McMynn v. Lombard General Insurance Co. of Canada

70 O.R. (3d) 534

[2004] O.J. No. 1755

Court of Appeal for Ontario

Gillese, Armstrong and Blair JJ.A.

April 29, 2004

Insurance -- Premiums -- Section 134(2) of Insurance Act permitting insurer to deduct amount of unpaid premiums from amount payable to party responsible for payment of premiums under policy but not from amount payable to third person covered by policy -- Insurance Act, R.S.O. 1990, c. I.8, s. 134(2).

The applicants leased buses to the operator of a passenger bus line. The lease agreement required the lessee to place and maintain insurance coverage for loss or theft of or damage to the leased vehicles, to pay the applicants for any damage caused to a leased vehicle in the event that the insurance proceeds were insufficient, and to indemnify the applicants from any damage, loss, theft or destruction of any leased vehicle. The lease also required the lessee to insure the applicants under the insurance policy that the lessee obtained. The lessee obtained a comprehensive business insurance policy from the respondent which covered the fleet of buses owned or leased by the lessee. The policy provided coverage for the applicants under a blanket lessor endorsement. One of the leased buses was damaged in October 2001. In January 2002, the policy expired, and unpaid premiums totalling more than $33,000 were outstanding. The lessee submitted a proof of loss to the respondent in April 2002. The respondent paid the cost of repairing the bus, less the amount that the lessee owed for unpaid premiums. The applicants brought legal proceedings to recover the cost of the unpaid premiums from the respondent. The applications judge ruled that the respondent could not rely on s. 134(2) of the Insurance Act to withhold loss payment amounts otherwise payable to the applicants. Section 134(2) provides that "[t]he insurer may sue for the unpaid premium and may deduct the amount thereof from the amount for which the insurer is liable under the contract of insurance." The respondent appealed.

Held, the appeal should be dismissed.

The applications judge correctly interpreted s. 134(2) of the Insurance Act as restricting recovery by deduction to amounts payable to the party responsible for payment of the premiums under the policy, not a third party. Section 134(2) does not create a statutory right to withhold from a loss payment due to an added insured an amount to cover unpaid insurance premiums owed by the insured party. The amounts payable under the insurance policy in this case were for property damage sustained by a third party insured, the applicants. The applicants were not the party with whom the respondent contracted. Therefore, the respondent was not entitled to withhold the amount it was owed by the lessee for unpaid premiums when making a payment to the applicants.

APPEAL by an insurer from a judgment in an application to recover an amount owing under an insurance policy.

MacRae v. British Aviation Insurance Co., 1983 3736 (MB QB), [1983] M.J. No. 93, 26 Man. R. (2d) 263, 3 C.C.L.I. 41, [1984] I.L.R. Â1-1731 (Q.B.), consd Other cases referred to Bell ExpressVu Limited Partnership v. Rex, [2002] S.C.J. No. 43, 2002 SCC 42, [2002] 2 S.C.R. 559, 212 D.L.R. (4th) 1, 287 N.R. 248, [2002] 5 W.W.R. 1, J.E. 2002-775, 166 B.C.A.C. 1, 100 B.C.L.R. (3d) 1, 18 C.P.R. (4th) 289, 93 C.R.R. (2d) 189 Statutes referred to Insurance Act, R.S.O. 1990, c. I.8, s. 134(2) [page535]

Barbara McAfee, for appellant. Christopher J. Staples, for respondents

The judgment of the court was delivered by

[1] GILLESE J.A.: -- Joanne Jacqueline McMynn and Robert McMynn leased some buses to a numbered company carrying on business under the name of Maple Rhodes.

[2] Maple Rhodes obtained comprehensive business insurance from Lombard General Insurance Company of Canada that provided coverage for, among other things, a fleet of buses owned or leased by Maple Rhodes, including those leased from the McMynns.

[3] One of the leased buses was damaged in an accident. Lombard paid the cost of repairing the bus less the amount that Maple Rhodes owed for unpaid premiums.

[4] The McMynns began legal proceedings to recover the cost of the unpaid premiums from Lombard. In a judgment dated May 5, 2003, Coo J. ordered, among other things, that Lombard could not rely on s. 134(2) of the Insurance Act, R.S.O. 1990, c. I.8 "to withhold loss payment amounts otherwise payable" to the McMynns.

[5] Lombard appeals that judgment.

[6] For the reasons that follow, I would dismiss the appeal.

Background

[7] Lombard General Insurance Company, the appellant, is an insurance company licensed to sell insurance in Ontario.

[8] The respondents, Joanne Jacqueline McMynn and Robert McMynn, operate a business that leases buses.

[9] The McMynns agreed to lease a number of buses to a numbered company carrying on business as Maple Rhodes. Maple Rhodes operated a passenger bus line.

[10] The lease agreement, dated January 20, 2001, required Maple Rhodes to (1) place and maintain insurance coverage for loss or theft of or damage to the leased vehicles; (2) pay the McMynns for any damage caused to a leased vehicle in the event that the insurance proceeds were insufficient; and (3) indemnify the McMynns from any damage, loss, theft or destruction of any leased vehicle. The lease also specifically required Maple Rhodes to insure the McMynns under the insurance policy that Maple Rhodes obtained. [page536]

[11] Maple Rhodes obtained a comprehensive business insurance policy from Lombard. The policy provided coverage for, among other things, property damage, business interruption, crime and general liability. It also provided insurance for the fleet of buses owned or leased by Maple Rhodes. The policy covered such risks as damage or loss to buildings and their contents, computer breakdown, sewer back-up, accounts receivable losses, money and securities losses and earthquake damage.

[12] The policy provided coverage for the McMynns, as the leasing company, under a blanket lessor endorsement which reads as follows:

It is hereby understood and agreed that this policy is extended to cover as an Additional Named Insured, any Leasing Company, with respect to ownership of automobiles, leasing automobiles to the Insured on a long term basis (over 30 consecutive days) for which the Insured is legally obligated to provide insurance.

[13] The policy was in effect from January 18, 2001 to January 18, 2002. During the term of the policy, premiums were withdrawn from Maple Rhodes's account on a monthly basis. The amount of the monthly premium changed throughout the term as a result of adding or deleting vehicles covered by the policy or as a result of added endorsements. During its term, the policy covered as many as 29 vehicles.

[14] On October 3, 2001, one of the leased buses was damaged. Mississauga Truck & Bus repaired the bus.

[15] On January 18, 2002, Maple Rhodes's policy with Lombard expired. On that date, the amount of $33,256.44 in unpaid premiums was outstanding. This amount was directly withdrawn from Maple Rhodes's account and credited to Lombard in accordance with Maple Rhodes's direct billing payment plan. However, on January 22, 2002, the January 18, 2002 direct billing withdrawal from Maple Rhodes's account was reversed as there were insufficient funds in Maple Rhodes's account to cover the withdrawal. That amount was then debited from Maple Rhodes's payment schedule. Maple Rhodes's account was also charged $15.00 for the NSF fee. The total amount of premiums, including the NSF fee, owing on January 27, 2002 was $33,271.44.

[16] Maple Rhodes submitted a proof of loss dated April 12, 2002 to Lombard, indicating that the repair cost to the bus was $174,678.27. Lombard authorized payment in the amount of $130,774.24, which represented the $174,678.27 in damages claimed, less GST in the amount of $10,632.59 and the unpaid premiums of $33,271.44.

[17] On April 23, 2002, Lombard issued a cheque in the amount of $130,877.35 and made payable to "MISSISSAUGA TRUCK & [page537] BUS AND MAPLE RHODES DIV OF JLD BUS INC. & JOANNE JAXQUELINE [sic] MCMYNN & R & J MCMYNN LEASING". The back of the cheque was endorsed on behalf of R & J McMynn Leasing, Joanne Jacqueline McMynn and Maple Rhodes. The cheque was then deposited into the account of Mississauga Truck & Bus on May 1, 2002.

[18] The McMynns started proceedings against Lombard for the unpaid $33,271.44. The applications judge made an order that Lombard was not entitled to rely on s. 134(2) of the Insurance Act to withhold unpaid premiums. He reasoned that:

The two clauses in the above section [134(2)] should be read conjunctively. The applicants could not be pursued under the first clause; they may not be pursued under the second. That interpretation certainly produces a more fair and balanced result and one which is more logically consistent. It also is compatible with the argument that no loss payee ought to be made globally liable for any and all premiums unpaid by the insured unless the language, either of policy or statute is clear on the point.

(Emphasis in original)

[19] Lombard appeals from that order.

The Issue

[20] This appeal turns upon the proper interpretation of s. 134(2) of the Insurance Act. Subsection 134(2) states that:

134(2) The insurer may sue for the unpaid premium and may deduct the amount thereof from the amount for which the insurer is liable under the contract of insurance.

[21] Lombard argues that s. 134(2) is ambiguous and, when correctly interpreted, allows the insurer to automatically deduct the amount of unpaid premiums from the amount for which it is liable. The McMynns, it argues, should be in no better position than the insured under the policy of insurance that affords them coverage.

[22] The McMynns maintain that the applications judge correctly interpreted s. 134(2) and that s. 134(2) restricts recovery by deduction to amounts payable to the party responsible for payment of the premiums under the policy, not a third party.

Analysis

[23] In my view, the decision below was correct both in result and reasoning.

[24] Subsection 134(2) of the Insurance Act is comprised of two clauses. The first clause gives an insurer the right to sue for unpaid premiums. Although s. 134(2) does not state whom the insurer has the right to sue, it must be assumed to be the insured contracting party because, unless otherwise stipulated by the [page538] insurance contract, it is the contracting party who is liable for the premiums, not the added party.

[25] The second clause gives the insurer the right to deduct the amount of the unpaid premium from the amount for which the insurer is liable. The second clause is tied to the first clause by the word "and"; thus the two clauses are to be read conjunctively. In that context, the intent of s. 134(2) must be to restrict recovery by deduction to amounts payable to the party responsible for payment of the premiums under the policy, not a third party. Thus, s. 134(2) does not create a statutory right to withhold from a loss payment due to an added insured an amount to cover unpaid insurance premiums owed by the insured party. In my view, this is what the applications judge meant when he wrote that, as the McMynns "could not be pursued under the first clause; they may not be pursued under the second".

[26] The amounts payable under the insurance policy in the instant case are for property damage sustained by a third party insured, the McMynns. The McMynns are not the party with whom Lombard contracted. Therefore, Lombard is not entitled to withhold the amount it was owed by Maple Rhodes for unpaid premiums when making a payment to the McMynns.

[27] This interpretation of s. 134(2) produces a more fair and balanced result than that argued for by Lombard. To allow Lombard to withhold the unpaid premiums from the amount owed to the McMynns would be to make the McMynns, as loss payees, liable for any and all of Maple Rhodes's unpaid premiums even though the premiums were for a scope of coverage far greater than that in which the McMynns had any interest. Moreover, it would make the McMynns liable outside the scope of any temporal connection they might have had with such coverage as there is no evidence that the premiums under the policy were in arrears at the time that the leased bus was damaged. In my view, nothing short of the clearest possible language would be required to shift legal responsibility for unpaid premiums to third party insureds.

[28] I do not accept Lombard's argument that s. 134(2) is ambiguous. When s. 134(2) is read in its grammatical and ordinary sense and in context, it is clear that it restricts recovery by deduction to amounts payable to the party responsible for payment of the premiums under the policy, not a third party. As Iacobucci J. said in Bell ExpressVu Limited Partnership v. Rex, 2002 SCC 42, [2002] 2 S.C.R. 559, [2002] S.C.J. No. 43, at p. 581 S.C.R.:

What, then, in law is an ambiguity? To answer, an ambiguity must be "real" [Marcotte v. Canada (Deputy A.G.), 1974 1 (SCC), [1976] 1 S.C.R. 108]. The words of the provision must be "reasonably capable of more than one meaning" (Westminster Bank Ltd. v. Zang, [1966] A.C. 182 (H.L.), at p. 222 per Lord Reid). By [page539] necessity, however, one must consider the "entire context" of a provision before one can determine if it is reasonably capable of multiple interpretations.

[29] Lombard argues that reading the clauses in s. 134(2) conjunctively is an error because such an interpretation would require an insurer to sue before being able to deduct unpaid premiums. The question of whether an insurer is required to sue before being able to deduct unpaid premiums is not in issue on this appeal. The question before this court is whether Lombard is entitled to deduct an amount for unpaid premiums from an amount owing to a third party. I would add that there is nothing in the decision below to suggest that an insurer must commence an action for premiums before it can deduct premiums from amounts payable. Rather, the applications judge held that the conjunctive language made it clear that both parts of s. 134(2) are to be read together and, as the right of action could apply only to the contracting party, the right to deduct unpaid premiums applies only to the same party.

[30] Lombard relies on MacRae v. British Aviation Insurance Co., 1983 3736 (MB QB), [1983] M.J. No. 93, 26 Man. R. (2d) 263 (Q.B.) to argue that the rationale behind s. 134(2) is that where there are earned premiums owing to the insurer at the time that the loss is payable, it may deduct those premiums from the loss amount. On my reading of MacRae, however, no such general proposition can be drawn; the result in MacRae is explicable on its facts.

[31] In MacRae, the third party lessor was a party to the contract by way of a special endorsement. Under the terms of the special endorsement, the lessor was required to pay any premiums that the insured failed to pay. There is no similar provision or endorsement in the case at bar.

[32] Finally, Lombard argues that the policy protected the McMynns' interest and there is no justification for depriving an insurer of the premiums payable in respect of the policy under which it provides coverage. As noted above, the policy in question provided coverage for a great many more things than just the McMynns' interest in the leased buses. There is no justification for requiring the McMynns to pay for premiums on unrelated coverage that was of no benefit to them and for which they could have made no claim.

Disposition

[33] Accordingly, the appeal is dismissed with costs to the respondents fixed at $4,800, inclusive of GST and disbursements.

Appeal dismissed. [page540]