Limitations on Recovery of Indemnity in Priority Dispute Arbitration Proceedings – Where has the Court of Appeal left us?

May 09, 2025

The Ontario Court of Appeal’s decision in Echelon General Insurance Company v. Unifund Assurance Company, 2025 ONCA 324, was released last week. It was decided in the context of a priority dispute and addresses issues concerning claims for reimbursement of adjusting expenses incurred by the handling insurer in administering the benefits claim prior to the priority insurer assuming handling. According to the Court of Appeal, recovery of adjusting expenses is generally not available, because the application of equitable remedies, such as the unjust enrichment doctrine, in priority disputes is limited to only “the most extreme cases.”

Arbitration Decision

Since August 2012, Echelon had adjusted the accident benefits claim, paying benefits as they were due and owing in accordance with the policy provisions and the SABS. Echelon initiated a priority dispute against Unifund to recover the benefits that it paid to the claimant. In addition, Echelon sought reimbursement for the costs and expenses that it incurred in adjusting the first-party claim. Echelon’s costs, including adjusting fees, surveillance costs, mediation expenses, and legal fees, were significantly increased (in excess of $100,000), since the claimant was designated as “catastrophically impaired”.

Arbitrator Bialkowski found Unifund to be the insurer highest in priority for payment of the accident benefits pursuant to s.268 of the Insurance Act. However, the Arbitrator denied Echelon’s request for reimbursement of the expenses incurred in adjusting the claim. The Arbitrator held that there were no special circumstances to apply the doctrine of unjust enrichment, stating that reimbursement of expenses on such basis should be reserved for “the most extreme cases.”

First-Level Appeal

Echelon appealed the Arbitrator’s decision, arguing that the Arbitrator erred in law by limiting the application of the unjust enrichment doctrine to “extreme cases.”

The appeal Judge (Chalmers, J.) found that priority dispute arbitrators have jurisdiction to order indemnity for administrative expenses incurred in the underlying benefits claim, in addition to repayment of benefits. The Court rejected the notion that the arbitrator’s equitable jurisdiction to order reimbursement of expenses requires special circumstances and that the doctrine of unjust enrichment should only be exercised in “the most extreme of cases”. As such, Echelon was found to be entitled to reimbursement by Unifund “for those reasonable expenses that were incurred for the ultimate benefit of Unifund.”

Court of Appeal’s Ruling

The Ontario Court of Appeal has now reversed the ruling of the initial appeal Court, finding that the Judge erred. The Court of Appeal affirmed the arbitrator’s decision, finding that Unifund was (again) not required to reimburse Echelon for the costs and expenses incurred in adjusting the underlying accident benefits claim.

The Court agreed with the arbitrator’s comments regarding the limited application of the doctrine of unjust enrichment, emphasizing that indemnity claims for expenses incurred beyond the actual accident benefits paid would only be recoverable if there were special circumstances and only “in the most extreme of cases”.

The reasoning of the Court of Appeal with regard to legislative intent turns largely on amendments to Regulation 283/95 that were added to address improper “deflection” of claim applications by insurers. The Court of Appeal agreed with the Arbitrator that “the Lieutenant Governor in Council intentionally chose to limit expense reimbursements [for legal fees, adjuster’s fees, administrative costs and disbursements] to the deflection cases to which s. 2.1(7) applies“.

Although it leaves the question open, the Court of Appeal goes so far as to question whether priority arbitrators can ever award equitable remedies, stating:

The question of whether Regulation 283 should be interpreted as implicitly barring arbitrators from invoking equitable principles even in exceptional cases is best left to be decided in an appeal where this issue actually arises.

Notably, the Fund was an intervenor in the appeal and sought a declaration that it should be entitled to recuperate its pre-arbitration expenses whenever it succeeds on a priority dispute. Although the Court of Appeal commented it would be inappropriate to decide this issue in the context of an appeal where the Fund is not a party and the issue is not squarely before the Court, the Court went out of its way to indicate that the ruling does not apply to the Fund, stating:

nothing in these reasons should be taken as deciding, one way or the other, whether Regulation 283 can or should be interpreted as permitting the Fund to recoup its pre-arbitration expenses, either through arbitration or in the courts, in cases where some other insurer is ultimately found to have priority over a SABs claim.

Summary and Take Aways

Although, on its face, this decision seems to provide some clarity regarding an insurer’s ability to recover claims administration expenses in priority disputes, it creates other problems that will likely only be addressed through legislative reform or further appeal.

The Court of Appeal has decided that equitable remedies such as unjust enrichment will rarely be available in priority disputes. Therefore, despite succeeding on a priority dispute, unless it is an extreme case with special circumstances (or a deflection), an insurer will not be entitled to recover for the administrative expenses (including legal fees, adjuster’s fees, administrative costs and disbursements) incurred in adjusting the claim before it is taken over by the priority insurer.

Taking this one step further, the Court of Appeal has suggested that O. Reg. 283/95 could bar arbitrators from ever invoking equitable principles and awarding equitable remedies. This comment seems to overlook the fact that the arbitrator is specifically granted equitable jurisdiction by s. 31 of the Arbitration Act, 1991,[1] which is incorporated by reference by s. 7(1) of O. Reg. 283/95 (yet, an amendment to the Regulation somehow displaced the jurisdiction granted to the arbitrator by the Act).

This decision is peculiar in that it appears to ignore the fact that nowhere in the priority regulation is there any mention of indemnification of the non-priority insurer for benefits paid. In other words, an arbitral award requiring a priority insurer to reimburse for benefits paid by the successful non-priority insurer is always made by granting an equitable remedy.

Perhaps it is unintentional, but by finding that equitable remedies should only be granted by priority dispute arbitrators “in the most extreme of cases” involving special circumstances (or perhaps never), the Court of Appeal has not only limited insurers’ potential recovery of administrative expenses but it has also called into question the ability to recover indemnity for benefits paid to the claimant.

Practically speaking, this decision will not encourage early resolution of priority disputes. Generally, insurers prefer to admit priority early, so they can assume handling and control of the claim, but this may now be outweighed by the financial considerations.

Without the risk of being responsible to reimburse for administrative expenses (and maybe even benefits paid), other than in the most extreme of cases, an insurer now has considerable disincentive to admit priority early. Meanwhile, the handling insurer which is not the priority payor but must pay pending resolution of the dispute may be more resistant to paying fair and generous benefits to the claimant considering they may not be reimbursed when priority is finally resolved.

[1] Section 31 of the Arbitration Act, 1991 is entitled “Application of law and equity” and provides: An arbitral tribunal shall decide a dispute in accordance with law, including equity, and may order specific performance, injunctions and other equitable remedies.