Siena-Foods Ltd. v. Old Republic Insurance Co. of Canada

Siena-Foods Limited, a Bankrupt, by its Trustee Deloitte & Touche Inc. v. Old Republic Insurance Company of Canada et al. [Indexed as: Siena-Foods Ltd. v. Old Republic Insurance Co. of Canada]

112 O.R. (3d) 180

2012 ONCA 583

Court of Appeal for Ontario,

Laskin, Sharpe and Epstein JJ.A.

September 10, 2012

Insurance -- Automobile insurance -- Coverage -- Applicant renting truck to transport machine and seeking compensation from lessor's insurer after machine was damaged in motor vehicle accident -- Motion judge erroneously applying s. 247(b) of Insurance Act and s. 3.5.1 of Ontario Automobile Policy in ruling that lessor's insurer was not "insurer" of applicant -- Sections 247(b) and 3.5.1 applying to third- party liability coverage and not to direct compensation for property [page181] damage -- Section 263 of Act applying -- Lessor entitled to coverage from its insurer for damage to truck and contents under s. 263 and terms of policy between lessor and insurer extending that coverage to lessees of truck -- Exclusion clause in rental agreement not limiting applicant's recovery as insurer was not party to rental agreement and rental agreement was not part of automobile insurance policy between lessor and insurer -- Any misrepresentation by applicant with respect to nature of cargo not affecting its entitlement under direct compensation provision of automobile policy -- Insurance Act, R.S.O. 1990, c. I.8, ss. 247(b), 263.

S Ltd. rented a truck from RC to transport a machine used in its business. The machine was damaged when the truck was involved in a motor vehicle accident. S Ltd. sought compensation for the damage to its machine from RC's insurer, Old Republic. Old Republic denied coverage. S Ltd. brought a motion to determine three questions of law: (1) Was Old Republic the "insurer" of S Ltd. for the purposes of s. 263(2) of the Insurance Act; (2) if so, did the terms and conditions in the rental agreement between S Ltd. and RC limit S Ltd.'s recovery; and (3) if S Ltd. misrepresented to RC the type of cargo it was carrying, did that impact its recovery from Old Republic under s. 263(2) of the Act? The motion judge answered those questions no, yes and yes, and dismissed S Ltd.'s action against Old Republic. S Ltd. appealed.

Held, the appeal should be allowed.

In finding that Old Republic was not the "insurer" of S Ltd., the motion judge erred in finding that s. 247(b) of the Act and s. 3.5.1 of the Ontario Automobile Policy excluded coverage. Sections 247(b) and 3.5.1 apply to third-party liability coverage, not to direct compensation for property damage. The applicable statutory provision was s. 263 of the Act. Under s. 263 and the corresponding provisions of the Ontario Automobile Policy, RC would be entitled to coverage from Old Republic for damage to its truck and contents. The terms of the policy between RC and Old Republic extended that coverage to a lessee -- such as S Ltd. -- which had rented the truck from RC. An exclusion clause in the rental agreement between S Ltd. and RC did not limit S Ltd.'s recovery, as Old Republic was not a party to the rental agreement and the rental agreement was not part of the automobile insurance policy between RC and Old Republic. Any misrepresentation by S Ltd. with respect to the cargo contents could not affect its entitlement under the direct compensation provisions of the automobile policy for two reasons. First, s. 263(2) of the Act specifies that under the regime governing direct compensation for property damage, the insured -- here, S Ltd. by virtue of RC's automobile policy -- is treated as a third party. S Ltd. could therefore recover from Old Republic even though it was not a party to the insurance contract. Thus, even if the misrepresentation found by the motion judge amounted to a breach of RC's insurance policy, S Ltd.'s right to recover under s. 263(2) of the Act and s. 6.1 of the Ontario Automobile Policy would be unaffected. Second, coverage under the Ontario Automobile Policy can only be terminated in accordance with the Act, the statutory conditions and the Compulsory Automobile Insurance Act, R.S.O. 1990, c. C.25. S Ltd.'s conduct alone could not automatically terminate its coverage.

APPEAL from the order of L.B. Roberts J., [2011] O.J. No. 6229, 2011 ONSC 7250 (S.C.J.) on a motion for a determination of questions of law.

Cases referred to Aube v. Royal Insurance Co. of Canada, 1998 CanLII 31635 (ON CJ), [1998] O.J. No. 4715, 8 C.C.L.I. (4th) 84 (Div. Ct.); Clarendon National Insurance v. Candow (2007), 87 O.R. (3d) 728, [2007] O.J. No. 3797, 2007 ONCA 680, 286 D.L.R. (4th) 567, 229 O.A.C. 277, 53 C.C.L.I. (4th) 159, [2007] I.L.R. I-4646, 57 M.V.R. (5th) 80, 161 A.C.W.S. (3d) 474; [page182] McCourt Cartage Ltd. (c.o.b. Laser Transport) v. Fleming Estate (Litigation Administrator of) (1997), 1997 CanLII 12297 (ON SC), 35 O.R. (3d) 795, [1997] O.J. No. 3933, 152 D.L.R. (4th) 179, 38 O.T.C. 230, 49 C.C.L.I. (2d) 88, [1998] I.L.R. I-3496, 33 M.V.R. (3d) 32, 74 A.C.W.S. (3d) 268 (Gen. Div.) Statutes referred to Compulsory Automobile Insurance Act, R.S.O. 1990, c. C.25 [as am.] Insurance Act, R.S.O. 1990, c. I.8, ss. 239(1), 247, (b), 263 [as am.], (1) [as am.], (2), (3)

James H. Cooke, for appellant. John J. Jones and Cynthia A. Aoki, for respondent.

The judgment of the court was delivered by

LASKIN J.A.: -- A. Introduction

[1] The appellant, Siena-Foods Limited, rented a truck from Ryder Canada to transport a machine used in its business. The machine was damaged when the truck was involved in a head-on collision with another motor vehicle. Siena-Foods sought compensation for the damage to its machine from Ryder's insurer, the respondent Old Republic Insurance Company of Canada.

[2] When Old Republic denied coverage, Siena-Foods brought a motion to determine three questions of law: (1) Is Old Republic the "insurer" of Siena-Foods for the purposes of s. 263(2) of the Insurance Act, R.S.O. 1990, c. I.8; (2) if Old Republic is Siena-Foods' insurer for the purposes of s. 263(2), do the terms and conditions in the rental agreement between Siena-Foods and Ryder Canada limit Siena- Foods' recovery; [and] (3) if Siena-Foods misrepresented to Ryder the type of cargo it was carrying, does this impact its recovery from Old Republic under s. 263(2) of the Insurance Act?

[3] The motion judge answered these questions no, yes and yes. Therefore, on all three bases she dismissed Siena-Foods' action against Old Republic.

[4] Siena-Foods' main contention on appeal is that the motion judge erred by failing to give effect to the "Direct Compensation [page183] -- Property Damage" provisions in the Ontario Automobile Policy, provisions authorized by s. 263 of the Insurance Act. I agree with this contention, and for the reasons that follow, I would allow the appeal and answer the three questions raised on the motion yes, no and no. B. Background Facts

[5] On May 21, 2009, Siena-Foods rented a transport truck and trailer from Ryder Truck Rental Canada Ltd. The parties signed a written rental contract, which contained a liability protection plan but excluded coverage for damage to Siena- Foods' property carried in the truck.

[6] The accident occurred on May 29, 2009 on Brock Road in Durham, Ontario. A Siena-Foods employee was driving the truck, which was carrying a food packaging machine used by Siena-Foods to vacuum seal its products. A car crossed the centre line of the road and collided head-on with the truck. The food packaging machine was badly damaged. The respondent acknowledges that the collision was not the fault of Siena- Foods' driver.

[7] Siena-Foods initially sought compensation for the damage to its machine both from its own insurer, Intact, and from Ryder Canada's insurer, Old Republic. However, Siena-Foods abandoned its claim against Intact and has proceeded only against Old Republic. Siena-Foods went bankrupt in April 2010. Its trustee in bankruptcy, Deloitte & Touche, has carried on the action.

[8] The motion judge held that Siena-Foods was not entitled to recovery against Old Republic for three reasons. First, she held that the "liability coverage" provisions of the insurance policy between Ryder Canada and Old Republic excluded coverage for damage to Siena-Foods' property in the rented truck. This exclusion was authorized by s. 247(b) of the Insurance Act, and therefore, in her view, s. 263(2) of the Act did not apply to this case.

[9] Second, she held that Siena-Foods was not entitled to recover under the terms of the rental agreement. And third, in the alternative, she held that any entitlement to recovery was terminated because Siena-Foods materially misrepresented the "cargo contents" in the truck and thus breached the rental agreement.

[10] I do not agree with any of these three reasons. Old Republic is liable to Siena-Foods under the Direct Compensation -- Property Damage provisions in its policy with Ryder, provisions that extend coverage for damage to the property of a lessee. And nothing in the rental agreement affects that coverage. [page184] C. Analysis

Question #1 -- Is Old Republic the "insurer" of Siena-Foods for the purposes of s. 263(2) of the Insurance Act?

[11] The answer to this question turns on whether Siena- Foods' claim is governed by s. 247 of the Insurance Act and the corresponding provisions in the Ontario Automobile Policy -- ss. 3.1 and 3.5.1 -- or by s. 263(1) and (2) of the Act and s. 6.1 of the Ontario Automobile Policy. The motion judge held that s. 247(b) of the Act and s. 3.5.1 of the policy excluded coverage. Siena-Foods submits that the motion judge erred in her holding because those provisions apply to third-party liability coverage, not to direct compensation for property damage. I agree with this submission. (a) Section 247: Third-party liability coverage

[12] Section 247 of the Insurance Act is located in the part in the statute headed "Motor Vehicle Liability Policies". That part deals with an insured's liability to another person for loss or damage arising out of a motor vehicle accident. Section 239(1) provides:

239(1) Subject to section 240, every contract evidenced by an owner's policy insures the person named therein, and every other person who with the named person's consent drives, or is an occupant of, an automobile owned by the insured named in the contract and within the description or definition thereof in the contract, against liability imposed by law upon the insured named in the contract or that other person for loss or damage, (a) arising from the ownership or directly or indirectly from the use or operation of any such automobile; and (b) resulting from bodily injury to or the death of any person and damage to property.

[13] Section 247(b) permits an insurer to exclude liability coverage for loss or damage to property carried in the insured vehicle:

247. The insurer may provide under a contract evidenced by a motor vehicle liability policy, in either or both of the following cases, that it shall not be liable, @7 . . . . . (b) for loss of or damage to property carried in or upon the automobile or to any property owned or rented by or in the care, custody or control of the insured. [page185]

[14] Section 3.5.1 of the Ontario Automobile Policy tracks s. 247(b) of the Act and states that an insurer will not cover claims for damage to property carried in the insured's vehicle:

3.5.1 Property Not Covered

Under this Section, we won't cover claims for damages to property carried in or upon the automobile, or claims for damage to other property owned or rented by, or in the care, custody or control of you or other insured persons.

[15] An endorsement to the policy between Ryder and Old Republic -- OPCF 5C -- extended the exclusion in s. 3.5.1 to property owned by a lessee who had rented the insured vehicle:

It is agreed that while the automobile is rented or leased, Section 3.5.1 of the Policy under "Liability Coverage" is amended to read as follows:

Under this Section, we won't cover claims for damage to property carried in or upon the automobile, or claims for damage to other property owned or rented by, or in the care, custody or control of the lessee or other insured persons.

[16] Thus, if s. 3.5.1 and OPCF 5C applied, then Old Republic would have no obligation to cover Siena-Foods' claim. But these provisions do not apply to Siena-Foods' claim. Section 3.5.1 is found in Part 3 of the Ontario Automobile Policy, entitled "Liability Coverage". Section 3.1 states:

Introduction

This Section of your policy provides coverage for amounts that the law holds you or other insured persons responsible for bodily injuries or losses others suffer in an automobile incident.

[17] In other words, this section of the policy, including s. 3.5.1, deals with third-party liability coverage. It has nothing to do with Siena-Foods' claim, which is a claim for damage to its own property. (b) Section 263: Direct Compensation -- Property Damage

[18] Instead, the applicable statutory provision is s. 263. Section 263 replaced the tort system and subrogation for property damage claims; the legislature brought in a direct compensation regime for property damage claims in order to reduce transactions costs. Under s. 263 and the corresponding provisions of the Ontario Automobile Policy, the insured, Ryder, would be entitled to coverage from its insurer, Old Republic, for damage to its truck and contents. And as I will show, the terms of the policy between Ryder and Old Republic extended this coverage to a [page186] lessee -- such as Siena- Foods -- which has rented the truck from Ryder.

[19] Section 263(1) states:

263(1) This section applies if, (a) an automobile or its contents, or both, suffers damage arising directly or indirectly from the use or operation in Ontario of one or more other automobiles; (b) the automobile that suffers the damage or in respect of which the contents suffer damage is insured under a contract evidenced by a motor vehicle liability policy issued by an insurer that is licensed to undertake automobile insurance in Ontario or that has filed with the Superintendent, in the form provided by the Superintendent, an undertaking to be bound by this section; and (c) at least one other automobile involved in the accident is insured under a contract evidenced by a motor vehicle liability policy issued by an insurer that is licensed to undertake automobile insurance in Ontario or that has filed with the Superintendent, in the form provided by the Superintendent, an undertaking to be bound by this section.

[20] If s. 263(1) applies, then s. 263(2) entitles an insured to recover from its own insurer for damage to its automobile or contents as if it were a third party:

263(2) If this section applies, an insured is entitled to recover for the damages to the insured's automobile and its contents and for loss of use from the insured's insurer under the coverage described in subsection 239(1) as though the insured were a third party. Although an insured claims as if it were a third party, the limitation on contents coverage in s. 247(b) of the Act does not apply to a claim for direct compensation under s. 263(2). To hold that it did would undermine the purpose of the scheme in s. 263: see CED Insurance X.5, 719.

[21] The extent of recovery turns on the insured's degree of fault. Section 263(3) states:

263(3) Recovery under subsection (2) shall be based on the degree of fault of the insurer's insured as determined under the fault determination rules.

[22] Two decisions help to explain s. 263 and its effect. In Clarendon National Insurance v. Candow (2007), 87 O.R. (3d) 728, [2007] O.J. No. 3797, 2007 ONCA 680, at para. 7, Juriansz J.A. explained the direct compensation scheme in s. 263:

Section 263 of the Insurance Act replaced the tort system that resolved automobile damage claims prior to its enactment. In the new statutory scheme, insureds can no longer sue the tortfeasor driver whose negligence has caused damage to their cars. Rather, their own liability insurer pays for the damage, to the extent that they were not at fault, under the third party liability section of their motor vehicle liability policies. Insureds can recover [page187] the at-fault portion of their damage by purchasing collision coverage. Insurers have no right of subrogation for payments to their own insureds, but, on the other hand, do not have to pay the subrogated claims previously brought by other insurers in the tort system. The result is that the statutory regime eliminates the transactions costs that were inherent in the tort system.

[23] And in McCourt Cartage Ltd. (c.o.b. Laser Transport) v. Fleming Estate (Litigation Administrator of) (1997), 1997 CanLII 12297 (ON SC), 35 O.R. (3d) 795, [1997] O.J. No. 3933 (Gen. Div.), at para. 3, Sharpe J. explained the effect of s. 263:

Before the enactment of s. 263, the common law tort regime applied to property damage claims. The result was that where an insured had purchased collision damage cover, and where the accident was caused at least in part by the fault of another driver, two insurers became involved. The insured would claim against his own insurer under the collision coverage, and that insurer would assert a subrogated claim against the insurer of the other driver to the extent of the other driver's fault. The intended effect of s. 263 was to remove the insured's right to sue for property damage and to confer the right to claim such losses not caused by the fault of the insured against one's own insurer. In the words of Somers J. in 583809 Ontario Ltd. v. Kay, 1995 CanLII 7080 (ON SC), [1995] O.J. No. 1626, the section was intended

". . . to bring to an end claims which were really made by one insurance company against another in the names of their respective insureds strictly for the property damage that had occurred in an accident."

See also Bassie v. Warren J. Brown Bituminous Paving Co., [1993] I.L.R. 2357, adopting Allan O'Donnell, Automobile Insurance in Ontario (1991), at p. 51:

". . . under the new system with the exceptions outlined below [none of which apply here], subrogation has been abolished. Thus, we have a "knock for knock" system whereby each insurer absorbs most of its policyholders' property damage claims without attempting to recover same from the insurers of tortfeasors causing such claims."

[24] Section 6.1 of the Ontario Automobile Policy under the heading "Direct Compensation -- Property Damage Coverage" tracks s. 263 of the Act:

6.1 Introduction

This Section of your policy covers damage to the automobile and certain trailers not shown on the Certificate of Automobile Insurance, their equipment, contents, and loss of use of the automobile or contents caused by another person's use or operation of an automobile in Ontario.

The coverage under this Section applies only if the accident takes place in Ontario and at least one other automobile involved is insured under a motor vehicle liability policy. The policy covering the other automobile must be issued by an insurance company licensed in Ontario, or one that has filed with the Financial Services Commission of Ontario to provide this coverage.

It is called direct compensation because you will collect from us, your insurance company, even though you, or anyone else using or operating the automobile with your consent, were not entirely at fault for the accident. [page188]

[25] The combination of s. 263 of the Act and s. 6.1 of the Ontario Automobile Policy would entitle Ryder to recover from Old Republic for damage to its own property. How then does this coverage extend to Siena-Foods' property? The automobile policy between Ryder and Old Republic contains an endorsement -- OPCF 5 -- which extends coverage to lessees. The endorsement begins with its purpose:

Purpose of This Change

This change is part of your policy. -- Lessor

It permits the lessor to rent or lease automobile(s) to the lessee who has completed the Ontario Application for Automobile Insurance -- Owners Form (OAF1). -- Lessee

It provides coverage to the lessee as if the lessee were the named insured, and to every other person who uses or operates the automobile with the lessee's consent. The coverage will not exceed the limits and amounts shown on the Certificate of Automobile Insurance.

[26] Thus, Siena-Foods, as lessee of the Ryder truck, is treated as an "insured" and Old Republic is treated as its "insurer" for the purpose of Siena-Foods' property damage claim.

[27] Old Republic does not dispute that all three of the criteria in s. 263(1) of the Insurance Act were met. Siena- Foods, therefore, can claim against Old Republic for damage to the machine it was transporting in the rental truck as if it were a third party. Its recovery will be based on the degree its own driver was not at fault for the accident, and, of course, its recovery will be subject to the limits in the policy between Ryder and Old Republic. Thus, I would answer yes to the first question: is Old Republic Siena-Foods' "insurer" for the purposes of s. 263(2) of the Insurance Act?

Question #2 -- If Old Republic is Siena-Foods' insurer for the purposes of s. 263(2), do the terms and conditions in the rental agreement between Siena-Foods and Ryder Canada limit Siena-Foods' recovery?

[28] The rental agreement between Siena-Foods and Ryder included a liability protection plan. However, the plan did not cover damage to Siena-Foods' property. Section 5.A of the agreement provided:

Liability Protection Plan and Supplemental Liability Protection Plan, if elected, do NOT apply (i) if the Vehicle is obtained, used or operated in violation of any provision of this Agreement (ii) to loss or damage to property owned by the Customer, in the Vehicle, or for any reasons in the Customer's care, custody or [page189] control (iii) to any injuries of any nature whatsoever to Customer, Customer's agent, employees, guests, family, members of Customer's household, or other occupants of the Vehicle, (iv) to any low dolly, car, carrier, or trailer if not rented from Ryder or if not attached to a Ryder truck, and or (v) for punitive, exemplary, incidental or consequential damages, fines or penalties. (Emphasis added)

[29] The motion judge held that s. 5.A precluded Siena-Foods' recovery. I do not agree. Old Republic is not a party to the rental agreement, and the rental agreement is not part of the automobile insurance policy between Ryder and Old Republic. Therefore, s. 5.A of the rental agreement cannot alter Old Republic's obligation to Siena-Foods under the terms of Ryder's automobile policy. I would answer no to the second question.

Question #3 -- If Siena-Foods misrepresented to Ryder the type of cargo it was carrying, does this impact its recovery from Old Republic under s. 263(2) of the Insurance Act?

[30] In the rental agreement, Siena-Foods represented that its "cargo contents" were produce. However, Siena-Foods was transporting a food packaging machine, not produce. The motion judge held that this was a material misrepresentation disentitling Siena-Foods to recovery. She wrote, at para. 23 of her reasons:

In consequence, the plaintiff's material misrepresentation constituted a breach of the rental agreement and of the Old Republic policy (which is expressly subject to the terms of the rental agreement), resulting in the termination of any entitlement to coverage that the plaintiff may have had under the Old Republic policy.

[31] I do not agree with the motion judge. Even if Siena- Foods misrepresented its cargo contents, that misrepresentation could not affect its entitlement under the direct compensation provision of the automobile policy for two reasons.

[32] First, s. 263(2) of the Insurance Act specifies that under the regime governing direct compensation for property damage, the insured -- here Siena-Foods by virtue of Ryder's automobile policy, which extends coverage to lessees -- is treated as a third party. Siena-Foods can therefore recover from Old Republic even though it was not in any sense a party to the insurance contract. Thus, even if the misrepresentation found by the motion judge amounted to a breach of Ryder's insurance policy, Siena-Foods' right to recover under s. 263(2) of the Act and s. 6.1 of the Ontario Automobile Policy would be unaffected: see Aube v. Royal Insurance Co. of Canada, 1998 CanLII 31635 (ON CJ), [1998] O.J. No. 4715, 8 C.C.L.I. (4th) 84 (Div. Ct.), at paras. 10-11.

[33] Second, coverage under the Ontario Automobile Policy can only be terminated in accordance with the Insurance Act, [page190] the statutory conditions and the Compulsory Automobile Insurance Act, R.S.O. 1990, c. C.25. At the very least, written notice is required before termination can be effective. Siena-Foods' conduct alone could not automatically terminate its coverage. I would answer no to the third question. D. Conclusion

[34] I would allow the appeal, set aside the order of the motion judge and answer the three questions on the motion as follows: Question #1: Yes Question #2: No Question #3: No

[35] I would award the appellant its costs of the motion in the amount $4,500 and its costs of the appeal in the amount of $10,000, each amount inclusive of disbursements and applicable taxes.

Appeal allowed.