Neutral Citation: 1997 ONICDRG 11

OIC A-14688

ONTARIO INSURANCE COMMISSION

BETWEEN:

FAYE EDDIE

Applicant

and

KINGSWAY GENERAL INSURANCE COMPANY

Insurer

AND BETWEEN:

FAYE EDDIE

Applicant

and

THE NON-MARINE UNDERWRITERS, MEMBERS OF LLOYD'S, LONDON, ENGLAND

Insurer

DECISION ON A PRELIMINARY ISSUE

Issues:

The Applicant, Faye Eddie, was injured in a motor vehicle accident on July 19, 1994 (the "accident"). She applied to Kingsway General Insurance Company ("Kingsway General") and The Non-Marine Underwriters, Members of Lloyd's, London, England ("Lloyd's") for statutory accident benefits payable under the Schedule.¹ Kingsway General and Lloyd's both denied the Applicant's claim. Each contended that Ms. Eddie should look to the other company for payment of statutory accident benefits. The parties were unable to resolve their disputes through mediation, and the Applicant applied for arbitration under the Insurance Act, R.S.O. 1990, c.I.8, as amended.

The preliminary issue to be determined in this arbitration proceeding is:

1. Which insurance company, Kingsway General or Lloyd's, is responsible for paying any statutory accident benefits to which the Applicant may be entitled?

Result:

1. Kingsway General is the insurance company responsible for paying any statutory accident benefits to which the Applicant may be entitled.

Hearing:

The hearing on the preliminary issue was held in North York, Ontario, on February 19 and August 28, 1996, before me, Lawrence Blackman, Arbitrator.

Present at the Hearing:

Applicant:

Ms. Faye Eddie

Applicant's Representative:

Mr. Stanley B. Pasternak

Barrister and Solicitor

Kingsway General's Representative:

Mr. William G. Scott

Barrister and Solicitor

Kingsway General's Officer:

Ms. Elizabeth Iwata

Legal Counsel

(on February 19, 1996 only)

Lloyd's

Ms. Elizabeth L.W. Fanjoy

Barrister and Solicitor

Representative:

The proceedings on February 19, 1996, were transcribed by Ms. Teresa A. Forbes of Atchison & Denman, Court Reporting Services Ltd.

Witnesses:

1. Mr. A. Roger Wingfield, Vice-president, Kingsway General Insurance Company, and Assistant Vice-president of Kingsway Financial Services Inc.

2. Ms. Faye Eddie, Applicant.

Exhibits:

Exhibit 1

Copy of Ontario Application for Automobile Insurance, Owner's Form (OAF 1), signed by Ms. Faye Eddie, dated 14/4/94.

Exhibit 2

Copies of Kingsway Financial Services Inc., Personally Approved Payments (PAP) Consumer Authorization, signed by Ms. Faye Eddie, dated 14/4, and void cheque with the Royal Bank of Canada.

Exhibit 3

Copy of Kingsway General Insurance Company, Certificate of Automobile Insurance (Ontario), Policy No. 113681, prepared 94/04/30 and New Business Worksheet dated 94/04/25.

Exhibit 4

Copy of Kingsway General Insurance Company spreadsheet.

Exhibit 5

Copy of Royal Bank Return Item Voucher for Voucherless Debits, dated 94/05/26.

Exhibit 6

Copy of Kingsway Financial Services Inc. Notice of Policy Termination, June 25/94 termination date.

Exhibit 7

Copy of Kingsway General Insurance Company Certificate of Automobile Insurance (Ontario), Policy No. 113681, prepared 94/06/30.

Exhibit 8

Copy of Kingsway Financial Services Inc. letter dated July 6, 1994, to Ms. Faye Eddie.

Exhibit 9

Copy of Cancellation Worksheet, dated June 30, 1994.

Exhibit 10

Copy of Application for Accident Benefits, signed by Ms. Faye Eddie, dated October 7, 1994.

Exhibit 11

Copy of Insurance Bureau of Canada, 1994 Automobile Insurance Experience excerpt, re Kingsway General Insurance Company.

Evidence and Findings:

Background:

On April 14, 1994, Ms. Eddie completed an Ontario Application for Automobile Insurance, Owner's Form (OAF 1), with Kingsway General, at the offices of Cansave Insurance Inc. in Toronto. The effective date of the policy was April 15, 1994, at 12:01 a.m. The expiry date was April 15, 1995, at 12:01 a.m. The form was completed by the broker, and initialled and signed by Ms. Eddie.

Ms. Eddie then signed a separate Personally Approved Payments ("PAP") agreement with a different company, Kingsway Financial Services Inc. ("Kingsway Financial"). Mr. Wingfield, the Vice-president of Kingsway General and the Assistant Vice-president of Kingsway Financial, testified that Kingsway Financial is a financial management company that is the holding company for different institutions, one of which is Kingsway General. Kingsway Financial has 100% ownership of Kingsway General. Mr. Wingfield stated that Kingsway General, a general insurance company, sells insurance in "niche marketing that specializes in hard to place or non-standard automobile, people with convictions, or multiplicity of accidents, they have difficulty purchasing insurance in the regular market."² [sic]

Mr. Wingfield further testified that Kingsway Financial provides premium financing of Kingsway General's insureds, on the automobile side, pursuant to the PAP agreements. Mr. Wingfield stated that this was done because:

the premiums for the non-standard automobile risk are substantially higher than premiums for the regular risk, to facilitate the individual's ability to purchase insurance and to compete with other insurers, Kingsway Financial offers premium financing to its clients.³

[emphasis added]

Under the PAP agreement, Kingsway Financial paid Kingsway General up front, Ms. Eddie's entire automobile insurance premium. In return for this consideration, Ms. Eddie paid Kingsway Financial two months of blended principal and interest payments, totalling $480.00. Ten remaining blended payments to Kingsway Financial of $240.00 were to be drawn from the Applicant's banking account, on a monthly basis. Ms. Eddie further agreed to the following:

I/WE HEREBY GIVE KINGSWAY FINANCIAL SERVICES INC. THE IRREVOCABLE AUTHORITY TO CANCEL THE POLICY AT ANY TIME THAT AN OUTSTANDING PREMIUM IS UNPAID OR IF ANY PAYMENT IS NOT HONOURED BY MY/OUR FINANCIAL INSTITUTION. CANCELLATION WILL TAKE EFFECT ONE MONTH AFTER THE PAYMENT WAS DUE.

IN THE EVENT REINSTATEMENT IS REQUESTED A CHARGE OF $25.00 WILL BE REQUIRED. KINGSWAY GENERAL INSURANCE COMPANY WILL RETAIN THE RIGHT TO REFUSE TO REINSTATE ANY CONTRACT WHICH HAS BEEN TERMINATED.

These provisions meant that if Ms. Eddie missed a monthly payment to Kingsway Financial (which was not a party to the contract of automobile insurance), that company had the irrevocable authority to cancel, on behalf of Ms. Eddie, Ms. Eddie's insurance policy with Kingsway General.

Mr. Wingfield testified that the two months deposit paid by Ms. Eddie represented the first and last monthly payments. Therefore, the first withdrawal from Ms. Eddie's account would be in May 1994. However the applicable forms do not say against which two months the deposit applies.

Ms. Eddie's testimony on this point was uncertain. She testified that she was told by the broker at Cansave Insurance Inc. that the deposit represented the first and last monthly payments, but then indicated her understanding that the deposit covered April and May 1994. If so, the first withdrawal from her bank account would be in June 1994.

A Certificate of Automobile Insurance was prepared by Kingsway General on April 30, 1994. As Kingsway General's premium had been paid in full by Kingsway Financial, the balance due, under Statement of Account, was shown as $0.00.

Kingsway Financial endeavoured to draw $240.00 from Ms. Eddie's account in May 1994. The pre-authorized monthly payment was rejected by Ms. Eddie's bank.

Pursuant to the "irrevocable authority" given by Ms. Eddie in the PAP agreement, Kingsway Financial exercised its right, in the words of counsel, to "repossess the policy." Accordingly, Kingsway Financial sent a document entitled "NOTICE OF POLICY TERMINATION" to Ms. Eddie and to Kingsway General. This form states, in part:

YOUR PRE-AUTHORIZED MONTHLY PAYMENT HAS BEEN REJECTED BY YOUR BANK. THEREFORE, YOU HAVE DEFAULTED UNDER THE PROVISIONS OF THE PERSONALLY APPROVED PAYMENT (PAP) CONTRACT.

PURSUANT TO THE AUTHORIZATION GIVEN TO KINGSWAY FINANCIAL SERVICES INC. IN THE CONTRACT, WE HEREBY TERMINATE THE POLICY SHOWN ABOVE AS OF THIRTY (30) DAYS AFTER THE DATE THAT THE PAYMENT WAS DUE.

YOUR BROKER HAS BEEN ADVISED OF THE POLICY TERMINATION.

THE ABOVE POLICY MAY BE REINSTATED IF AND ONLY IF KINGSWAY FINANCIAL SERVICES INC. RECEIVES THE REPLACEMENT OF THE DISHONOURED ITEM(S) PLUS A SERVICE CHARGE OF $25.00 PER ITEM BY CERTIFIED CHEQUE OR MONEY

ORDER NOT LATER THAN TEN (10) DAYS FROM THIS ADVICE DATE.

THE INSURANCE COMPANY IS TO ARRANGE TO PAY KINGSWAY FINANCIAL SERVICES INC. THE GROSS UNEARNED PREMIUM OF THE POLICY TERMINATION AND ANY EXCESS WILL BE CREDITED TO THE BROKERS [sic] NEXT MONTHLY STATEMENT FROM KINGSWAY GENERAL INSURANCE COMPANY.

A termination advice date of June 1, 1994 and a final reinstatement date of June 11, 1994 are noted in the letter. A termination date of June 25, 1994 at 12:01 a.m. is given.

Ms. Eddie acknowledged that she received this Notice from Kingsway Financial. She knew that a monthly payment had "bounced." She testified that she therefore telephoned "Kingsway." She advised an unidentified employee of her financial difficulties, and asked whether she could make two payments the next month (in her mind July 1994) which she evidently felt would keep her policy in good standing. She testified that this unidentified person said that this was "OK." Ms. Eddie testified that she intended to pay the double installment on July 15, 1994. In fact, she failed to do so.

Mr. Wingfield testified that the Notice of Policy Termination would be hand delivered from Kingsway Financial to a central file mail unit at Kingsway General. As the two companies shared the same offices, and as this was considered "internal" mail, there would be no "date received" stamp on the document, unlike Exhibits 1 and 2 which were evidently received from Cansave Insurance Inc. Mr. Wingfield testified that although he believed that Kingsway General received the Notice of Policy Termination on June 1, 1994, being the date it was generated from Kingsway Financial, it was not possible for him to verify this date.

On June 30, 1994, Kingsway General therefore prepared a calculation of the unearned premium. This totalled $2,353.05, which would be remitted to Kingsway Financial.

Kingsway Financial then notified Ms. Eddie by letter dated July 6, 1994 that their "records" indicated that her policy with Kingsway General had been cancelled with an outstanding balance of $293.09 owed by her to Kingsway Financial. This is the amount that Kingsway Financial was "out of pocket."

On July 19, 1994, Ms. Eddie was involved in a motor vehicle accident when her car was struck by a vehicle insured by Lloyd's.

The Law:

Lloyd's argued that the deposit paid by Ms. Eddie in fact represented the first two months of the policy year. Therefore, the first installment missed would have been June 15, 1994, and hence the notice of termination with the advice date of June 1, 1994 was premature.

Even if correct, this argument does not assist the Applicant. Firstly, the effective cancellation date under the PAP agreement (which did not require notice to be given) would be one month after the payment was due, that is July 15, 1994, which is still prior to the accident date of July 19, 1994. Furthermore, whereas a notice of cancellation delivered by an insurer on the basis of non-payment of premiums would be ineffective where the premiums had in fact been paid,⁴ where such an error is made by the insured's agent, the insured's remedy would be against the agent, not the insurer.

Lloyd's further argued non est factum, i.e., that the contract with Kingsway Financial, although seemingly Ms. Eddie's, was in fact not hers, as she had signed something other than she had intended. For the Applicant to be successful in this plea, the PAP agreement must be found to be fundamentally or radically different from what Ms. Eddie believed and intended it to be.⁵ I find that the document was not fundamentally different from Ms. Eddie's basic understanding that if she missed a payment, her policy would be cancelled.

It was further argued that the means by which Ms. Eddie's automobile policy was cancelled, was contrary to Ontario Regulation 777/93 (the "Statutory Conditions").⁶ Subsection 11(1) of the Statutory Conditions states:

11. (1) Subject to section 12 of the Compulsory Automobile Insurance Act and sections 237 and 238 of the Insurance Act, this contract may be terminated by the insurer giving to the insured

fifteen days notice of termination by registered mail or five days written notice of termination personally delivered.

[emphasis added]

Subsection 11(2) states that the contract of automobile insurance may be terminated by the insured, at any time, on request.

Subsection 11(1) of the Statutory Conditions reflects the policy consideration that it is important to both the specific insureds and the public generally, that insureds be given mandatory notice that their insurance is going to be cancelled, so that they might rectify any default. It is not sufficient for insureds to be subject to an insurer's discretion as to the appropriate method and length of notice, if any.

In this case, Ms. Eddie's default in payment did not allow the Insurer, Kingsway General, to terminate her policy, as her premium had been paid in full by Kingsway Financial. "Kingsway" could only terminate her policy by having its financing entity, Kingsway Financial, exercise the irrevocable authority given by Ms. Eddie; that is to have Ms. Eddie in effect terminate her own policy pursuant to subsection 11(2) of the Statutory Conditions.

Kingsway General argues that as Ms. Eddie terminated her own policy, she was not entitled to receive, nor did she ever receive, notice of termination from Kingsway General pursuant to subsection 11(1) of the Statutory Conditions. The notice which was gratuitously provided by Kingsway Financial was not in accordance with any Statutory Condition. To require Kingsway Financial to provide notice to Ms. Eddie would be tantamount to requiring Applicants to give themselves notice that they were cancelling their own insurance.

Kingsway General submits that several cases⁷ have held that a financing company, as agent for an insured, can cancel an insured’s policy, so long as such authority has been given by the insured, as in this case.

However, none of the cases cited by Kingsway General dealt with a situation where the financing company is closely related to the insurer.

In addition, the cases cited by Kingsway General did not deal with the implications of section 3 of the Statutory Conditions, which was introduced in 1990. Section 3 states that:

Unless otherwise provided by the regulations under the Insurance Act, the insured may pay the premium, without penalty, in equal monthly payments totalling the amount of the premium. The insurer may charge interest not exceeding the rate set out in the regulations.

Allan O'Donnell notes that this section "provides that the insured can, as of right, pay the automobile insurance premium monthly as opposed to having to pay the full premium annually or semi-annually"⁸ (emphasis added), which was part of a consumer demand for an automobile insurance system that provided "availability of insurance, which was, after all, compulsory."⁹

Statutory Condition 3 is qualified by section 3 of Regulation 664, R.R.O. 1990, as amended, ("Regulation 664"), which restricts the requirement to allow premiums to be paid in installments to, among others, those insurers who in the preceding year insured more than 10,000 private passenger automobiles in Ontario.

Mr. Wingfield clarified on August 28, 1996, that in 1993, Kingsway General insured 9,455 private passenger automobiles in Ontario. Therefore, Kingsway General was not required in 1994 to offer Ms. Eddie the option of paying her premiums in instalments pursuant to Regulation 664. In 1994, Kingsway General insured 18,426 vehicles.¹⁰ Mr.Wingfield testified that as of January 1, 1995, Kingsway General provides financing in accordance with Regulation 664, and that in 1995, Kingsway Financial stopped providing premium financing in Ontario for automobile insurance.

Section 3(7) of Regulation 664 however states that:

(7) An insurer who is not required to permit its insureds to pay their premiums in instalments but who chooses to do so is subject to the same requirements as those insurers who are required to permit their insureds to pay their premiums in instalments.

[emphasis added]

The intent of this subsection is to afford insureds the protection of the statutory requirements when an insurer opts to permit its insureds to pay their premiums in installments. The subsection also protects those insurers who are required to provide premium installment payments from being subject to unfair competition from those insurers who would otherwise not be subject to the same statutory requirements.

Did Kingsway General permit Ms. Eddie to pay her premiums in instalments?

Strictly speaking, Ms. Eddie never paid her "premiums" in installments. The insurance premium was in fact paid in one lump sum to Kingsway General by Kingsway Financial. What Ms. Eddie technically was to pay in instalments were her loan payments to Kingsway Financial.

It should be noted however that subsection 3(4) of Regulation 664 sets out the following provisions in cases where insurers must offer their insureds the option of paying their premiums in installments:

(4) As a precondition for permitting an insured to pay the premium in instalments, an insurer may require that the insured,

(a) make an initial payment equal to two monthly instalments of the premium; and

(b) agree to make all payments under the contract by pre-authorized payment from the insured's account at a financial institution.

(5) The maximum interest rate that an insurer may charge for instalment payments in respect of a contract entered into or renewed before July 1, 1994 is 3 per cent of the total premium payable under a contract.

(6) The amount of each instalment payment shall be calculated as blended principal and interest.

Ms. Eddie's Application for Automobile Insurance with Kingsway General, calculates her total premium as $2,796.00, including tax. Then mirroring subsection 3(4), the Application notes, under the heading "method of payment," that the total estimated cost of insurance is $2,880.00 (which includes interest calculated at 3% of the total premium, i.e. $83.88), that $480.00 has been received (representing two monthly installments of premiums), that ten equal payments of $240.00 are due, that the payments (presumably blended premium and interest) will be made monthly, and that May 16, 1994 is the estimated installment due date. The PAP agreement with Kingsway Financial merely states that Ms. Eddie's subsequent monthly payments will be drawn from her bank account. One therefore queries whether Kingsway General is indeed truly independent from Ms. Eddie’s financing arrangement.

It is trite to say, as stated in the Saskatchewan Court of Appeal decision of Nedco Ltd. v. Clark, that "the autonomous and independent existence of the corporate entity has generally been accepted as a fundamental feature of both English and Canadian law."¹¹

However, the Saskatchewan Court of Appeal further held in Kinookimaw Beach Assn. v. Saskatchewan¹² that:

the principle to be drawn from the Nedco case is that the autonomous and independent existence of the corporate structure must be accepted and respected unless it can be shown that such structure is being deliberately used to defeat the intent and purpose of a particular law or is intended to or does convey a false picture of independence between one or more corporate entities which, if recognized, would result in the defeat of a just and equitable right.

In this arbitration case, Kingsway General was at all material times completely owned by Kingsway Financial. There was an overlap in corporate management. The two companies shared office space. Correspondence between the two companies was considered to be "internal mail."

In addition, there was an overlap in corporate purpose regarding payment of automobile insurance premiums. Mr. Wingfield testified that Kingsway Financial offered premium financing in order to allow Kingsway General to compete with other insurers.

Not surprisingly then, when in 1995, Kingsway General was required to allow premiums to be paid in installments (as it had insured more than 10,000 private passenger automobiles in Ontario in the preceding year), Kingsway Financial stopped providing premium payment financing in Ontario for automobile insurance. At that point, there was simply no further need for Kingsway Financial to duplicate a service now being provided directly by Kingsway General.

In 1994, Kingsway General was merely doing indirectly through Kingsway Financial what it is now doing directly: permitting its insureds to pay their premiums in installments. However, the artificial arrangement existing in 1994 allowed the statutory notice provisions of subsection 11(1) of the Statutory Conditions to be circumvented. In their place, Ms. Eddie had no right to notice. Any notice provided by Kingsway Financial was at its absolute discretion. Although notice was provided in this case, I received no evidence that the notice was served in accordance with the Statutory Conditions. Gratuitous notice hardly meets the policy reasoning behind subsection 11(1).

I find that the arrangement existing in 1994 conveyed a "false picture of independence" between Kingsway General and Kingsway Financial, if not a deliberate effort to defeat the intent and purpose of the Statutory Conditions and Regulation 664. If this false picture were recognized, it would result in the defeat of the right of notice provided by subsection 11(1) of the Statutory Conditions.

Accordingly, I find that it is appropriate to "pierce the corporate veil" in this case, and state what I think is the obvious, that Kingsway General was in reality permitting Ms. Eddie to pay her premium in instalments, but on condition that she give up her right to statutory notice of termination by her insurer.

Brown and Menezes state in Insurance Law in Canada¹³ that "Statutory conditions as to cancellation must be strictly complied with." Subsection 234(2) of the Act states that:

(2) Variation. No variation or omission of or addition to a statutory condition is binding on the insured.

Kingsway General, by permitting premiums to be paid in installments, was subject to the same requirements as those insurers who were obliged to offer premium financing. These requirements include the Statutory Conditions. The requirement that Ms. Eddie provide Kingsway Financial with irrevocable authority to allow it to cancel her insurance, purportedly on her behalf, is a variation of subsection 11(1) of the Statutory Conditions. Accordingly, it is not binding on the Applicant.

Therefore, Ms. Eddie’s insurance with Kingsway General was not cancelled by Kingsway Financial’s Notice of Policy Termination.

Accordingly, Ms. Eddie's policy of automobile insurance with Kingsway General was in force at the time of the accident. Therefore Kingsway General is the insurance company responsible for paying any statutory accident benefits to which the Applicant may be entitled.

It was argued that the above result would be unfair, as Kingsway General could not terminate Ms. Eddie’s policy of automobile insurance upon default of payment, since its premium had been paid in full. Therefore, if Ms. Eddie chose not to terminate her policy upon default of payment, she could miss her monthly payments without the risk of cancellation of her insurance. If this is so, it is only because of an arrangement created by Kingsway, which negated provisions of the Statutory Conditions. I cannot ignore the latter in order to protect Kingsway from its own creation. In any event, Kingsway Financial would still have its remedies as an ordinary creditor.

Expenses:

The issue of expenses of this preliminary hearing is reserved to the main hearing.

Order:

1. Kingsway General is the insurance company which is responsible for paying any statutory accident benefits to which the Applicant may be entitled.

January 16, 1997

Lawrence Blackman

Arbitrator

Date

Footnotes

1. 1The Statutory Accident Benefits Schedule - Accidents after December 31, 1993, and before November 1, 1996, called "the Schedule" in this decision. The Schedule is Ontario Regulation 776/93, as amended.
2. 2Atchison & Denman Court Reporting Services Ltd., Transcript from February 19, 1996 hearing, p. 10.
3. 3Ibid, at p. 11.
4. 4Antiseptic Bedding Co. v. Gurofski (1915), 33 O.L.R. 319 C.A.
5. 5Saunders v. Anglia Building Society, [1971] A.C. 1039 (H.L.).
6. 6Pursuant to section 1(2) of Ontario Regulation 777/93, the statutory conditions apply to all contracts of automobile insurance entered into or renewed on or after January 1, 1994. Section 234(1) of the Insurance Act, R.S.O. 1990 c. I.8, as amended (the "Act"), confirms that such prescribed conditions are statutory and that they shall be deemed to be part of every contract to which they apply. The exception noted in section 234(3) is inapplicable as the Statutory Conditions are set out in the standard Owner's Policy for use on or after March 31, 1994.
7. 7Alberta (Administrator, Motor Vehicle Accident Claims Act) v. Wellington Insurance Co. (1992), 1992 CanLII 6124 (AB KB), 129 A.R. 147 (Alta. Q.B.)., J.W. Arden Logging Co. Ltd. v. Fireman's Fund Insurance Co. [1964] I.L.R. 576 (B.C.C.A.)., Larizza v. Commercial Union Assurance Co. of Canada et al (1990), 1990 CanLII 6645 (ON CA), 74 O.R. (2d) 559 (Ont. C.A.).
8. 8Alan O'Donnell, Automobile Insurance in Ontario (Toronto and Vancouver: Butterworths 1991), at p. 30.
9. 9Ibid. See also the comments of the then Minister of Financial Institutions, the Hon. Murray Elston, that one of the objects of the 1990 amendments (which included section 3 of the Statutory Conditions) was a "highly accessible marketplace", cited in Rafael Hernandez v. Warren Palmer, [1993] I.L.R. 1-2905.
10. 10Exhibit 11.
11. 111973 CanLII 892 (SK CA), [1973] 6 W.W.R. 425, 43 D.L.R. (3d) 741 (Sask. C.A.).
12. 121979 CanLII 2198 (SK CA), [1979] 6 W.W.R. 84; leave to appeal to S.C.C. refused (1979), 30 N.R. 267.
13. 13(Scarborough:Thomson Professional Publishing Canada 1991), at page 150.