In that case, the court had held 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. The onus is on the Plaintiff to establish that there is no factual or legal defence to the insurance claim itself.

Forestex argued that the bad faith claim should be considered a separate cause of action. The court disagreed, indicating that there was nothing in the case law which would allow Forestex to maintain its bad faith action unless there was a valid claim and liability arising out of the insurance policy.

The court then reviewed the issue of whether the action on the policy was completely defunct where it was not terminated on its merits but terminated for delay. The court cited from Lord Denning’s judgment in Hart v. Hall & Pickles Ltd., [1969] 1 Q.B 405 (C.A.) where Lord Denning stated at 411:

…When an action has been dismissed for want of prosecution, the defendant has not been "sued to judgment" at all. There has been no judgment that the Defendant is not liable. It is only an interlocutory order — a matter of procedure — which does not affect substantive rights. It is not a final decision. It does not give rise to an estoppel by res judicata. 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….

Relying on this precedent, the court held that, assuming there was no time bar to the action, there was no estoppel which would bar Forestex from reinstituting its action on the policy as the basis upon which they might pursue the bad faith cause of action.

The court heard argument on what should be considered the applicable limitation but held that the limitation argument was a defence for the Defendants to invoke when the merits of the case were considered and ought not to be applied on the motion to strike out for want of a cause of action. In this case, the bad faith action was brought within two years of the denial of coverage and, therefore, the court could not say that the action was time barred. The court noted that to dismiss for want of a cause of action, it must be plain, obvious, and beyond doubt that the action could not succeed. In this case, an appropriate amendment, if granted, could allow Forestex to continue by adding a supporting cause of action claiming on the insurance policy.

In the result, the court dismissed Lloyd’s application to strike the Statement of Claim and directed Forestex to file a motion to amend its Statement of Claim within 30 days.

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