Stephan v. Insurance Corporation of British Columbia

Stephan v. Insurance Corporation of British Columbia [Indexed as: Stephan v. Insurance Corp. of British Columbia]

48 O.R. (3d) 41

[2000] O.J. No. 1103

Nos. C32798 and C32799

Court of Appeal for Ontario

McMurtry C.J.O., Abella and Feldman JJ.A.

April 4, 2000

Insurance -- Automobile insurance -- Settlement -- Rescission -- Insured who purports to rescind settlement under s. 9.1(4) of Reg. 664 under Insurance Act not obliged to return all settlement funds before settlement can be said to be rescinded -- Insured required to return funds after settlement rescinded -- Automobile Insurance Regulation, R.R.O. 1990, Reg. 664, s. 9.1(4).

The insured settled his claim for accident benefits with the insurer. He was not given the written notice which the insurer was required to give him under s. 9.1(2) of Reg. 664 under the Insurance Act, R.S.O. 1990, c. I.8. After signing a release, he received the agreed funds. He subsequently purported to rescind the settlement pursuant to s. 9.1(4) of the Regulation. He brought an application for an order declaring that the release did not prohibit him from pursuing a claim for statutory accident benefits from the insurer. He asserted that, since he was not given the required notice, he was entitled under s. 9.1(4) to rescind the settlement and have the release set aside simply by delivering a written notice to the insurer. The insurer brought a cross-application for an order that if the insured was successful in obtaining an order declaring that the settlement was rescinded under s. 9.1(4), he was obliged to repay to the insurer the funds he had received pursuant to that settlement. The insured' s application was granted and the cross-application of the insurer was dismissed. The insurer appealed.

Held, the appeal should be allowed in part.

The phrase "rescind the settlement" in s. 9.1(4) of the Regulation does not require the repayment of any funds by an insured before a rescission has crystallized. The insurer is entitled to any money paid under the settlement, but is not entitled to it before the rescission contemplated by s. 9.1(4) can be said to have taken place. There are four legal consequences which immediately flow from the delivery of written notice under s. 9.1(4): the settlement is rescinded; the release incorporating the settlement is voided; any settlement moneys paid to the insured become due and owing; and the insured has the right to pursue a claim for statutory accident benefits.

APPEAL from a judgment allowing an application by the insured and dismissing a cross-application by the insurer for orders in respect of a repayment of moneys received under a settlement.

Cases referred to Abram SS Co. v. Westville Shipping Co., [1923] A.C. 773, [1923] All E.R. Rep. 645, 93 L.J.P.C. 38, 130 L.T. 67 (H.L.); Guarantee Co. of North America v. Gordon Capital Corp. (1999), 1999 664 (SCC), 178 D.L.R. (4th) 1, 247 N.R. 97, [2000] I.L.R. 1-3741, 49 B.L.R. (2d) 68 (S.C.C.); McLellan v. Pilot Insurance, [1997] O.I.C.D. No. 59 (O.I.C.) Statutes referred to Insurance Act, R.S.O. 1990, c. I.8, s. 280 Rules and regulations referred to Automobile Insurance Regulation, R.R.O. 1990, Reg. 664, ss. 9.1, 9.1(2), 9.1(3), 9.1(4) Authorities referred to Fridman, The Law of Contract, 4th ed. (Toronto: Carswell, 1999), p. 740

Samantha E. Richmond, for appellant. Peter T.M. Haney, for respondent.

The judgment of the court was delivered by

[1] ABELLA J.A.: -- The issue in these appeals is whether an insured who purports to rescind a settlement under s. 9.1(4) of Reg. 664, R.R.O. 1990 to the Insurance Act, R.S.O. 1990, c. I.8 is obliged to return all moneys received under that settlement before the rescission is effected.

[2] Clarence Stephan was involved in a motor vehicle accident on July 2, 1996 in Ontario. At the time, he had a motor vehicle policy of insurance with the Insurance Corporation of British Columbia and was a resident of British Columbia.

[3] After the accident, he entered into negotiations with an adjuster in British Columbia and settled his claim for accident benefits for the sum of $32,112.95.

[4] The terms of the settlement as reflected in the release include:

FULL AND FINAL RELEASE OF ALL CLAIMS

In consideration of the payment of, or the promise to pay, the sum of THIRTY-TWO THOUSAND AND ONE HUNDRED & TWELVE ----95/100 dollars ($32,112.95)

The undersigned . . . hereby release and forever discharge The Insurance Corporation of British Columbia under Part VII of the Regulations . . . from any and all actions, causes of action, claims and demands . . . in consequence of a car accident at or near Elmira, Ontario on or about the 2nd day of July, 1996.

And it is hereby declared that the terms of this settlement are fully understood; that the amount stated herein is the sole consideration of this release and that the said sum is accepted voluntarily for the purpose of making a full and final compromise, adjustment and settlement of all claims for injuries, losses and damages resulting or to result from the said accident. I confirm that I have been advised to consult legal counsel regarding any claims regarding W.C.B. and pain and suffering claims in Ontario.

(Emphasis added)

[5] Mr. Stephan was not given the written notice the insurer was required to give him under s. 9.1(2) of Reg. 664 to the Insurance Act. This section states:

9.1(2) Before a settlement is entered into between an insurer and an insured person, the insurer shall give the insured person a written notice that contains the following:

1. A description of the benefits that may be available to the insured person under the Statutory Accident Benefits Schedule and any other benefits that may be available to the insured person under a contract of automobile insurance.

2. A description of the impact of the settlement on the benefits described under paragraph 1, including a statement of the restrictions contained in the settlement on the insured person's right to mediate, litigate, arbitrate, appeal or apply to vary an order as provided in sections 280 to 284 of the Act.

3. A statement that the insured person may rescind the settlement within two business days after the settlement is entered into by delivering a written notice to the insurer.

4. A statement that the tax implications of the settlement may be different from the tax implications of the benefits described under paragraph 1.

5. If the settlement provides for the payment of a lump sum in an amount offered by the insurer and, with respect to a benefit under the Statutory Accident Benefits Schedule that is not a lump sum benefit, the settlement contains a restriction on the insured person's right to mediate, litigate, arbitrate, appeal or apply to vary an order as provided in sections 280 to 284 of the Act, a statement of the insurer's estimate of the commuted value of the benefit and an explanation of how the insurer determined the commuted value.

6. A statement advising the insured person to consider seeking independent legal, financial and medical advice before entering into the settlement.

[6] Mr. Stephan signed a release incorporating the settlement in British Columbia on July 29, 1997 and received the agreed funds.

[7] Section 9.1(3) gives an insured an unconditional right to rescind a settlement within two days:

9.1(3) A settlement may be rescinded by the insured person, within two business days after the settlement is entered into, by delivering a written notice to the insurer.

[8] At the heart of the appeal is an interpretation of s. 9.1(4) which states:

9.1(4) If the insurer did not comply with subsection (2), the insured person may rescind the settlement after the period mentioned in subsection (3) by delivering a written notice to the insurer.

The insurance company does not dispute that a notice under s. 9.1(2) was not provided to Mr. Stephan prior to his entering into the settlement. In a letter dated November 3, 1998, Mr. Stephan, through his counsel, notified the insurer that he was rescinding the settlement pursuant to s. 9.1(4).

[9] An application and a cross-application were before the court. Mr. Stephan sought an order declaring that the release he signed on July 29, 1997 in favour of the Insurance Corporation of British Columbia does not prohibit him from pursuing a claim for statutory accident benefits as against the Insurance Corporation of British Columbia pursuant to the Ontario Insurance Act. Since he was not given the required notice by the insurer under s. 9.1(2), Mr. Stephan asserted that he was entitled under s. 9.1(4) to rescind the settlement and have the release set aside simply by delivering a written notice to the insurer.

[10] The cross-application of the Insurance Corporation of British Columbia was for an order that if Mr. Stephan was successful in obtaining an order declaring that the settlement was rescinded under s. 9.1(4), he was obliged to repay to the Insurance Corporation of British Columbia the $32,112.95 he had received pursuant to that settlement.

[11] The issue arises because the Financial Services Commission of Ontario, which has the jurisdiction under s. 280 of the Insurance Act to appoint a mediator to settle any disputes about an insured's entitlement to statutory accident benefits, will not accept Mr. Stephan's application until the release is set aside. The insurer refuses to set aside the release until all the money it has paid under the settlement has been returned. It asserts that since the settlement consists both of the signing of the release by the insured and the payment of the funds by the insurer, the settlement cannot be said to be rescinded unless both parties are put back into their pre-settlement position. In other words, to be effective under s. 9.1(4), rescission requires both the setting aside of the release and the return of the settlement money.

[12] The applications judge held that the requirements of s. 9.1(4) were satisfied and that Mr. Stephan's written notice rescinded the settlement. Mr. Stephan was accordingly entitled to pursue his accident benefits claim against the insurance company. The insurance company's application to recover the funds was dismissed without reasons. This is an appeal by the insurer from both orders.

[13] The narrow issue in these appeals is whether the phrase "rescind the settlement" in s. 9.1(4) of the Regulations requires the repayment of any funds by an insured before a rescission has crystallized. In my view, there is no such prior obligation.

[14] The insurer argues that "rescind" in s. 9.1(4) should be interpreted in accordance with the approach to the equitable remedy of rescission: unless both parties can be restored to their original situations, rescission will not be granted: see Guarantee Co. of North America v. Gordon Capital Corp. (1999), 1999 664 (SCC), 178 D.L.R. (4th) 1, 247 N.R. 97 (S.C.C.); and Abram SS Co. v. Westville Shipping Co., [1923] A.C. 773 at p. 781, [1923] All E.R. Rep. 645 (H.L.). In the case before us, the insurer argues, that means that the required mutuality involves the return of the settlement funds as well as the setting aside of the release.

[15] But it should be noted that even under equitable rescission, the court will not order full restitution if it is not just to do so (Fridman, The Law of Contract, 4th ed. (Toronto: Carswell, 1999), at p. 740). Having put the insured in the position of thinking the funds are properly his pursuant to a valid settlement, it can hardly be said to be just that the insurer insist on restitutio in integrum before Mr. Stephan can pursue the rights he could have pursued earlier had the insurer given him the required notice.

[16] In any event, we are not dealing here with the application of the equitable remedy of rescission. We are, instead, applying a statutory right to rescind based on the failure by the insurer to comply with a duty to provide the insured with written notice of his rights.

[17] The settlement regulation in s. 9.1 of Reg. 664 is in the nature of consumer protection legislation: see McLellan v. Pilot Insurance, [1997] O.I.C.D. No. 59 (O.I.C.). It requires written disclosure by the insurer to the insured of the range of options available before a settlement is entered into. This gives the insured the opportunity to make an informed choice between settlement and pursuing statutory accident benefits. Section 9.1(4) ensures that if this notice as set out in s. 9.1(2) is not given, any settlement reached will not, at the option of the insured, be binding. Any moneys paid under such a settlement are moneys paid by an insurer entering into a contract it knows is voidable, to an insured who thinks the settlement is binding.

[18] What then is the status of any money paid under the settlement? The simple answer is that the insurer is entitled to it. This is different from the argument made by the insurer in this case that it is entitled to the money before the rescission contemplated by s. 9.1(4) can be said to have taken place. When the insured delivers the written notice under s. 9.1(4), the settlement contract is rescinded. The insured at that moment becomes indebted to the insurer for any money received under that settlement. But he or she is not precluded from treating the settlement as void if the settlement funds have not been fully repaid.

[19] The intention of the statutory right of rescission under s. 9.1(4) is to remedy the failure of the insurer to inform the insured of all options with respect to the claim. To give effect to this intention, it naturally flows that if the settlement is rescinded, the release, which incorporates the settlement, is no longer binding.

[20] To me, the issues of whether the settlement has been rescinded and whether Mr. Stephan is obliged to repay the money are discrete and severable. The settlement is rescinded once written notice is given under s. 9.1(4). Mr. Stephan is thereby obliged to repay the settlement money. But there is no duty of contemporaneity imposed on him, and the repayment of the settlement money is not a condition precedent to an insured's entitlement to pursue claims for statutory accident benefits under the Insurance Act.

[21] There are, in short, four legal consequences which immediately flow from the delivery of the written notice under s. 9.1(4):

1. the settlement is rescinded;

2. the release incorporating the settlement is voided;

3. any settlement moneys paid to the insured become due and owing; and

4. the insured has the right to pursue a claim for statutory accident benefits.

[22] Interpreting the legislation in this way does not condone double recovery. The money Mr. Stephan has received from the insurance company is a debt which came into existence when he invoked his s. 9.1(4) rights. It may be that after a determination by an arbitrator of his rights, the insurance company will owe Mr. Stephan more than it had previously paid; on the other hand, Mr. Stephan may be found to be entitled to less. Those eventualities have nothing to do with whether Mr. Stephan is entitled to exercise his right to set aside the settlement in circumstances where, in violation of the statutory duty, his rights were not explained to him. Nor do they have anything to do with the insurer's right immediately to enforce the debt Mr. Stephan now owes.

[23] Accordingly, the appeal from the order setting aside the release signed by the applicant on July 29, 1997 is dismissed and Mr. Stephan is entitled to pursue his benefits claim.

[24] The appeal from the order dismissing the insurer's application should, however, be allowed. The order of Hambly J. dismissing the insurer's application is, therefore, set aside. As stated above, the rescission of a settlement under s. 9.1(4) entitles an insurer to the return of any funds paid pursuant to the settlement. There will therefore be an order as requested by the insurer in its cross-application declaring that it is entitled to the return of the settlement funds.

[25] Since there has been mixed success in this case, there will be no order as to costs.

Appeal allowed in part.