Did the court jump the gun on allowing a negligence claim against a brokerage?

A brokerage has been added as a defendant in a sideline negligence claim, even though the central legal action for breach of contract involving two other parties (including a defendant reinsurer) has yet to be decided.

Ontario’s Superior Court applied the “balance of convenience” principle on June 5 to find it would be more costly to litigate the negligence claim against the brokerage after the breach of contract claim was decided than to hear the two legal action actions together.

Plus, if the plaintiffs won their main breach of contract case against a property management group and a reinsurer, the court noted, a negligence suit against the brokerage would seem likely to follow.

Neither the brokerage nor the negligence action were named in the original breach of contract lawsuit. The court agreed the original claim could be amended to include the brokerage as a defendant and the new cause of action (negligence).

“I find that, on balance, the expense and delay that would be caused by compelling the plaintiffs [unit holders in a retirement home] to bring a separate action against [the brokerage] outweighs the inconvenience, expense or embarrassment to which [the brokerage] would be put if the actions were tried together,” Ontario Superior Court Associate Justice Robert Frank ruled.

“I find that the plaintiffs should be permitted to join their negligence claim against [the brokerage] with the fraudulent misrepresentation [breach of contract] claim [against the property management group and the reinsurer].”

The plaintiffs, Terra Park Developments Ltd., are unit owners in a retirement home development. When they acquired their units, they contracted with Pensio Property Management Group Inc. to obtain a rental income guarantee that would provide a financial backstop in case the units were not leased immediately.

The rental income guarantee was secured by a rental income contract bond brokered on behalf of Pensio by the insurance brokerage Tripemco Insurance Group Limited. The bond was issued and underwritten by Rentalis Insurance Company.

In their claim, which has not been proven in court, Terra Park Developments accused Pensio and Rentalis of colluding and knowingly making “false representations concerning, among other things, their legitimacy in order to induce the plaintiffs to enter into the various applicable agreements,” as the court framed the issue. For their part, the defendants claimed the plaintiffs did not take the proper steps to trigger the bond coverage.

“The plaintiffs also allege that Tripemco, as broker, was negligent for failing to take appropriate steps to ensure that Rentalis was a legitimate insurance provider,” as the court decision read.

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Tripemco argued it was “premature” to name them in a negligence action, because the main dispute between Terra Park Developments and Pensio and Rentalis had not been decided yet. If the Pensio and Rentalis’s defence against breach of contract was successful, there would be no basis for a negligence action against the brokerage.

As the court framed Tripemco’s argument:

“Tripemco argues that: (1) the proposed amended statement of claim indicates that the plaintiffs are still in the process of completing the insurance claims process; and (2) in the Pensio statement of defence and counterclaim, Pensio alleges that the terms of the insurance bond have not been triggered and that neither Pensio nor the insurer are obligated to make payments pursuant to the insurance bond.

Tripemco submits that, based on the pleadings between the plaintiffs and Pensio, the claim against Tripemco is therefore contingent on the determination of the contract dispute between Pensio and the plaintiffs, and that there is no cause of action against Tripemco at this stage because the alleged damages have not occurred.”

But the court found “the fraud and negligence claims against the proposed defendants in this action involve a more directly overlapping factual matrix between Tripemco and the existing defendant, Pensio, and the other proposed defendants. This is evident from the proposed amendments at paragraphs 75-77 that include allegations that Tripemco’s negligence as broker resulted in ‘there [being] no reinsurance policy in place.’”

Other claims proposed to be added to the original lawsuit included:

Tripemco represented to the plaintiffs that it was a specialized insurance broker
The plaintiffs relied on the brokerage to place them with reputable reinsurers
Tripemco failed to take appropriate steps to ensure that the reinsurer was a legitimate insurance provider capable of giving the plaintiffs their desired reinsurance solution.

“In these circumstances, I find that [adding in the brokerage and the negligence action] is appropriate given the nature of the allegations and the connection between the negligence claim against Tripemco and the fraudulent misrepresentation claim against Pensio and the proposed Pensio and Rentalis defendants,” Frank ruled.

Feature image courtesy of iStock.com/FangXiaNuo