Lambton Mutual Insurance Company v. General Accident Insurance Company and Robert Findlay, 1995 ONICDRG 193

Ontario Insurance Commission

Commission des assurances de l’Ontario

Neutral Citation: 1995 ONICDRG 193 Appeal P-005358 & P-005359

OFFICE OF THE DIRECTOR OF ARBITRATIONS

LAMBTON MUTUAL INSURANCE COMPANY Appellant

and

GENERAL ACCIDENT INSURANCE COMPANY Respondent

and

ROBERT FINDLAY Respondent

Before: David R. Draper, Director's Delegate

Counsel: Barry Sullivan (for Lambton Mutual) Stephen Schenke (for General Accident)

Observing: Marc Katzman (for Robert Findlay)

APPEAL ORDER

Under section 283 of the Insurance Act, R.S.O. 1990, c.I.8, as amended, it is ordered that:

The appeal is dismissed and the arbitration order, dated February 15, 1995, is confirmed.

December 22, 1995

David R. Draper Director's Delegate

Date

REASONS FOR DECISION

I. THE DISPUTE

This is a dispute between two insurers over which is responsible for paying Mr. Findlay's accident benefits. At the time of the accident on April 15, 1993, Mr. Findlay did not have his own automobile insurance. He was a passenger in a vehicle insured by Lambton Mutual Insurance Company ("Lambton Mutual"). One of the other vehicles involved in the accident was insured by General Accident Assurance Company ("General Accident"). According to section 268(2) of the Insurance Act, the Lambton Mutual policy has priority. Lambton Mutual claims, however, that its policy was void ab initio because its policyholder had no insurable interest in the vehicle.

The arbitrator concluded that Lambton Mutual is the responsible insurer based on her view that the common law defence of void ab initio is not available against an innocent third party, and has been effectively removed by section 233(2) of the Insurance Act. Lambton Mutual appeals the resulting order that it is liable to pay accident benefits to Mr. Findlay.

In its Notice of Appeal, Lambton Mutual asked the Director to state a case for the Divisional Court on the legal question of whether section 233 of the Insurance Act removes the common law defence of void ab initio. The Director declined this request by letter, dated June 7, 1995, stating: "It is not necessary, nor indeed appropriate, that a question be stated for the Court's opinion where the tribunal is competent to dispose of it."

The appeal proceeded by way of oral submissions from Lambton Mutual and General Accident. Mr. Findlay's lawyer listened to the proceedings by telephone, but did not participate. Following the appeal hearing, both insurers provided additional written submissions.

II. BACKGROUND

The factual situation, as found by the arbitrator, is as follows. Lambton Mutual only underwrites automobile insurance in the Sarnia-Lambton area. Beverly Fenn, a Sarnia resident, was one of its policyholders, insuring a Firebird. In October 1992, Ms. Fenn contacted Lambton Mutual by telephone and added a 1983 Ford Mustang to her policy as an additional vehicle.

Lambton Mutual assumed that Ms. Fenn owned the Mustang, and did not ask for any written confirmation.

Ms. Fenn subsequently reported that her Firebird had been stolen. As a result of investigating this claim, Lambton Mutual became suspicious about the ownership of the Mustang. Despite its suspicions, however, Lambton Mutual could not take action to cancel or avoid the policy of insurance because it had no firm proof that any of the terms of the contract were being violated.

On April 15, 1993, the Mustang was involved in an accident. Mr. Gerald Robert St. Jean was driving, and Mr. Findlay was a passenger. Mr. Findlay claims benefits under the Schedule¹ based on injuries that he suffered in this accident. The question is which insurer is responsible for paying them.

section 268 (2) of the Insurance Act sets out the following priority rules:

268(2) The following rules apply for determining who is liable to pay statutory accident benefits:

1. In respect of an occupant of an automobile,

i. the occupant has recourse against the insurer of an automobile in respect of which the occupant is an insured,

ii. if recovery is unavailable under subparagraph i, the occupant has recourse against the insurer of the automobile in which he or she was an occupant,

iii. if recovery is unavailable under subparagraph i or ii, the occupant has recourse against the insurer of any other automobile involved in the incident from which the entitlement to no-fault benefits arose,

iv. if recovery is unavailable under subparagraph i, ii or iii, the occupant has recourse against the Motor Vehicle Accident Claims Fund.

[emphasis added]

Because Mr. Findlay did not have his own automobile insurance, he contacted Lambton Mutual as the insurer of the automobile in which he was an occupant [s.268(2)1ii]. After some investigation, Lambton Mutual returned Ms. Fenn's entire premium related to the Mustang, and took the position that there was no contract of insurance because she was not the owner of the vehicle.

The arbitrator found that although Ms. Fenn was the registered owner of the Mustang, she did not have possession of the vehicle in Sarnia. At all material times, it was in the control and possession of Mr. St. Jean in Windsor. The arbitrator accepted Lambton Mutual's submission that Ms. Fenn misrepresented the true ownership of the Mustang. Ms. Fenn also misrepresented the insurance risk to Lambton Mutual by stating that the vehicle would be operated in the Sarnia-Lambton area by her as the principal driver.

III. ANALYSIS

Section 233 of the Insurance Act deals with the consequences of misrepresentation:

233.--(1) Where,

(a) an applicant for a contract,

(i) gives false particulars of the described automobile to be insured to the prejudice of the insurer, or

(ii) knowingly misrepresents or fails to disclose in the application any fact required to be stated therein;

(b) the insured contravenes a term of the contract or commits a fraud; or

(c) the insured wilfully makes a false statement in respect of a claim under the contract,

a claim by the insured is invalid and the right of the insured to recover indemnity is forfeited.

(2) Subsection (1) does not invalidate such no-fault benefits as are set out in the Statutory Accident Benefits Schedule.

General Accident contends that section 233 answers the issue in this case. Although Ms. Fenn's misrepresentations might prevent her from claiming under the policy², section 233(2) states that the policy's coverage for accident benefits is unaffected. Therefore, Mr. Findlay can claim accident benefits under the Lambton Mutual policy as "an occupant of the insured automobile."³

In my opinion, section 233(2) makes it is clear that Lambton Mutual cannot deny accident benefits to Mr. Findlay based on Ms. Fenn's misrepresentations. However, coverage is not being denied based on her misrepresentations, but on the fact that she was not the owner of the Mustang when she insured it. Lambton Mutual submits that although the common law defence of void ab initio has been substantially limited, the law in Ontario still allows an insurer to treat a policy as invalid if the named insured had no insurable interest in the vehicle at the time the policy was issued. In essence, its position is that third parties are not protected if there was never a valid automobile insurance policy in place.

As a matter of public policy, Lambton Mutual's position holds little attraction. Judges and authors have commented on the need to limit or eliminate this type of defence, particularly against innocent third parties. In addition, the thrust of the current legislation is toward the payment of accident benefits, even where the claimant has acted foolishly or dishonestly. The exclusions set out in section 17 of the Schedule are quite limited. However, Lambton Mutual's legal argument is legitimate, and must be addressed.

Lambton Mutual relies on cases decided under section 258 of the Insurance Act, its predecessors, and similar provisions in the legislation of other provinces. The current section states:

258.--(1) Any person who has a claim against an insured for which indemnity is provided by a contract evidenced by a motor vehicle liability policy, even if such person is not a party to the contract, may, upon recovering a judgment therefor in any province or territory of Canada against the insured, have the insurance money payable under the contract applied in or towards satisfaction of the person's judgment and of any other judgments or claims against the insured covered by the contract and may, on the person's own behalf and on behalf of all persons having such judgments or claims, maintain an action against the insurer to have the insurance money so applied.

The common law developed in earlier cases allowed insurers to deny the claim of an innocent third party where the policy was issued based on a material misrepresentation by the insured person.⁴ Many jurisdictions, including Ontario, responded by amending their legislation to protect third parties by requiring insurers to pay, even if the insured person had lost his or her right to indemnification. The relevant provision is now found in section 258(5) of the Insurance Act:

258.--(5) It is not a defence to an action under this section that an instrument issued as a motor vehicle liability policy by a person engaged in the business of an insurer and alleged by a party to the action to be such a policy is not a motor vehicle liability policy, and this section applies with necessary modifications to the instrument.

The Ontario Court of Appeal considered the effect of adding section 223(4) of the Insurance Act, a predecessor to section 258(5), in Minister of Transport et al. v. London & Midland General Insurance Co., [1971] 3 O.R. 145. In that case, Mr. Dolson had no driver's licence, but wanted a vehicle. He entered into a casual arrangement with Miss Bassert whereby he purchased a vehicle that was registered and insured in her name. The understanding was that when he eventually got a driver's licence, the ownership and insurance would be transferred to him. The court found that on the day of the accident, Mr. Dolson was operating what was in fact his car.

The plaintiffs obtained a judgment against Mr. Dolson's estate, which was paid by the Minister. The Minister then brought an action against Ms. Bassert's insurer based on section 223(4) of the Insurance Act. The Court of Appeal upheld the trial judge's decision dismissing the action against Miss Bassert's insurer, stating as follows:

We agree with Mr. Holland that if a policy is issued to the owner of a motor vehicle as a result of his misrepresentation, then the fact of the misrepresentation will not provide an insurance company with a defence against third parties who are injured as a result of the operation of the vehicle by the owner. In other words, it has the effect of overcoming the results achieved in the decisions of Comer v. Bussell et al., 1939 CanLII 305 (ON CA), [1940] 1 D.L.R. 97, 7 I.L.R. 44 (Ont. C.A.); affirmed 1940 CanLII 9 (SCC), [1940] S.C.R. 506, [1940] 3 D.L.R. 417, 7 I.L.R. 247, and in Bourgeois et al. v. Prudential Assurance Co. Ltd., 1945 CanLII 334 (NB CA), [1946] 1 D.L.R. 139, 18 M.P.R. 334, 13 I.L.R. 1. However, it is our opinion that it does not have any further effect and that the first two grounds of the Court of Appeal decision in Comer, which judgment was sustained by the Supreme Court of Canada, are still available to the respondent. This policy does not cover this risk not only because it is not an owner's policy but also because it cannot be said that Dolson had Miss Bassert's consent to operate the car at the time the accident occurred. We say that because she was not in a position to be able to give or withhold consent . . .

The decision makes it clear that the legislation limits an insurer's defences against a third party, but does not entirely eliminate them. If a policy is issued to an owner as a result of a misrepresentation, the fact of the misrepresentation will not allow the insurer to deny responsibility to an innocent third party who is injured as a result of the operation of the motor vehicle. However, the insurer can still deny coverage under an owner's policy issued to someone who was not the owner of the vehicle. The rationale is that the risk set out in section 223(4) [now s.258(5)] is not covered because there is no valid owner's policy.

The decision in London & Midland has been considered in many subsequent cases, and not always followed. It is unnecessary to review the details of those cases due to the recent decision in Campanaro v. Kim (1995), 1995 CanLII 7071 (ON CTGD), 24 O.R. (3d) 274, which dealt with a situation quite similar to that in London & Midland. State Farm issued an automobile policy to Ki-Suk, who stated in his application for insurance that he was the registered and actual owner of the vehicle, a Dodge. Ki-Suk's brother, Ki-Jin was subsequently involved in an accident while driving the Dodge. Following the accident, State Farm returned Ki-Suk's premium and took the position that the policy was void ab initio because he had misrepresented the true ownership of the vehicle.

Justice Gotlib reviewed the state of the law and concluded that London & Midland is still the law in Ontario, and that section 258(5) "does not extend to impose liability under an owner's policy where the named insured is not in both fact and law the owner of the car." She released State Farm from the proceedings brought against it because its named insured, Ki-Suk, was not in fact or in law the owner of the Dodge.

I accept the analysis in Campanaro, but am not persuaded that it answers the issue in this case. The third party liability cases deal with insurance coverage for which ownership of the vehicle is essential. The scope of third party liability coverage is currently set out in section 239(1), as follows:

239.--(1) Subject to section 240, every contract evidenced by an owner's policy insures the person named therein, and every other person who with the named person's consent drives, or is an occupant of, an automobile owned by the insured named in the contract and within the description or definition thereof in the contract, against liability imposed by law upon the insured named in the contract or that other person for loss or damage,

(a) arising from the ownership or directly or indirectly from the use or operation of any such automobile; and

(b) resulting from bodily injury to or the death of any person and damage to property. [emphasis added]

In my opinion, the decisions in Comer, London & Midland and Campanaro stand for the proposition that a non-owner cannot insure against risks arising out of the ownership of the vehicle. Therefore, coverage which turns on ownership is invalid if the named insured had no insurable interest in the vehicle at the time it was insured. The decisions stop short, however, of establishing that an automobile policy issued to someone who misrepresents himself or herself as the owner of the vehicle is invalid for all purposes.

In Comer v. Bussell et al., 1940 CanLII 9 (SCC), [1940] 3 D.L.R. 417, the Supreme Court of Canada focussed on the specific sections of the legislation and concluded that third party liability coverage was dependant on ownership and, therefore, the driver could not be indemnified under a policy where the named insured did not own the vehicle. In London & Midland, the Court of Appeal did not state that the policy was void ab initio. It concluded: "This policy does not cover this risk." Finally, I do not read the decision in Campanaro as concluding that the entire insurance policy was void ab initio. Accident benefits simply were not an issue and, therefore, the effect of Ki-Suk's misrepresentation about his ownership of the vehicle on any claim for accident benefits was not addressed.

IV. CONCLUSION

The standard automobile insurance policy in Ontario is now a composite policy providing different types of insurance coverage, including statutory accident benefits. Ownership is not as critical a concept for accident benefits as it is for third party liability and property coverage. Every automobile insurance policy, both owner's policies and non-owner's policies, must include the accident benefits set out in the Schedule.⁵ The purpose is to ensure that people injured in motor vehicle accidents have access to those benefits, regardless of fault.⁶

Lambton Mutual was unable to provide any decision in which a court has concluded that an innocent third party is precluded from claiming statutory accident benefits where the named insured was not the owner of the vehicle when it was insured. The only two cases that deal with the issue support General Accident's position.

In Tame v. Canadian General Surety Company et al., [1981 I.L.R. 1-1378 (Ont. Co.Ct.), the issue was: "Does coverage under Section B of the Standard Automobile Policy of Insurance [Accident Benefits] remain effective even though the named insured had no insurable interest in the vehicle insured." Judge Rapson found that the policy covered three separate risks, and concluded:

The failure of the insured to have an insurable interest in the motor vehicle and consequently to have no insurable interest in Section C [Loss of or Damage to the Insured Automobile] should not affect the totally different risks in Section B [Accident Benefits]. An insurable interest in the motor vehicle is not necessarily required to support the separate insuring agreement under Section B.

. . . I find that it is not necessary for the insured to have a defined insurable interest and therefore the general rule that there be an identifiable insurable interest is not applicable to Section B benefits. Consequently in answer to the question before me, coverage under Section B of the Standard Automobile Policy of Insurance remains effective even though the named insured had no insurable interest in the vehicle insured.

The Tame decision was reviewed in LaForme et al. v. Wabisa Mutual Fire Insurance Company et al., [1988] I.L.R. 1-2367 (Ont. S.C.). Although the facts of the case are not clear from the decision, Justice Kent was urged not to follow Tame because it did not address the issue of whether the policy was void ab initio. Justice Kent was not persuaded that Judge Rapson's decision would have been different if the void ab initio argument had been put to him. He concluded that the decision in Tame was good law, and applied it to the facts before him.

I accept the approach taken in Tame, and followed in LaForme. Misrepresentations by the named insured about his or her ownership of the vehicle may invalidate coverages that are based on ownership, but do not render the entire policy void ab initio.

In this case, Ms. Fenn had a valid owner's automobile policy. She paid a premium to add the Mustang to her policy, although she misrepresented that its true ownership and anticipated use. This may allow the insurer to deny some claims, but an innocent third party, such as Mr. Findlay, should still be able to claim accident benefits under the policy as an occupant of the insured vehicle.

December 22, 1995

David R. Draper Director's Delegate

Date

APPENDIX 1

Judicial Decisions Considered:

Federated Insurance Co. of Canada v. Borg (1995), 1995 CanLII 7101 (ON CTGD), 25 O.R. (3d) 8 (Gen. Div.).

Campanaro et al. v. Kim et al.; State Farm Insurance Companies et al., Third Parties (1995) 1995 CanLII 7071 (ON CTGD), 24 O.R. (3d) 274 (Gen. Div.).

Weavers Estate v. Biseau (1992), 1992 CanLII 7435 (ON CTGD), 8 O.R. (3d) 781 (Gen. Div.).

LaForme et al. v. Wabisa Mutual Fire Insurance Company et al., [1988] I.L.R. 1-2367 (Ont. S.C.).

Negash v. H. Later & Company Limited et al., [1985] I.L.R. 1-1856 (Ont. Co. Ct.).

Tame v. Canadian General Surety Company, [1981] I.L.R. 1-1378 (Ont. Co.Ct.).

Kloppenburg v. Pitts Insurance Company, [1980] I.L.R. 1-1242 (Ont. C.A.)

Lawrence v. Powell et al., [1977] 28 N.S. Rep. (2d) 167.

Hayduk et al. v. Pidoborozny et al. (1972), 1972 CanLII 136 (SCC), 29 D.L.R. (3d) 8 (S.C.C.).

Minister of Transport et al. v. London & Midland General Insurance Co., [1971] 3 O.R. 145 (C.A.).

Bourgeois et al. V. Prudential Assurance Co. Ltd., 1945 CanLII 334 (NB CA), [1946] 1 D.L.R. 139.

Comer v. Bussell et al., 1939 CanLII 305 (ON CA), [1940] 1 D.L.R. 97 (Ont. C.A.); aff’d 1940 CanLII 9 (SCC), [1940] 3 D.L.R. 417 (S.C.C.).

OIC Decisions Considered:

Salmon v. Toronto Transit Commission (Markel Insurance), June 29, 1992, OIC File No. P-000235.

Footnotes

1. 1The term “Schedule” will be used to refer to Ontario Regulation 672. Before January 1, 1994, Regulation 672 was called the No-Fault Benefits Schedule. As of that date, it became the Statutory Accident Benefits Schedule - Accidents Before January 1, 1994.
2. 2Because Ms. Fenn apparently did not state in writing that she was the owner of the Mustang, section 233(3) might prevent Lambton Mutual from denying coverage under section 233. See, Federated Insurance Co. of Canada v. Borg (1995), 1995 CanLII 7101 (ON CTGD), 25 O.R. (3d) 8.
3. 3Section 2 of the Schedule.
4. 4Comer v. Bussell et al., 1939 CanLII 305 (ON CA), [1940] 1 D.L.R. 97 (Ont. C.A.); aff'd 1940 CanLII 9 (SCC), [1940] 3 D.L.R. 417 (S.C.C.); and Bourgeois et al. v. Prudential Assurance Co. Ltd., 1945 CanLII 334 (NB CA), [1946] 1 D.L.R. 139 (New Bruns. C.A.).
5. 5Insurance Act, section 268(1).
6. 6Insurance Act, section 268(1.1) and (2).