DATE: 20010525
DOCKET: C33729
C33735
COURT OF APPEAL FOR ONTARIO
GOUDGE, MacPHERSON AND SIMMONS JJ.A.
B E T W E E N:
MICHAEL BURNS personally, JONATHON BURNS, MARK BURNS, LAURA BURNS by their Litigation Guardian, Michael Burns, MICHAEL BURNS Executor of the Estate of DEBORAH BURNS, deceased, MICHAEL O. BURNS AUTO SALES LTD. and ROXY CONSTRUCTION CO. LIMITED
Richard F. Horak For the defendant
Economical Mutual Insurance Company
Barry A. Percival, Q.C. For the defendant Continental Insurance
Plaintiffs
- and -
ROGER HEDGE personally and ROGER HEDGE, as Litigation Administrator of the Estate of AUDRA JESSICA HEDGE, deceased, THE CONTINENTAL INSURANCE COMPANY OF CANADA and ECONOMICAL MUTUAL INSURANCE COMPANY
T. H. Rachlin, Q.C. For the respondent/ Co-operators
Defendants (Appellants/Respondents)
- and -
CO-OPERATORS GENERAL INSURANCE COMPANY, Pursuant to the provisions of the Insurance Act, R.S.O. 1990, Chapter I.8
Third Party (Respondent/Cross-Appellant)
Heard: January 18, 2001
On appeal from the judgment of Justice John C. Wilkins dated January 28, 2000 and February 18, 2000.
GOUDGE J.A.:
[1] This is a dispute amongst three insurance companies over the funding of the settlement of an action for damages arising from a motor vehicle accident.
[2] The plaintiffs’ action was settled in the amount of $1,995,000 for claims and interest together with costs of $155,000 plus G.S.T. plus disbursements. The settlement is to be paid by three insurers: Co-operators General Insurance Company (Co-operators), which provided third party coverage to the defendants, Continental Insurance Company of Canada (Continental) and Economical Mutual Insurance Company (Economical) both of which provided underinsured motorist coverage to the plaintiffs.
[3] To sort out their relative obligations to fund the settlement, the insurers posed three separate questions, on agreed facts, to Wilkins J. This is an appeal from the answers he gave.
[4] First, Wilkins J. determined that the obligation of Co-operators does not extend to its policy limits of $500,000 but is capped at the statutory minimum limit of $200,000 because of the material misrepresentation made in obtaining the policy by the insured, the defendant Roger Hedge.
[5] Second, Wilkins J. determined that Continental and Economical who are required to pay the balance of the claim (excluding costs) apportioned on a “pro rata”basis, must contribute in proportion to their policy limits.
[6] Third, Wilkins J. decided that the costs component of the settlement should be borne entirely by Co-operators because it is the primary loss insurer and because Continental and Economical as underinsurers are, in this case, beyond the reach of the court’s discretion to award costs.
[7] For the reasons that follow, I agree with the answers to the first two questions. I disagree with the answer to the third question and conclude that the three insurers should properly apportion costs equally amongst them. I would therefore allow the appeal in part.
THE AGREED FACTS
[8] On September 8, 1991, a motor vehicle owned by Roger Hedge and operated by the late Audra Hedge collided with a vehicle operated by the late Deborah Burns. The plaintiffs, members of the Burns family, claimed damages for the death of Deborah Burns and the injuries to Jonathon and Mark Burns as a result of this accident.
[9] As of September 8, 1991 Co-operators had issued a policy of standard automobile insurance with third party liability limits of $500,000 to Roger Hedge. The Hedge vehicle was listed as a described vehicle.
[10] There was a material misrepresentation made by Roger Hedge to Co-operators with respect to this policy. The policy was issued on the representation that the use of the Hedge vehicle was to be pleasure. Roger Hedge had licensed the vehicle as a taxi cab and regularly operated it as such, but deliberately did not advise Co-operators of this use. He was aware that the vehicle had not been insured for use as a taxi cab. At the time of the accident Audra Hedge was not operating the Hedge vehicle as a taxi cab.
[11] Co-operators would not have issued or continued this policy if it had been advised of the use of the vehicle as a taxi cab. When Co-operators learned during its investigation following the accident that the vehicle had been operated as a taxi cab, it treated the policy as void and returned the premium to Roger Hedge.
[12] Continental insured the plaintiffs under a standard policy of automobile insurance with an OEF 44 Endorsement which provides underinsured motorist coverage with policy limits of $1,000,000.
[13] Economical insured the plaintiffs under a garage policy of automobile insurance with an OEF 81 Underinsured Motorist Endorsement with policy limits of $2,000,000.
[14] Co-operators has paid a competing claim of $5,000 leaving only $195,000 (under its statutory limits) or $495,000 (under its policy limits) to contribute to the payment of the settlement of this matter.
QUESTION 1
[15] Wilkins J. dismissed Continental’s argument that because the Hedge vehicle was not being operated as a taxi cab at the time of the accident, there was no breach of the Co-operators policy and its full limits can be accessed by the plaintiffs to help fund the settlement. Rather, Wilkins J. found that the Co-operators’ policy was voidable because it was obtained by fraudulent misrepresentation and that Co-operators was entitled to void the policy and return the premium. He then determined that the provisions of s. 285 of the Insurance Act, R.S.O. 1990, c. I.8 protected the plaintiffs as innocent third parties, but only up to the minimum statutory limits of $200,000.
[16] I agree with this answer. The deliberate nondisclosure of a material fact by Mr. Hedge in order to obtain the policy entitled Co-operators to void the policy and return the premium. See Ford v. Dominion of Canada General Insurance Co., 1991 118 (SCC), [1991] 1 S.C.R. 136 affirming (1989), 1989 7494 (MB CA), 62 Man. R. (2nd) 244 (C.A.).
[17] The operation of the relevant subsections of s. 258 of the Insurance Act gives Co-operators the right to assert this defence against the plaintiffs with respect to any claim over the statutory minimum limits. The relevant subsections are as follows:
- (1) Application of insurance money under motor vehicle liability policy
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 a 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 behalf of all persons having such judgments or claims, maintain an action against the insurer to have the insurance money so applied.
(4) Insurer absolutely liable
The right of a person who is entitled under subsection (1) to have insurance money applied upon his judgment or claim is not prejudiced by,
(a) an assignment, waiver, surrender, cancellation or discharge of the contract, or of any interest therein or of the proceeds thereof, made by the insured after the happening of the event giving rise to a claim under the contract; or
(b) any act or default of the insured before or after that event in contravention of this Part or of the terms of the contract; or
(c) any contravention of the Criminal Code (Canada) or a statute of any province or territory of Canada or of any state or the District of Columbia of the United States of America by the owner or driver of the automobile,
and nothing mentioned in clause (a), (b) or (c) is available to the insurer as a defence in an action brought under subsection (1).
(5) Section applicable to purported policy
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.
(11) Defence where excess limits
Where one or more contracts provide for coverage in excess of limits mentioned in section 251, except as provided in subsection (12), the insurer may,
(a) with respect to the coverage in excess of those limits; and
(b) as against a claimant,
avail itself of any defence it is entitled to set up against the insured, despite subsection (4).
[18] These provisions mean that notwithstanding any act or default on the part of the insured, an insurer who has issued a motor vehicle liability policy has the legal obligation to respond to a judgment obtained by a third party against its insured at least up to the statutory minimum limits of liability coverage. In this case, s. 258(1) accords the right to the plaintiffs to look to Co-operators. Sections 258(4) and (5) protect the plaintiffs as innocent third parties against any violation of a contractual condition by the insured or conduct by the insured that would render the policy voidable.
[19] However, s. 258(11) gives the insurer the right to avail itself of any defence it is entitled to raise against the insured for any part of the claim of the third party that exceeds the statutory minimum limits set by s. 251. This subsection is determinative in answering this question. It gives Co-operators the right to assert against the plaintiffs the material misrepresentation defence it has against its insured and thereby limit its liability to the statutory minimum limits of $200,000 set by s. 251 of the Insurance Act.
QUESTION 2
[20] In answering the second question, Wilkins J. found that Continental and Economical are liable to the plaintiffs under their respective underinsured motorist endorsements in the ratio of one to two, namely, in proportion to the limits of their respective policies being $1,000,000 and $2,000,000 respectively.
[21] Again, I agree. The OEF Endorsements in the Continental and Economical policies both provide underinsured motorist coverage in identical terms:
MULTIPLE COVERAGES
- The following rules apply where an eligible claimant is entitled to payment under family protection coverage under more than one policy.
(b) all applicable first loss family protection coverage shall be apportioned on a pro rata basis, but in no event shall the aggregate payment under all such insurances exceed the highest limit of coverage provided by any one of such first loss insurances;
[22] This language explicitly provides that where family protection coverage is available to a claimant under more than one policy, the contributions of the policies are to be on a pro rata basis. It is not disputed here that the plaintiffs are eligible claimants under both OEF Endorsements and are entitled to first loss underinsured motorist coverage under both.
[23] The only issue to be determined is the meaning of the phrase “on a pro rata basis”. That phrase is not defined in either the OEF Endorsements or in the Insurance Act.
[24] In determining its meaning, Wilkins J. properly looked for assistance to Black’s Law Dictionary, which defines “pro rata clause” as follows:
Pro rata clause. Such clause commonly used as other insurance provision in automobile liability policy provides that when an insured has other insurance available, company will be liable only for protection of loss represented by ratio between its policy limit and total limits of all available insurance. …
[25] Economical argues that this meaning is an error. It says that the proper meaning of “pro rata” requires the use of what it refers to as the “independent liability” approach to defining the phrase. This approach assumes that each insurer has proceeded on the basis that its own OEF Endorsement alone would be applied to the loss and that the premiums were fixed on this basis.
[26] Economical argues that this approach results in it and Continental sharing equally until Continental has paid up to its limits, and thereafter, any additional amount is to be paid by Economical.
[27] In my view, such an approach is inapt in this case where both OEF Endorsements explicitly contemplate that the insured may have access to multiple OEF Endorsement coverages. As Wilkins J. said, this must have been a factor in calculating the premiums.
[28] Taking these circumstances together with the dictionary definition referred to above, the reasonable expectation of the parties – insurers and insured alike – would be that “pro rata” means “in proportion to the maximum policy limits” and I think Wilkins J. was correct to define it in this way.
QUESTION 3
[29] The answers given by Wilkins J. to questions one and two, with which I have agreed, result in Co-operators having to contribute $195,000 to fund the settlement of the claims in this action (the other $5,000 of its statutory minimum limits having gone to pay a competing claim). Continental is required to contribute $600,000 and Economical $1.2 million to make up the total of $1,995,000 at which the claims were settled.
[30] The three insurers also agreed to settle the issue of the plaintiffs’ costs by paying $155,000 in party and party costs together with GST and disbursements. Question 3 was posed to Wilkins J. by all three insurers asking him to determine the relative liability of each to pay these costs.
[31] The factual context relevant to this question begins in September 1993 with the commencement of the plaintiffs’ action against the tortfeasor and Continental as the plaintiffs’ underinsured motorist insurer. In November 1993, since there were circumstances surrounding the issuance of the tortfeasor’s policy to warrant a denial of coverage, Co-operators was added as a third party and participated in that capacity thereafter. Economical was added as a defendant in June of 1996 because of the underinsured motorist coverage it too provided to the plaintiffs.
[32] The case carried on through productions, discoveries and medical examinations with all three insurers being arrayed against the plaintiffs. Ultimately, in January 2000 the settlement described above was reached.
[33] Wilkins J. determined that the costs agreed to should all be borne by Co-operators and that no portion was payable by Continental or Economical.
[34] Because the answer to this question is clearly of importance in the conduct of litigation involving underinsured motorist insurance, and because underinsurers are now routinely named as parties in litigation arising out of serious motor vehicle accidents, it is appropriate that leave to appeal from this answer be granted.
[35] In coming to his decision, Wilkins J. acknowledged that the jurisdiction of the court to award costs is found in s.131(1) of the Courts of Justice Act, R.S.O. 1990, c. C.43 and that that section provides the court with a very wide discretion. He also properly referred to rule 57.01, which sets out a list of factors that may be considered by the court in exercising that discretion.
[36] However, Wilkins J. was also clearly influenced by the fact that under the Ontario scheme for automobile insurance, Co-operators stands as the first loss insurer with respect to the plaintiffs’ claims because it insured the tortfeasor. By contrast, the two OEF insurers, Continental and Economical, stand as excess insurers with respect to the claims of the plaintiffs who are their insureds. Moreover, the obligation of the primary loss insurer to indemnify extends to costs as well as damages while the relevant contractual provisions of both OEF Endorsements are identical and provide as follows:
- In determining any amounts an eligible claimant is entitled to recover from an inadequately insured motorist, no amount shall be included with respect to costs.
[37] Wilkins J. concluded that the intent of the automobile insurance scheme is to have the plaintiffs’ costs paid by the primary loss insurance policy, namely that of the tortfeasor, and that generally speaking, indemnity for the plaintiffs’ costs should not be the obligation of the excess insurer under an OEF Endorsement which provides underinsured motorist coverage.
[38] He described his approach to allocating the plaintiffs’ costs between the primary loss insurer and the excess loss OEF insurers in these terms:
… In effect, that procedure is that the primary loss automobile insurer of the tortfeasor remains liable to the plaintiff for the costs of the litigation which would ordinarily and naturally flow. The excess insurer under an O.E.F. endorsement who is joined to the litigation is capable of being made liable for those costs which are caused or associated with that party having to be joined in the litigation and the participation of that party in the litigation – that is to say, the costs which have been incurred over and above those costs which would naturally flow had that O.E.F. endorsement insurer not been a party to the action.
Once the O.E.F. endorsement insurer enters the litigation and participates, however, that insurer becomes subject to a discretionary cost order under Rule 57 as a consequence of its own conduct and not as a consequence of any liability for which it may have to pay excess at the end of the day.
[39] He then concluded that in this case both OEF insurers had participated in this litigation simply in the normal and usual way expected of OEF insurers and there was therefore nothing to permit the application of the court’s discretion to make a costs order against them. The plaintiffs’ costs were therefore all to be born by Co-operators.
[40] In my view, by proceeding in this way Wilkins J. unduly fettered his discretion.
[41] Where an OEF insurer has issued underinsured motorist coverage and has become a party to litigation potentially engaging that coverage, there is nothing in s. 131 of the Courts of Justice Act or Rule 57 that prohibits the court from exercising its discretion to award costs against that insurer except if it finds that there have been incremental costs of the litigation due to that insurer’s own conduct. Neither s. 131 nor Rule 57 give the OEF insurer who is a party to the litigation any special status in connection with the court’s exercise of its discretion to award costs.
[42] Nor does the language of the OEF Endorsement have such an affect. While that language limits the contractual liability of the OEF insurer to indemnify its insured for costs, it does not fetter the court’s general discretion to award costs against the underinsurer as a party to the action. In Mete v. Guardian Insurance Company of Canada (1998), 1998 7177 (ON CA), 165 D.L.R. (4th) 457 (Ont. C.A.) this Court speaking about this contractual language said the following at p. 467:
However, in a case such as this one where the underinsurer was an active party in defending the action, and where the matter could have been settled at the mid-trial settlement conference or earlier had the underinsurer agreed to waive its subrogation rights against the tortfeasor or to contribute an amount ultimately less than the amount awarded at trial, the clause cannot be used to fetter the court’s discretion to award costs against the underinsurer as a party to the action. (Emphasis in the original text.)
[43] In my view, despite the contractual provision, once the underinsured motorist insurer becomes a party to the litigation s. 131 and Rule 57 require that it be subject to the exercise of the court’s discretion in the awarding of costs in the same way as other parties to the litigation are. In Mete, supra, at p. 467, this Court quoted with approval the statement by Haines J. in Churchill v. Wilson (1 June, 1993), London No. 4511/89 (Gen. Div.):
The clear intention of paragraph 5(e) of the S.E.F. 44 Endorsement is to ensure that the S.E.F. 44 carrier is not burdened with the costs properly payable by the insurer of the “inadequately insured motorist”. It is not intended to relieve the S.E.F. 44 carrier of its obligations concerning costs in the normal course. As a party to the action the S.E.F. 44 carrier assumes the same risks and benefits attendant to the rules and principles relating to costs as any other party. (Emphasis added.)
[44] In my view, this result is congruent with the policy objective of providing the court with the maximum flexibility to determine a fair allocation of costs on a case by case basis. In circumstances such as this case, it avoids the risk that once the primary loss insurer’s limits are exhausted, the underinsured motorist insurer might continue to defend the action to protect its own interests without incurring any consequential exposure in costs.
[45] I therefore conclude that Wilkins J. erred in principle in fettering his discretion to award costs and as a result his determination must be set aside.
[46] Rather than send the matter back for a fresh determination, I think efficiency is best served by this Court performing that task as best it can, not having been witness to the litigation at first instance.
[47] The plaintiffs have been successful in recovering $1,995,000 by way of settlement of their claims. Thus the settlement appropriately provides for their recovery of costs in the amount of $155,000 together with GST and disbursements.
[48] Having in mind the factors set out in Rule 57, I think the appropriate division amongst the three insurers is that each be responsible for a third of the costs component of the settlement. The broad reality of this litigation is that each insurer opposed the plaintiffs’ claims and sought to limit its own exposure, each in its own way with its own arguments. As Wilkins J. said:
To sort out what steps in the litigation were necessitated by reason of the position of the plaintiff in the action as opposed to either one or the other O.E.F. insurers, would, in my view, on the facts of this case, be virtually impossible.
[49] Thus, the fair result is that the costs settlement be borne equally by the three insurers and I would substitute this for the answer given by Wilkins J. to question 3. Given this result there should be no costs of the motion posing question 3.
[50] In summary, I would dismiss with costs the appeal from the answers to questions 1 and 2. I would allow with costs the appeal from the answer to question 3, those costs to be shared equally by Continental and Economical.
Released: May 25, 2001 “STG”
“S.T. Goudge J.A.”
“I agree. J.C. MacPherson J.A.”
“I agree J. Simmons J.A.”