Executive Summary: Key Legal and Evidentiary Issues

• Validity and enforceability of a mediated settlement under rule 49.09 when the defendants later discover their construction “Wrap-Up” policy appears to be fraudulent and uninsured.
• Allocation of loss between an innocent accident victim and innocent insured defendants where an intermediary (TruStar’s president) allegedly issued fake insurance and misappropriated premiums.
• Scope of defence counsel’s actual and apparent authority in the tripartite insurer–insured–lawyer relationship, and whether insurer-appointed counsel can bind the insured defendants to a settlement reached at mediation.
• Effect, if any, of alleged insurance fraud and lack of coverage on the validity of a settlement agreement where all parties believed there was a Lloyd’s policy in place.
• Application of agency law and promissory estoppel principles to the chain of broker, coverholder/Managing General Agent, putative Lloyd’s underwriters, and insureds in determining who must litigate coverage and indemnity.
• Discretionary “injustice” analysis under rule 49.09, balancing an 89-year-old plaintiff’s need for finality and funds against defendants’ wish to avoid personally funding a $600,000 settlement and to reopen the litigation.

Factual background

Rosemary Hales, approaching her 90th birthday, suffered life-altering injuries when she was struck and knocked to the ground by an unsecured construction fence surrounding a project site on the Rosedale High Street stretch of Yonge Street in Toronto. Her injuries required ongoing assisted living care costing approximately $5,500 per month. She, together with family members Megan Kavanagh, John Davidson and Patricia Thaw, sued Vaughan Build Ltd., Dancap Private Equity Inc., Dancap Realty Inc. and Joe Doe Construction Fence Inc. for compensation based on negligence in the construction operations and site safety. The defendants treated this as a liability claim to be handled through their construction insurance arrangements. They had arranged a “Wrap-Up” construction insurance policy through their insurance broker with TruStar Underwriting Inc., which was described as the issuer of the Wrap-Up policy for the project. TruStar in turn instructed independent insurance adjusters Charles Taylor Adjusting to manage the claim and appointed the law firm Dolden Wallace Folick LLP (“Doldens”) to defend the action. Defence counsel Kate O’Malley of Doldens accepted the retainer in the belief that a Lloyd’s of London syndicate was the insurer, with TruStar acting as coverholder and Canadian Managing General Agent. The litigation proceeded in the usual way, through pleadings and examinations for discovery, without any party questioning the existence of liability coverage.

Mediation and the $600,000 settlement

On August 7, 2024, the parties attended mediation before experienced mediator Frank Gomberg. Present were the plaintiffs and their counsel, together with Ms. O’Malley and the adjuster for the defence. The adjuster had obtained settlement authority from TruStar’s president, Daniel Moses, and everyone proceeded on the understanding that a Lloyd’s syndicate stood behind the policy. A mediation agreement was executed confirming that the attending parties had authority to settle the case. At the end of the mediation, the parties reached a settlement of $600,000 in exchange for a release of the defendants, and the plaintiffs ultimately executed their release in reliance on that outcome. Following the mediation, Ms. O’Malley requisitioned the settlement funds and repeatedly followed up—along with the adjuster—when payment was not received. For several months, both assumed that the delay stemmed from slow funding processes in the Lloyd’s London market rather than any defect in the underlying insurance.

Insurance arrangements and the alleged fake Wrap-Up policy

The assumptions about insurance unravelled in late 2024. On December 30, 2024, Ms. O’Malley learned from the adjuster that TruStar had sued its own president, Mr. Moses, for fraud, and that Osborne J. had granted a Mareva injunction in Trustar Underwriting Inc. v. Moses et al., 2024 ONSC 6932. The allegations included that Mr. Moses had issued fake insurance policies and pocketed premiums, or sold genuine policies but then issued false renewal notices to misappropriate renewal premiums. In this context, the defendants learned that their TruStar Wrap-Up policy for the project was allegedly one of the fake policies. The wording of the Wrap-Up insurance did not explicitly name “Lloyd’s,” though the capitalized term “Underwriters” suggested a Lloyd’s syndicate as the insurer. No full policy was produced on the motion—only declarations pages—and there was no evidence that either the adjuster or the defence firm had a practice of independently verifying TruStar’s status as a Managing General Agent for a Lloyd’s syndicate. The judge noted that the insurance placement involved agency issues between the broker, TruStar, and any putative Lloyd’s underwriters, and that these issues were already being litigated in separate interpleader-type proceedings. While the defendants argued that there was effectively “no insurance,” the court was not prepared to accept a categorical absence of coverage as established on this record and, in any event, emphasized that issues of promissory estoppel, agency and the validity of the policy would fall to be litigated between the defendants, the broker, TruStar, and any underwriters—not in this personal-injury action. Ms. Hales, as a stranger to that chain, had no standing to sue the broker, TruStar or Lloyd’s and no control over how the defendants managed their risk.

Defendants’ response and procedural stance

Once they learned of the alleged fraud and the possibility that there was no valid Lloyd’s-backed policy, the defendants took the position that they should not have to fund the $600,000 settlement themselves. They asserted that, in the absence of effective insurance, they should be permitted to treat the mediation as if it had never resulted in a binding settlement, and asked the court to allow the underlying tort action to continue to trial. They argued that, from their perspective, they had participated in the project in the belief that their liability exposure was limited to policy deductibles and potential rating consequences. They had not personally attended or participated in the mediation and saw defence counsel and the adjuster as operating under what turned out to be a mistaken belief about the existence of a valid policy. Their position was that enforcing the settlement after the discovery of a fake policy would be unjust, and that Ms. Hales and her family would be no worse off than before mediation if the matter were returned to the litigation track. The plaintiffs, in contrast, moved under rule 49.09 of the Ontario Rules of Civil Procedure to enforce the mediated settlement. That rule permits a party to seek judgment in the terms of an accepted offer to settle where the other side fails to comply, or alternatively, to continue the proceeding as if no accepted offer existed. The plaintiffs asked for judgment according to the $600,000 settlement, emphasizing the elderly plaintiff’s vulnerability and the substantial delay they had already experienced in attempting to collect the agreed sum.

Authority of defence counsel and the tripartite relationship

A central evidentiary and legal issue concerned whether Ms. O’Malley had authority to bind the defendants to the settlement. The defendants argued that they had not personally retained her and that she functioned as the insurer’s counsel, not their own. The court rejected this argument as inconsistent with their having allowed her to appear, plead, and conduct all steps in the litigation as their lawyer of record. Under rule 15.01(2), a lawyer on the record is the party’s lawyer for all formal steps, and mediation under rule 24.1 is such a step even when conducted by a private mediator. Evidence showed the defendants had some involvement in the defence and interacted with Ms. O’Malley during the proceeding. The judge emphasized that in the Canadian tripartite insurance-defence relationship (insured, insurer and insurer-appointed counsel), defence counsel’s primary duty remains to the insured client, despite the insurer’s role as dominus litis under standard liability wordings. Defence counsel must keep insureds informed and secure concurrence for key decisions such as settlement. In this case, from the plaintiffs’ perspective, Ms. O’Malley appeared as the defendants’ counsel with apparent authority to settle, and they were entitled to rely on that apparent authority. Any conflict-of-interest or deontological issues arising from the choice and instructions of defence counsel were matters internal to the relationships among Doldens, Charles Taylor Adjusting, TruStar and any underwriters—not grounds to undermine the plaintiffs’ settlement. The court also underscored that, between two innocent parties, the law generally places the loss arising from fraud on the party who provided the means and authority to the fraudster. Here, the defendants’ failure to participate directly in mediation, and their reliance on an intermediated insurance structure, allowed Mr. Moses to instruct the adjuster and defence counsel. That structural choice gave the fraud room to operate, making it appropriate that any resulting disputes be resolved between the defendants and their insurance and broker chain, rather than at the expense of the accident victim.

Application of rule 49.09 and the injustice analysis

Ontario courts apply a two-step test under rule 49.09. First, the court asks whether a settlement agreement was reached, based on ordinary contract principles. Second, if there was an agreement, the court must enforce it unless doing so would be unjust in the circumstances—an exception that is rare, given the strong public policy favouring finality of settlements. On the first step, the judge held that a valid settlement was concluded at the August 7, 2024 mediation. The parties there exchanged binding promises: the plaintiffs agreed to release their claims, and the defendants, through counsel and adjuster with apparent authority, agreed to pay $600,000. The subsequent allegations of fraud against Mr. Moses did not vitiate that contract. Fraud by a stranger to the agreement (here, in effect, the intermediary in the insurance chain) does not render the agreement void, and the non est factum or mistake-of-fact defences based on third-party deception are generally rejected in such circumstances. Nor did the unresolved status of the insurance policy’s validity negate the settlement. Issues of coverage, agency and promissory estoppel in the insurance chain were left for other proceedings, but they did not undermine the plaintiffs’ right to rely on the settlement in this personal injury action. On the second step, the court concluded that enforcing the settlement would not be unjust. The defendants, as liability insureds, were the parties with the necessary procedural rights and practical ability to pursue brokers, TruStar or other actors for indemnity or contribution once they had funded the settlement. Canadian case law provides a “playbook” for insureds to settle with plaintiffs and then pursue coverage disputes in separate litigation. By contrast, Ms. Hales—an 89-year-old woman with serious injuries and ongoing care costs—had spent a year and a half trying to collect the sum she reasonably believed had been secured at mediation. Reopening the action would prolong uncertainty and strain during the limited remaining years of her life, and could result in a trial that might ultimately be prosecuted by her estate rather than by her personally. The underlying liability picture, including unchallenged medical evidence from her physiatrist, gave the court no strong sense of injustice in holding the defendants to the settlement. The suggestion that the case might have been defended more cheaply or that a lower settlement could have been negotiated if the defendants had known they were uninsured did not outweigh the need for certainty and the fairness owed to the injured plaintiff.

Ruling and overall outcome

The court held that a valid settlement agreement for $600,000 was reached at the August 7, 2024 mediation and that it would not be unjust to enforce it despite the defendants’ discovery that their Wrap-Up policy was allegedly fake. The alleged fraud and any resulting lack of indemnity are matters for the defendants to litigate with their insurance and brokerage intermediaries, not grounds to shift the loss onto the accident victim. Judgment was therefore ordered in favour of the plaintiffs in accordance with the settlement. The decision makes clear that the successful party is the plaintiffs, led by Ms. Hales, and that the enforceable monetary component is the $600,000 settlement. The judge did not fix a specific dollar figure for costs in this decision; instead, he directed the parties to exchange brief written costs submissions and indicated that, if they could not agree, he would determine costs later. As a result, the total amount definitively ordered at this stage is $600,000 in favour of the plaintiffs, with any additional costs award yet to be determined.