Reliable Life Insurance Company v. M.H. Ingle & Associates Insurance Brokers Limited

Reliable Life Insurance Company v. M.H. Ingle & Associates Insurance Brokers Limited Reliable Life Insurance Company v. M.H. Ingle & Associates Insurance Brokers Limited et al. [Indexed as: Reliable Life Insurance Co. v. M.H. Ingle & Associates Insurance Brokers Ltd.]

59 O.R. (3d) 1

[2002] O.J. No. 1382

Docket No. C33079

Court of Appeal for Ontario

Morden, Laskin and Rosenberg JJ.A.

April 17, 2002

Insurance -- Insurance contracts -- Enforceability -- Broker and insurer entered into reinsurance agreement -- Agreement contained provision requiring broker to indemnify insurer -- Broker subsequently claimed that contract unenforceable as broker was not licensed under Insurance Act to carry on business of insurance -- Contract enforceable on public policy grounds even if prohibited by Insurance Act -- Insurance Act, R.S.O. 1990, c. I.8.

The defendant was an insurance broker which developed, promoted and sold programs of health and travel insurance. It approached the plaintiff to underwrite those programs, and the parties entered into a series of agreements under which the defendant sold the programs which it had developed and promoted and the plaintiff underwrote them. The agreements involved premium sharing. Paragraph 2 of the agreement in issue in this case provided, in effect, that the defendant was to indemnify the plaintiff for all "losses" occurring in the program. The plaintiff asserted a claim for amounts allegedly owing to it in respect of the 1987-88 year. The defendant defended the claim on the basis that the indemnity provision in para. 2 was a contract of reinsurance and, because the defendant was not licensed as an insurer, the contract was unenforceable. The trial judge allowed the plaintiff's action, holding that the contract did not provide for insurance and, accordingly, was not prohibited. The defendant appealed.

Held, the appeal should be dismissed.

It was unnecessary to express a final opinion on the issue whether the plaintiff was suing on a contract of insurance, since the contract was enforceable even if it was prohibited by the Insurance Act, R.S.O. 1990, c. I.8. The licensing requirement in the Insurance Act is enacted solely for the benefit of the public who seek to buy insurance policies. It is part of a legislative scheme to protect policy holders from insolvent insurance companies. In the present case, the parties were sophisticated participants in the insurance industry and licensing requirements should not be relied upon by the defendant to avoid its obligations under an otherwise valid contract with the plaintiff. Further, public policy did not countenance the defendant profiting from its own wrongdoing.

Phoenix General Insurance Company of Greece S.A. v. Administratia Asigurarilor De Stat, [1986] 2 Lloyd's L.R. 552, distd

APPEAL from judgments in actions by an insurance company.

Other cases referred to R. v. Century 21 Ramos Realty Inc. (1987), 1987 171 (ON CA), 58 O.R. (2d) 737, 19 O.A.C. 25, 37 D.L.R. (4th) 649, 29 C.R.R. 320, 56 C.R. (3d) 150, 87 D.T.C. 5158 (C.A.) [Leave to appeal to S.C.C. dismissed (1987), 80 N.R. 313n] (sub nom. R. v. Century 21 Ramos); Royal Bank of Canada v. Grobman (1977), 1977 1113 (ON SC), 18 O.R. (2d) 636, 83 D.L.R. (3d) 415 (H.C.J.); Sidmay v. Wehttam Investments Ltd. (1966), 1967 24 (ON CA), [1967] 1 O.R. 508, 61 D.L.R. (2d) 358 (C.A.); Still v. Minister of National Revenue (1997), 1997 6379 (FCA), 154 D.L.R. (4th) 229, [1998] F.C. 549 (C.A.) Statutes referred to Insurance Act, R.S.O. 1980, c. 218, ss. 1, 21, 24 Insurance Act, R.S.O. 1990, c. I.8, ss. 1, 40, 41 Loan and Trust Corporations Act, R.S.O. 1960, c. 222 Rules and regulations referred to Calculations Under Clause 60(1)(b) of the Act, R.R.O. 1990, Reg. 665 Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 25.07(4) Authorities referred to Brown, C., and J. Menezes, Insurance Law in Canada (Toronto: Carswell, 1999- ) McGuinness, K.P., The Law of Guarantee, 2nd ed. (Toronto: Carswell, 1996) Waddams, S.M., The Law of Contracts, 4th ed. (Toronto: Canada Law Book, 1999)

John C.F. Hunt, for appellants. William G. Scott, for respondent.

The judgment of the court was delivered by

[1] MORDEN J.A.: -- The defendants appeal from two judgments of Garton J., one in each of two actions commenced by Reliable Life Insurance Company. The reasons for judgment are reported (1999), 1999 36819 (ON SC), 15 C.C.L.I. (3d) 249, [2000] I.L.R. 1-3761, and [1999] O.J. No. 3557.

[2] In the first action, Garton J. held that the defendant M.H. Ingle & Associates Insurance Brokers Limited was liable to Reliable in the amount of $1,616,595 under an agreement between Reliable and Ingle relating to the underwriting by Reliable of insurance programs developed, promoted, and sold by Ingle. In the second action, she held that the defendants M.H. Ingle & Associates Insurance Brokers Limited, Muriel H. Ingle, Robin Ingle and Muriel Helena Ingle and David Bruce Black, Executors of the Estate of John Wright Ingle were liable to Reliable for the same amount under the terms of a guarantee dated September 1, 1987.

[3] I shall deal first with the appeal in the first action. The trial judge dealt with several defences raised by Ingle but on this appeal Ingle raises only one issue and that is whether an indemnity provision in the agreement between Reliable and Ingle upon which Reliable based its claim is unenforceable. Ingle submits that this provision is a contract of reinsurance and because Ingle was not licensed under the Insurance Act, R.S.O. 1980, c. 218, s. 24 and R.S.O. 1990, c. I.8, s. 40 to carry the business of insurance, the agreement is unenforceable.

[4] The facts have been stated in some detail in the reasons of the trial judge and I will not repeat in detail what she has said. The essential facts for the purpose of addressing the only issue arising on the appeal may be stated as follows.

[5] Ingle was an insurance broker. It developed, promoted, and sold programs of health and travel insurance. It approached Reliable to have it underwrite these programs. Ingle and Reliable entered into a series of agreements between 1980 and 1989 under which Ingle sold the programs which it had developed and promoted and Reliable underwrote them. The claim in this action arises out of what took place in the years September 1, 1987 to August 31, 1988 and September 1, 1988 to August 31, 1989.

[6] From the beginning of the arrangement in 1980 to August 31, 1987, the agreements between the parties involved premium- sharing by Reliable and Ingle. A typical example of these agreements involved the following. They provided for the underwriting of three plans developed by Ingle, a hospital medical care plan, an international travel protection plan, and a university health accident and life plan. Under the agreements:

(a) Ingle was required to remit premiums to Reliable less a 30 per cent commission (the amount could be more or less than 30 per cent depending on the particular plan in question);

(b) Reliable was responsible for the payment of all claims;

(c) Reliable was entitled to retain 15 per cent of the commission;

(d) If paid claims were less than 55 per cent of the total premium (the amount of premium available for payment of claims after the Ingle commission of 30 per cent and the Reliable retention of 15 per cent) Ingle and Reliable were entitled to share the difference.

[7] This arrangement was altered for the years beginning September 1, 1987 and September 1, 1988. An agreement dated September 1, 1987, which was stated to be in effect for September 1 to December 31, 1987 but was extended by subsequent agreements to August 31, 1988, contained the following provisions:

2. The Broker [Ingle] agrees to indemnify the Company [Reliable] for paid claims on the combined results of the book of business in excess of

i) 55 [per cent] of earned premiums in the H.M.C. plan;

ii) 55 [per cent] of earned premiums in the U.H.A.L. plan, and

iii) 45 [per cent] of earned premiums in the N.I.T. plan;

with respect to insurance policies written after August 31, 1987 and remit to the company 1 [per cent] of earned premiums for each 1 [per cent] that paid claims exceed earned premiums as determined in this paragraph.

4. The broker shall be entitled to the interest earned on reserves held by the Company for incurred claims, calculated on a monthly basis, paid January 15, 1988 and monthly thereafter.

5. The Broker shall be entitled to the amount, if any, including interest, by which earned premiums, less the Company retention under paragraph 3 of the letter of intent and the Broker's retention under paragraph 1(d), exceed paid claims. Payment of this amount less outstanding reserves shall be made by the Company on or before June 30, 1988.

[8] Paragraph 2, the one in issue in this appeal, in effect, meant that Ingle was to indemnify Reliable for all "losses" occurring in the program. A loss was determined to result when, using the H.M.C. and U.H.A.L. plans as an example, more than 55 per cent of earned premium had been paid to satisfy claims.

[9] I shall elaborate on this using the H.M.C. plan as an example. The agreement relating to this plan provided that Ingle was to keep 30 per cent of the premiums as its commission and that Reliable was to retain 15 per cent. The breakdown of the 15 per cent was as follows:

Premiums Tax - 2 [per cent]

Administration - 3 [per cent] for claims expense - 5 [per cent] for general expense

Profit - 5 [per cent]

[10] The remaining 55 per cent was the percentage available to pay claims. If less than 55 per cent in the year was paid out there was a "profit" which was divided, in accordance with a formula, between Ingle and Reliable. If more than 55 per cent was paid, there was a "loss". Until the year beginning September 1, 1987, all losses were paid by Reliable. Beginning on September 1, 1987 the variation in the agreement involved Ingle being entitled to all of the profit (para. 5) and responsible for all of the losses (para. 2). In addition, Ingle became entitled to interest on reserves (para. 4).

[11] The agreement that governed the year September 1, 1988 to August 31, 1989 contains substantially the same provisions. As I shall indicate, Reliable had no loss for this year and it appears that the only claim that it had under this agreement was based on Ingle's failure to remit to it $511,068 in premiums for August, 1989. This is not an issue.

[12] I turn now to what happened under the new regime for the year September 1, 1987 to August 31, 1988. During this year, the written premiums totalled $11,460,978. Ingle's commission was $3,438,293 (assumed at 30 per cent for all programs for ease of calculation). Reliable's retention of 15 per cent was $1,719,147. The premiums available to pay claims (55 per cent of the total premium) were $6,303,538. The paid claims on the three programs exceeded this amount by $962,910. This latter amount was paid by Reliable which reduced its retention to $757,000. Ingle did not pay Reliable the loss of $962,910 for this year. Had it done so, it still would have received $2,475,383 in gross commission for that year.

[13] In the year September 1, 1988 to August 31, 1989, the written premium was $11,904,651. Ingle's commission at 30 per cent was $3,571,395. Reliable's retention of 13 per cent (the percentage that year) was $1,547,605. Assuming the receipt by Reliable of the August premium of $511,068, the earned premium available to pay claims after deduction of the Ingle commission and the Reliable retention exceeded paid claims by $59,089. This was "profit" that went to Ingle.

Is Reliable's Claim Enforceable?

[14] This is the claim for $962,910, with interest, for the 1987-88 year. As I have said, Ingle defends this claim on the basis that the indemnity provision in para. 2 is a contract of reinsurance and, because Ingle was not licensed as an insurer, the contract is unenforceable.

[15] The most relevant statutory provisions are as follows:

Insurance Act, R.S.O. 1980, c. 218, ss. 1 and 21

1. In this Act, except where inconsistent with the interpretation sections of any Part,

2. "insurance" means the undertaking by one person to indemnify another person against loss or liability for loss in respect of a certain risk or peril to which the object of the insurance may be exposed, or to pay a sum of money or other thing of value upon the happening of a certain event and includes life insurance;

21(1) Every insurer undertaking insurance in Ontario or carrying on business in Ontario shall obtain from the Minister and hold a licence under this Act.

(2) Every insurer undertaking insurance or carrying on business in Ontario without having obtained a licence as required by this section is guilty of an offence.

Insurance Act, R.S.O. 1990, c. I.8, ss. 1 and 40

[The definition of "insurance" is the same as that in s. 1 of the R.S.O. 1980 legislation above.]

40(1) Every insurer undertaking insurance in Ontario or carrying on business in Ontario shall obtain from the Superintendent and hold a licence under this Act.

(2) No person shall carry on business as an insurer or engage in an act constituting the business of insurance in Ontario without a licence under this Act.

(3) No insurer shall carry on business in Ontario as an insurer of a class of insurance that is not authorized by its licence under this Act.

[16] I might mention that neither party before us referred to the statutory definition of insurance and it was not referred to in the trial judge's reasons. Ingle refers to both the R.S.O. 1980 and 1990 provisions because the 1980 provisions were in force when the agreement sought to be enforced was made and the 1990 provisions were in force when Reliable asserted its claim. While it appears to me that s. 40(2) in the latter legislation contains a more precise prohibition of conduct which amounts to the business of insurance without a licence than do ss. 21(1) and (2) in the earlier legislation, I do not think that anything turns on this. Nothing was made of it in the argument.

[17] Before turning to the issues, I shall say a general word about the reinsurance aspect of this case. The parties accept that reinsurance is a form insurance and that a reinsurer is required to be licensed under the general provisions referred to above. This is clearly implied in s. 41 of the Insurance Act, R.S.O. 1990, c. I.8 which, subject to the regulations, enables a licensed insurer to reinsure with "an insurer transacting business out of Ontario and not licensed under this Act."

The Two Issues: (1) Does the Agreement Provide for "Insurance" and (2), If It Does, Does This Mean the Claim is Unenforceable?

[18] Ingle, of course, did not have a licence under either Act. The basic question is the same under each version of the legislation: was Ingle, under the 1987-88 agreement, carrying on business as an insurer or engaging in an act constituting the business of insurance? If the agreement between Reliable and Ingle is prohibited by the Insurance Act, it does not necessarily follow that it is unenforceable by Reliable. In my reasons that follow, I express the opinion that the agreement does not provide for insurance and accordingly, is not prohibited, but I ground my decision on my conclusion that, assuming the contract to be prohibited by the Act, it is, nonetheless, enforceable by Reliable.

Does the agreement provide for insurance?

[19] I shall begin by outlining the reasons of the trial judge for concluding that the agreement did not provide for insurance. She based her decision entirely on the evidence given by Lawrence Savage, an expert witness called by Reliable. Mr. Savage had substantial experience in the insurance field in both the private and public sectors. He had been Superintendent of Insurance in Ontario from 1991 to 1995. In this position he was responsible for all aspects of insurance regulation in the province, including the financial solvency of provincial insurers and the marketing practices of insurers.

[20] The evidence of Mr. Savage that the trial judge particularly relied upon in her reasons covered the following matters:

[21] Mr. Savage was of the view that none of the contracts or guarantees covering the years 1987-88 and 1988-89 constituted contracts of reinsurance. Reinsurance occurs between two insurers. Premiums are paid by the insured policy-holders to the insurer. The insurer pays premiums to the re-insurer. In the present case, there was only one insurance company (Reliable), and only one set of premiums and these premiums were paid to Reliable. Ingle was a broker, not an insurance company. It was not licensed as an insurance company.

[22] It was significant to Mr. Savage that Reliable and Ingle, both being experienced in the insurance industry, did not name their agreements "reinsurance" agreements.

[23] Mr. Savage called the agreement between the parties a "side agreement". With respect to the "side agreement" aspect of the agreement, the trial judge said [at para. 65]:

Mr. Savage also explained that a broker, having presented to an insurance company a program which it has developed and which it wished to market, would probably wish to benefit in terms of the program's performance. This makes sense from a business perspective. As a result, brokers and insurance companies frequently enter into indemnification agreements whereby the broker receives additional commission payments or some other benefit if the losses are below a certain amount. Alternatively, if the losses are higher, the broker may have to pay something extra or suffer a reduction in commission. As Mr. Savage explained, this type of relationship does not offend any statute or regulatory provision because the insurance company is fully responsible for paying any claims:

Every insurance company knows that when they sell a policy of insurance they have to pay, so any sort of side agreement that they might enter into for, you know, reimbursement based on performance of the business or anything like that is something that they can do from a business perspective. It's transparent to the public because the regulator is looking and saying, we don't pay any attention to those side agreements. You have to have the money to pay all these claims. You have to have the financial strength to pay all these claims. If there's a problem with one of these agreements, it's the problem of the insurance company. It's not the problem of the policyholder.

[24] The trial judge also referred to Mr. Savage's evidence which differentiated between the kind of risk assumed by an insurer, or re-insurer, and the kind of risk assumed by Ingle in this case. She quoted the following from his evidence:

The performance of a portfolio of business, it's not the same risk that was originally insured. The insured risk, as you said, was the health of John Doe. Now the health of John Doe is no longer an issue. What's an issue is thousands of John Does relative to the amount of premiums that they paid. Not whether they got sick or not but whether they paid a high enough premium relative to in total, in aggregate, the number of people who got sick, which is a totally different risk than the risk of John Doe getting sick.

[25] Having decided that the agreements were not for insurance, the trial judge did not consider the question of their enforceability, on the assumption or basis that they contravened the Insurance Act.

[26] With respect, I do not find the foregoing reasons, in themselves, to be entirely convincing. I accept that Mr. Savage's evidence was admissible and useful in outlining the governmental and administrative context bearing on the decision to be made by the court but I do not think that his evidence could be directly dispositive of the question the trial judge had to decide, which was one of law. See R. v. Century 21 Ramos Realty Inc. (1987), 1987 171 (ON CA), 58 O.R. (2d) 737, 37 D.L.R. (4th) 649 (C.A.) at pp. 751-52 O.R. The issue was whether the agreements provided for "insurance" within the meaning of this word in the statutory prohibitions. As I have indicated, although "insurance" is defined for the purpose of the Act in s. 1, no mention was made of this in the trial judge's reasons. I do not say that if the trial judge had applied the statutory definition the conclusion would necessarily have been different. I mention this omission because it shows that the decision was made simply on a basis of accepting Mr. Savage's evidence.

[27] As far as the substance of Mr. Savage's evidence is concerned, none of the verbal or labelling features he mentioned, in themselves, dictated that the contracts could not be insurance contracts. The fact that the agreement was not a typical contract of reinsurance did not mean that, notwithstanding its subject matter, it necessarily could not be for insurance. In this regard, it is circular to say that it could not be a contract of reinsurance because the alleged re- insurer, Ingle, was not an insurance company but, rather, a broker. That was the issue raised by Ingle for decision: the contract could not be enforced because Ingle was not a licensed insurance company.

[28] Further, I am not sure that the reasoning of the trial judge relating to the risk respecting the health of John Doe being different from that relating to the "thousands of John Does" necessarily means that the contract between Reliable Insurance and Ingle could not be one of reinsurance. Ingle submits that it is a "stop loss" insurance, which is a category of reinsurance. I would not wish to express a final opinion on this issue.

[29] I do, however, think that the part of Mr. Savage's evidence relating to the "side-agreement" aspect of the agreement set forth in para. 65 of the trial judge's reasons, quoted above, is helpful in approaching a solution to the question. I shall refer to it again shortly.

[30] Having canvassed and considered what the trial judge said on the question, I shall now deal directly with it. The necessary starting point in considering whether the contract is prohibited by the Insurance Act is the meaning of "insurance" in the statute. It is defined in s. 1 of the Act as follows:

1. In this Act, except where inconsistent with the definition sections of any Part, . . . . .

"insurance" means the undertaking by one person to indemnify another person against loss or liability for loss in respect of a certain risk or peril to which the object of the insurance may be exposed, or to pay a sum of money or other thing of value upon the happening of a certain event and includes life insurance; ["assurance"]

[31] Applying this definition to the case before us, it could be said that in the contract in question, Ingle undertook to indemnify Reliable against loss in respect of Reliable's exposure to claims exceeding 55 per cent of the earned premium. The existence of the indemnity feature alone, however, is not conclusive on the issue of whether or not it is a contract of insurance.

[32] In Brown and Menezes, Insurance Law in Canada (Toronto: Carswell, 1999- ) it is said at p. 2-2:

This [the statutory definition] is wide enough to include many transactions not normally thought of as insurance. While this can be justified on the ground of providing maximum protection for consumers, on the whole the courts tend to construe the definition narrowly.

[33] Of course, not all contracts of indemnity are insurance contracts and a distinction has been drawn, in some cases, between insurance and non-insurance contracts of indemnity. Brown and Menezes, op. cit., at p. 2-3. In this regard it may be questioned whether the 1987-88 agreement, just because it contains an indemnity provision (para. 2), may be properly called an undertaking to indemnify within the meaning of this term in the Insurance Act, or, more accurately, whether the indemnity provision itself is such an undertaking.

[34] Ingle seeks to abstract from the agreement one of its provisions (para. 2) leaving all of the others out of account and then submits that by reason of the Insurance Act, this provision is unenforceable. I do not think that this is the right approach. If the agreement is looked at as a whole, and in the light of its history, it may fairly be seen to be an arrangement of some complexity relating to the sale of Ingle's insurance programs. Each party has rights and obligations, which necessarily are interrelated. The agreement is a business arrangement, an important feature of which is the allocation of the profits and losses of the program. Before 1987-88, the profits were divided between the parties. In 1987-88, any profits would solely belong to Ingle but, on the profit-loss continuum, when there was a "loss" it would, ultimately, be borne by Ingle. I put "loss" in quotation marks because it is far from clear that, having regard to the premium income Ingle received in the year 1987-88, Ingle suffered a loss on the programs. What suffered was a reduction in its profit. I refer to para. 12 of these reasons.

[35] In effect, Ingle seeks, in defence of the claim against it, to keep the substantial benefit it has received under the contract but to have one provision, under which it is liable, rescinded. As I have indicated, I am not sure that the para. 2 feature of the arrangement can properly be abstracted out as a freestanding term to be rendered unenforceable by reason of the Insurance Act.

[36] I have mentioned above that Mr. Savage based part of his opinion on the fact that the parties, both experienced in the insurance industry, did not see fit to name their agreement a reinsurance agreement. I think that it is more significant, in this regard, that in Ingle's statement of defence it did not occur to it to plead, as required by rule 25.07(4) [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194], that the agreement was one for insurance and hence unenforceable. This breach of the pleading rule did not prevent the court from considering the question because, obviously, by the time of the trial Ingle had raised this defence other than in its pleading. The pleading lapse is, merely, consistent with the failure of Ingle, which was experienced in the insurance industry, to regard the 1987-88 agreement as providing for insurance within the meaning of this word in the Insurance Act.

[37] It could be said that para. 2 in the 1987-88 agreement in substance is not an agreement for insurance within the meaning of this term in the Insurance Act but, rather, is part of a complex business contract which, although it related to insurance, had profit-sharing as its main purpose.

[38] I turn now to what is the most important consideration bearing on the meaning of "insurance", the purpose of the licensing provisions in the Insurance Act. Brown and Menezes, op. cit., say at p. 2-4:

In the end, the only sensible approach to the interpretation of the definition is to employ the mischief rule. The thrust of the legislation is to protect consumers of insurance in two basic ways: by ensuring the solvency of insurers through complex licensing, auditing, deposit and accounting requirements, and by regulating the terms of the contracts which insurers enter into. Only if a particular type of transaction calls for supervision of that degree of sophistication, should it fall within the scope of the Act as "insurance".

[39] As stated in this text, licensing is part of a legislative scheme to insure the solvency of insurers dealing with the public. It is to protect members of the public who deal with insurers. The agreement in question in this proceeding does not bear on this concern. As Mr. Savage testified, the members of the public affected by the insurance program in this case are protected by the licensing and regulation of Reliable. It could be that, in some circumstances, Reliable's financial ability to provide insurance to members of the public could depend on the nature of any reinsurance contracts it had entered into but these circumstances are not present in this case. In fact, Mr. Savage testified that the regulators would pay no attention to "side agreements" of the kind in question in this case. Reference may be made to Regulation 665, R.R.O. 1990 [Calculations Under Clause 60(1)(b) of the Act] with respect to solvency calculations for insurers.

[40] Accordingly, statutory purpose or policy concerns do not support the interpretation of the 1987-88 agreement as providing for insurance within the meaning of the Insurance Act.

[41] Although, as I have said, I do not think that Reliable is suing on a contract of insurance, I need not express a final opinion on this issue. For the reasons I shall give, I am of the view that the contract is enforceable even if it is prohibited by the Insurance Act and I would dismiss the appeal for this reason. It may be that a future case will turn on the resolution on the matters I have discussed to this point and I think that it is the better course not to encumber the decision in such a case.

Is the agreement enforceable? The application of the doctrine of illegality

[42] It would be wrong to say that the law respecting the enforceability of contracts that contravene a statute is clear and that the decisions in the cases are all consistent. Much turns on the particular terms on the statute, its underlying policy, and the facts of the case at hand.

[43] In Sidmay v. Wehttam Investments Ltd. (1966), 1967 24 (ON CA), [1967] 1 O.R. 508, 61 D.L.R. (2d) 358 (C.A.) this court addressed the question of the invalidity of a mortgage to the defendant, a corporation that had not been registered under the Loan and Trust Corporations Act, R.S.O. 1960, c. 222. The court construed the statute narrowly and held that it did not apply to [the] defendant. It went on to hold that, if it were wrong in this respect, it would not have been prepared to hold the mortgages unenforceable. Kelly J.A., for himself and Wells J.A., said at pp. 528-29 O.R. that the borrower could not seek relief as it was not a person for whose protection the legislation was enacted.

[44] The third member of the court, Laskin J.A., said at pp. 537-38 O.R.:

Moreover, it seems to me that the facts of this case come within the principle, which I endorse, expressed in s. 601 of the American Law Institute, Restatement of the Law of Contracts, p. 1116. It is headed "Recovery on an Illegal Bargain Because of the Effect of Refusal" and in the following terms:

If refusal to enforce or to rescind an illegal bargain would produce a harmful effect on the parties for whose protection the law making the bargain illegal exists, enforcement or rescission, whichever is appropriate is allowed.

The first illustration given of this principle is that of a bank which is forbidden by statute to invest in real estate mortgages, and the statute makes it criminal to do so. The bank nevertheless invests in such mortgages. Action, it is said, can be maintained on the mortgage debt and to foreclose the mortgage, since otherwise creditors and shareholders of the bank, for whose protection the statute is enacted, would be injured. The analogical aptness of this illustration is clear.

[45] The judgment of the Court of Appeal was affirmed by the Supreme Court of Canada on the basis that the legislation did not invalidate the mortgage. The court did not deal with [the] issue of enforceability of the mortgage on the assumption that it was illegal but did not cast any doubt on what the Court of Appeal had said on this issue.

[46] In Royal Bank of Canada v. Grobman (1977), 1977 1113 (ON SC), 18 O.R. (2d) 636, 83 D.L.R. (3d) 415 (H.C.J.) Krever J. relied upon both the reasons of Kelly J.A. and Laskin J.A. in Sidmay in holding that a mortgage securing a bank loan that exceeded the loan to value ratio provided for in the Bank Act was enforceable. He said at pp. 651-52 O.R.:

As I understand the evolution of the current law of contract, modern judicial thinking has developed in a way that has considerably refined the knee-jerk reflexive reaction to a plea of illegality.

[47] At pp. 652-53 O.R. Krever J. referred to what he considered to be "the modern judicial view of illegality in the contracts field and the consequences the Courts are prepared to visit upon a contract entered into in contravention of a statute." He said:

The serious consequences of invalidating the contract, the social utility of those consequences and a determination of the class of persons for whom the prohibition was enacted, are all factors which the Court will weigh.

Waddams, The Law of Contracts, 4th ed. (Toronto: Canada Law Book, 1999) at p. 416 approves of the "modern judicial view" reflected in Krever J.'s judgment.

[48] In the present case, as indicated earlier in these reasons, the statutory licensing requirement is enacted solely for the benefit of the public who seek to buy insurance policies. It is part of a legislative scheme to protect policy holders from insolvent insurance companies. In the context of this case, the statute must be taken to protect the "policy holder" Reliable even though the agreement is for reinsurance, not primary insurance. In my view, public policy clearly preponderates in favour of enforcing the promise contained in para. 2 of the 1987-88 agreement. The sound policy principle contained in s. 601 of the American Law Institute Restatement, which Laskin J.A. sets forth in his judgment in Sidmay, is directly in point. Further, public policy does not countenance Ingle profiting from its own wrongdoing. See Still v. Minister of National Revenue (1997), 1997 6379 (FCA), [1998] F.C. 549, 154 D.L.R. (4th) 229 (C.A.) at p. 579 F.C.

[49] Before concluding, I should refer to the decision of the English Court of Appeal in Phoenix General Insurance Company of Greece S.A. v. Administratia Asigurarilor De Stat, [1986] 2 Lloyd's L.R. 552 which contains a dictum Ingle relies upon to support its submission that the absence of a licence in the present case should defeat Reliable's claim. I might first mention that there are many statements in the reasons of Phoenix which support Reliable, rather than Ingle. For example, at p. 570, the following appears in the reasons [of] Kerr L.J. for the court:

The statutory prohibitions are designed to protect the insured by seeking to ensure that undesirable persons are not authorized to carry on insurance business and that authorized insurers remain solvent. Good public policy and common sense therefore require that contracts of insurance, even if made by unauthorized insurers, should not be invalidated. To treat the contracts as prohibited would of course prevent the insured from claiming under the contract and would merely leave him with the doubtful remedy of seeking to recover his premium as money had and received.

[50] However, the statute in that case, with respect to contracts made by insurers without authorization, included a provision which prohibited not only the business of "effecting contracts of insurance" but also, the business of "carrying out contracts of insurance" (emphasis added). The court was of the view that this latter wording declared the only relevant public policy and that, if it had been obliged to decide the question, it would have held that the contract in that case to be unenforceable.

[51] In considering the impact of Phoenix in the present case, I need do no more than hold that, by reason of the terms of the legislation in that case on which the opinion relating to enforceability was based, which has no counterpart in the present case, it is distinguishable. Accordingly, it is not necessary to decide whether under the law in this jurisdiction respecting the effect of illegality on the enforceability of contracts, we should follow Phoenix.

The Second Action

[52] In this action, Reliable claims against the individual defendants on their guarantee of the obligation assumed by Ingle (the corporation). The guarantee reads:

To: Reliable Life Insurance Company 105 Main Street East Suite 700 Hamilton, Ontario

In consideration of your entering into the Agreement dated September 1, 1987 with M.H. Ingle & Associates Insurance Brokers Limited, the undersigned hereby guarantee the performance of the obligations assumed and covenants made therein by M.H. Ingle & Associates Insurance Brokers Limited and agree to indemnify you for paid claims on the combined results of the book of business in excess of 55 [per cent] of earned premiums in the H.M.C. plan, 55 [per cent] of earned premiums in the U.H.A.L. plan and 45 [per cent] of earned premiums in the N.I.T. plan with respect to policies of insurance written after August 31, 1987 and before January 1, 1988.

It is understood and agreed that Reliable Life Insurance Company will exhaust its remedies on any letter of credit provided to it by M.H. Ingle & Associates Insurance Brokers Limited before taking action under this guarantee.

[53] In their statement of defence the defendants pleaded that the guarantee was not enforceable because the guarantees are "in the nature of reinsurance in that the Plaintiff purports to pass the risk it assumed as an underwriter on to guarantors, however, the guarantors are not licensed or lawful insurers (which the plaintiff knew or ought to have known)".

[54] In their factum, these defendants submit that the guarantee corresponds to a recognized class of insurance, surety insurance.

[55] There is nothing about the guarantee in this case that takes it out of the usual or standard form of guarantee. Accordingly, if the defence under the Insurance Act were applicable in this case, it would apply in virtually every case of an action on a guarantee.

[56] Although contracts of insurance and of guarantee often serve similar economic purposes, in several respects they are substantially distinct. I refer to McGuinness, The Law of Guarantee, 2nd ed. (Toronto: Carswell, 1996) at pp. 682-84. The essence of a contract of guarantee is that it is a secondary undertaking by one person to answer for the default of another. This hardly describes an insurance contract.

[57] Clearly, the typical contract of guarantee, of which the one before us is an example, does not reflect the kind of transaction that would bring the guarantors within the policy concerns of the provisions of the Insurance Act, discussed earlier in these reasons.

[58] I would not give effect to this ground of appeal.

Disposition

[59] For these reasons, I would dismiss these appeals, with costs. Counsel may make written submissions on the amount of the costs, the respondent's submission to be delivered within 12 days from the date of release of these reasons and the appellants' within seven days after delivery of the respondent's.

Appeals dismissed.