Full Decision
An automobile insurer in Ontario cannot rescind an automobile insurance contract at common law ab initio, and any attempt to unilaterally do so without strict compliance with the provisions of the Insurance Act, R.S.O. 1990, c. I.8 (and O. Reg. 777/93 made thereunder), and the Compulsory Automobile Insurance Act, R.S.O. 1990, c. C.25, is insufficient to unilaterally effect that result.
The principal Plaintiff and Appellant, Karla Merino, was catastrophically injured when she was hit by a car driven by Timothy Klue (“TK”) on September 12, 2002. He and his wife, Sonia Abou-Khalil (“SAK”), were joint owners of the car which was ostensibly insured by the Defendant ING Insurance. But, almost two months earlier, ING had purported to unilaterally terminate the insurance contract, based on non-disclosure of SAK’s driving record, by registered letter sent on July 2, 2002 which referenced the non-disclosure and proclaimed that the policy was “void from the inception date.” (SAK had previous convictions for speeding and careless driving, a license suspension for non-payment of fines and cancellation of a previous policy for non-payment of premiums. But, when both attended at the broker’s office on May 29, 2002, only TK signed the application, which contained accurate information about his driving record, and the broker provided a 30-day binder to both as insureds, followed by a one-year automobile insurance contract). Believing the car to be uninsured after reading the letter, neither of them drove the car in the ensuing 6 weeks until, coincidentally, the day of the accident.
When counsel for the Plaintiffs sent a notice letter to SAK on March 19, 2003, ING’s adjuster responded stating that neither TK nor SAK had an automobile policy with it and enclosed a copy of the rescission letter. Based upon ING’s position, the Plaintiffs sued the owners and driver, as well as Allianz, Ms. Merino’s mother’s insurer, for uninsured motorist coverage. Although neither TK nor SAK defended the action, counsel appointed by the Superintendent admitted TK’s liability. The Plaintiff’s obtained a judgement for $2,000,000 in July 2011. ING was not joined in that action. In the context of a 2005 accident benefits arbitration between the insurers, Plaintiff’s/Appellant’s counsel obtained a complete copy of ING’s underwriting file on the policy it had issued. Despite that ING continued to maintain that it had validly rescinded the policy, the Plaintiff/Appellant brought the within action in April 2012 under s. 258(1) of the Insurance Act against it on the basis that the policy was not validly terminated before the accident. Both sides brought summary judgement motions.
The primary issue was whether the policy was validly rescinded at common law, ab initio, based upon the misrepresentations in the application and the rescission letter. If not, could the Appellants recover against ING under s. 258(1) of the Insurance Act? Also, if not, was the Appellants’ recovery limited to the statutory minimum of $200,000 under s. 251 of the Act, based upon the defence of knowing misrepresentation, asserted under s. 258(11)? And, finally, were the Appellants barred from recovery under s. 258(1), based on the doctrine of waiver or abuse of process, because they initially pursued uninsured motorist claims against Allianz?
On the primary issue, the Court ruled that s. 258 of the Act was designed as the absolute liability provision of the insurance regime, with ss. (1) providing an injured third party the right to collect his or her judgment against the at-fault driver from that driver’s insurer where it had issued an automobile policy that provided for indemnity, regardless of any misrepresentation that the insured may have made in the application for insurance. Subsections (4) and (5) of that section preclude the insurer from defending on the basis that because the insured made a misrepresentation in the application for insurance, including a misrepresentation as to ownership of the vehicle, there never was an insurance policy. However, as the Court pointed out, ss. (11) limits that restriction to the $200,000 minimum that every automobile policy is required to provide under s. 251.
Justice Verbeem, hearing the summary judgement motions at first instance, seized upon the distinction that in every reported case where the insurer sought to rely on a misrepresentation by the insured in the application to obtain the policy as a defence under s. 258(1), the policy had not been validly terminated before the accident. In the present case, he ruled that there was no policy in effect on the day of the accident – not because of the effect of the misrepresentation but because of ING’s earlier rescission of the contract. The Court of Appeal agreed with his analysis on the effect of s. 258 if there was no policy in place at the time of the accident, but then considered ING’s actions in sending the rescission letter as a means of terminating the policy.
Addressing the permissible ways in which an insurer can terminate a policy, Justice Verbeem reviewed the provisions of s. 11 of O. Reg. 777/93, which indicate that an insurer may give 15 days’ notice by registered mail or 5 days’ notice by personal delivery and, in both cases, must refund the excess premium paid by the insurer. ING did not provide the required notice or refund the excess premium in this case (as none had been yet paid), but Justice Verbeem ruled that the insurer could also rescind the policy at common law based on the doctrine of material misrepresentation and in fact did so by its letter of July 22, 2002.
The Court of Appeal reviewed the history and combined effects of section 258, O. Reg. 777/93 and the Compulsory Automobile Insurance Act and determined that the scheme of the Act and these statutory provisions “prescribes the rights and obligations of the insured and the insurer under the automobile provisions, requires strict compliance, and provides an orderly and predictable set of consequences for compliance and non-compliance.” This, the Court reasoned is to ensure that certain statutory benefits are available to every person who obtains a policy of insurance (including by misrepresentation), that the termination and renewal provisions allow for certainty of timely insurance coverage for compliance with the Compulsory Automobile Insurance Act, and to provide protection to innocent third parties involved in an accident. In concluding that ING had not properly terminated the policy, it decreed: “That predictable set of consequences would be undermined if an insurer could circumvent the requirements of the Act by rescinding the contract at common law, making it void ab initio.” In the result, the Court ruled that the policy was in effect and was accessible under s. 258 to satisfy the Plaintiff’s judgement.
In so deciding, the Court reviewed section 233 of the Act and pointed out that it does not contain the terms “void” or “voidable” and neither requires nor contemplates any action by an insurer to terminate the contract, describing only the threefold consequences, as between the insured and insurer, when the insured has “knowingly” misrepresented or omitted a fact in a signed application: 1) a claim by the insured (for own property damage or own loss due to injury) is invalid; 2) the right of the insured to recover indemnity (from a claim by a third party who suffered damage where the insured was at fault) is forfeited; but 3) the insured remains entitled to certain statutory accident benefits.
ING argued that section 258(11) of the Act allowed it to raise against a third party any defence it could have raised against its insured in respect of any amount of coverage that the policy provides in excess of the $200,000 minimum. The Court of Appeal agreed, but observed that, according to s. 233(1)(a)(ii), the insurer must prove that “the applicant for a contract knowingly misrepresent[ed] or fail[ed] to disclose in the application any fact required to be stated therein.” First, the Court noted that, while only TK signed the application, the misrepresented facts related to only SAK’s application for insurance. Reviewing the only evidence on the record – the transcripts of TK in the tort action – the Court concluded that there was no evidence that he intended to sign on SAK’s behalf and, absent any sworn evidence from the broker representatives who took the insurance application and witnessed TK’s signature, ING would be unable to succeed on this argument. Second, the Court noted that given these were competing summary judgement motions requiring both parties to put their best evidentiary foot forward, the absence of such evidence redounded to ING’s detriment. Finally, the Court noted that the motion judge had determined that given the passage of time (15 years since the application was completed), he had the best evidence available before him on the point: the Court of Appeal agreed and, therefore, determined it was appropriate to make the necessary findings of fact based on the record – that there was no basis to find that TK signed the application as SAK’s agent and that there was no evidence from the Respondent that it had any contrary belief. Consequently, ING could not rely on the defence on knowing misrepresentation.
Finally, the Court summarily dismissed ING’s arguments that the Plaintiff had waived her right to sue it by pursuing an uninsured motorist claim against Allianz. In order to establish waiver, the waiving party must have had full knowledge of its rights and an unequivocal and conscious intention to abandon those rights. “Not only was that clearly not the case here, but it lies ill in the mouth of the respondent to suggest that it was when it was the respondent that told the appellant’s counsel that it had no contract with the at-fault driver.” The Court noted that the respondent could’ve sought to be added as a third party to the tort action but didn’t do so and concluded its reasoning by noting that the respondent hadn’t provided any authority for the proposition that s. 258, as it provides a right of action to an innocent third party, could be waived, although in light of its finding that there was no wavier it was not necessary to decide the point. On similar reasoning the Court dispensed with ING’s argument of abuse of process.
The Court of Appeal set aside the judgement and reasons of the motion judge and decreed that the contract of insurance remained in place on the date of the accident. As ING had not established a defence under s. 258(11) it was accordingly liable for the full amount of its policy limits. The appeal was allowed with costs fixed at $40,000, inclusive of disbursements and HST.