COURT OF APPEAL FOR ONTARIO

CITATION: Rochon v. Rochon, 2015 ONCA 746

DATE: 20151106

DOCKET: C58777

Simmons, Epstein and Pardu JJ.A.

BETWEEN

Paulette Rochon and Marcel Rochon

Plaintiffs (Appellants)

and

Francois Rochon

Defendant (Respondent)

Steven Baldwin and Daniel Baldwin, for the appellants

Alan L. Rachlin, for the respondent

Heard: May 26, 2015

On appeal from the judgment of Justice Helen K. MacLeod-Beliveau of the Superior Court of Justice, dated April 11, 2014 with reasons reported at 2014 ONSC 2337, 119 O.R. (3d) 747.

Epstein J.A.:

OVERVIEW

[1] On March 28, 2010, a fire broke out in the garage of the home of Paulette and Marcel Rochon when their son, Francois Rochon, who was living at home with them, was working on his car in the garage.

[2] At the time of the fire, the house, including the garage, was insured under a residential home owner’s insurance policy (the “Policy”) issued by Grenville Mutual Insurance Company. Paulette and Marcel Rochon were the named insured under the Policy and Francois Rochon was an unnamed insured. Francois Rochon’s car was insured under an Ontario automobile policy of insurance issued by Economical Insurance.

[3] Grenville paid Paulette and Marcel Rochon $148,581.65 for property damage caused by the fire. In this subrogated action, Grenville claims it is entitled to recover this amount from Economical. In addition, Paulette and Marcel Rochon sought judgment for their uninsured loss of $8,000.

[4] While this appeal focuses on the interpretation of the Policy, from a practical perspective it effectively involves a contest between Grenville and Economical over which insurer bears the ultimate responsibility for the fire loss. Therefore, for ease of reference, I will refer to Grenville as the appellant and Economical as the respondent.

[5] The trial judge concluded that Francois Rochon was negligent. And, in accordance with the parties’ agreement, the trial judge analyzed the issues on the basis that the negligence took place in the course of Francois Rochon’s use and operation of his motor vehicle. However, she dismissed the action on the basis that Grenville was not entitled to subrogate against its own insured; namely, Francois Rochon. The trial judge granted judgment in the amount of $8,000 against Francois Rochon to reimburse Paulette and Marcel Rochon for their uninsured loss.

[6] Grenville advances three main arguments in support of its position that the trial judge erred in dismissing its subrogation claim:

1. The trial judge erred in concluding that Francois Rochon was an insured under the Policy for the purposes of the claim;

2. The trial judge erred in finding that Francois Rochon had an insurable interest in the loss; and

3. The trial judge erred in failing to give effect to the policy argument for allowing subrogation in the circumstances of this case.

[7] In my view, dismissal of Grenville’s subrogation claim is consistent with the language of the Policy, the jurisprudence, and the policy against allowing an insurer to subrogate against its own insured. I would therefore dismiss the appeal.

THE FACTS

The Circumstances Surrounding the Fire

[8] Francois Rochon, then a 21-year-old technician-mechanic, used the garage attached to the home where he lived with his parents to do personal general maintenance work, including car maintenance.

[9] On the evening of March 28, 2010, Francois Rochon was in the garage, installing auxiliary lights under the headlights of his car. He needed direct power to the headlights to check his wire and electrical connections. He used the car battery as the power source, connecting it to a battery charger. After working on the car for about five minutes, he checked the connections on the battery charger. Everything appeared fine.

[10] After about an hour of work, Francois Rochon checked the battery connections again and then went into the house to get his cell phone charger. He spent approximately 30 to 45 minutes in the house, before returning to the garage. When he opened the door, he saw flames coming mainly from the trunk of his car where the battery was located. The fire quickly spread to the structure of the garage causing extensive damage.

The Policy and Francois Rochon’s Insurance with Economical

[11] The Policy consists of two parts – the Declaration Page and the Policy itself. The Policy has five sections:

1. Section 1 – Property Coverages;

2. Section 2 – Liability Coverage;

3. Section 3 – Limited Coverages;

4. Section 4 – Miscellaneous Coverages; and

5. Conditions; Statutory and Additional.

[12] The Policy provides coverage for the garage as well as the house, in two main areas – multi-peril loss and third party liability. Named and unnamed insured are covered for loss of buildings and contents by fire. Fire loss is not dealt with separately: it is included in the general list of insured perils covered under Section 1 – Property Coverages.

[13] The definition of who is insured under the Policy is found on page 1-1 in the terms “you” and “your”. The Policy provides that the definitions of “you” and “your” apply to Sections 1, 2, 3 and 4. This definition reads as follows:

“You” or “your” means the person(s) named as Insured on the Declaration Page and, while living in the same household, his or her spouse, the relatives of either or any person under the age of 21 in their care. “Spouse” includes either of two persons who are not married to each other and have lived together continuously for a period of not less than three years or, in a relationship of some permanence where there is a child born of whom they are the natural or adoptive parents, and have cohabited within the preceding year. Only the person named on the Declaration Page may take legal action against us. [Emphasis added.]

[14] The Policy also provides liability coverage for negligence claims brought against the insured by third parties but specifically excludes coverage for claims resulting from “the ownership, use or operation of any motorized vehicle, trailer or watercraft except those for which coverage is provided by this policy”. It was agreed that the work Francois Rochon performed on his car constituted the “use and operation of a motor vehicle”.

[15] As previously mentioned, Francois Rochon had third party liability coverage for loss caused by his negligence in the use and operation of a motor vehicle under his insurance policy with Economical.

THE JUDGMENT BELOW

The Negligence Issue

[16] The trial judge was satisfied that Francois Rochon’s negligence had caused the fire. She accepted the expert evidence of a professional engineer who concluded that the fire was started by electrical arching due to a poor connection between the battery charger and the positive battery post, and found that Francois Rochon was the only person who could have made the loose connection. In doing so, his conduct fell below the standard of care required in the use of this type of equipment. He also failed to check the battery connections sufficiently.

The Subrogation Issue

[17] The trial judge held that despite Francois Rochon’s negligence, Grenville was not entitled to subrogate its claim against Economical because an insurer cannot subrogate against its own insured. At para. 48, the trial judge reasoned that Francois Rochon was an insured as follows:

In the [Policy], there is no definition of who is an “Insured”. Rather the [P]olicy defines “You” and “Your”. Importantly, this definition applies to all four sections of the [P]olicy. As [Francois Rochon] is an unnamed insured on the [P]olicy, by the definition of “You” and “Your” in the [P]olicy, [Francois Rochon]’s rights are the equivalent of [Paulette and Marcel Rochon]’s throughout the [P]olicy.

[18] The trial judge distinguished this court’s decision in Morawietz v. Morawietz (1986), 1986 CanLII 7783 (ON SC), 18 C.C.L.I 108. In Morawietz, the insurer brought a successful subrogation claim by the parents, as named insured, against their son, whose negligence caused the loss. Significantly, this court held that the son was not an insured under the separate fire section of the policy under which the loss was paid out and had no insurable interest in the loss.

[19] The trial judge held that those two critical findings rendered the reasoning in Morawietz inapplicable to this case.

[20] In addition to concluding that Francois Rochon was an insured under Section 1, which paid out the fire loss, the trial judge held that Francois Rochon had an insurable interest in the loss, following the Supreme Court’s decision in Scott v. Wawanesa Mutual Insurance Co., 1989 CanLII 105 (SCC), [1989] 1 S.C.R. 1445, which established that an insurable interest can exist absent legal ownership. She also found that some of his possessions were in the garage and were damaged in the fire. I will return to Scott later in these reasons.

[21] Having found the language that established Francois Rochon as an insured under Section 1 of the Policy clear and unambiguous, the trial judge held that the fact that Francois Rochon owned contents that were insurable (presumably referring to his automobile policy with Economical) was irrelevant. In reaching this conclusion, she relied on Scott where, at para. 51, the Supreme Court held that absent ambiguity, no further inquiry is required or appropriate; the wording of the insurance contract prevails.

[22] The trial judge identified Conditions 5, 6, and 11 of the Policy as reinforcing her conclusion that Grenville’s subrogated claim could not succeed, on the basis that Francois Rochon was an insured and an insurer cannot sue its own insured. These conditions, which required Francois Rochon to assist Grenville in investigating the incident and to take reasonable steps to recover lost property, were contrary to Francois Rochon’s interest if Grenville, his own insurer, could sue him under the Policy. At para. 61, the trial judge put it as follows: “The only way these contractual requirements make sense is that [they] relate to the conditions required of the insurer’s own insured on the [P]olicy to recover losses from third persons, not their own insured” (emphasis added).

[23] On the basis of this analysis, the trial judge dismissed Grenville’s subrogated claim for $148,581.65.

[24] The trial judge granted judgment in favour of Paulette and Marcel Rochon for $8,000 – the amount of their loss that was not covered by insurance – based on the trial judge’s conclusion that Francois Rochon’s negligence caused the fire.

ANALYSIS

The Standard of Review

[25] In Creston Moly Corp. v. Sattva Capital Corp., 2014 SCC 53, [2014] 2 S.C.R. 633, at paras. 50-55, the Supreme Court of Canada held that absent an extricable error of law, the standard of review on matters of contractual interpretation is reasonableness. Although a correctness standard is appropriate when an extricable error of law is identified, such circumstances will be rare: Sattva, at para. 55.

[26] The Alberta Court of Appeal has held that this general approach does not apply to certain standard form contracts. In Vallieres v. Vozniak, 2014 ABCA 290, 377 D.L.R. (4th) 80 and Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., 2015 ABCA 121, 386 D.L.R. (4th) 482, leave to appeal granted, 36452 (September 24, 2015), the Alberta Court of Appeal applied a correctness standard to the interpretation of a standard form real estate contract and a standard form insurance policy respectively: see also Precision Plating Ltd. v. Axa Pacific Insurance Co., 2015 BCCA 277, 387 D.L.R. (4th) 281.

[27] I do not find it necessary to express a view on this issue as I see no reason to interfere with the trial judge’s interpretation of the Policy whether it is reviewed on a correctness or deferential standard.

1. Did the trial judge err in concluding that Francois Rochon was an insured under the Policy for the purposes of the claim?

[28] Grenville takes the position that Francois Rochon was not an insured under Section 1 of the Policy, the section that responded to the claim.

[29] I do not agree. For the following reasons, I am of the view that the language of the Policy is clear and that the trial judge properly gave effect to it.

(a) Francois Rochon is an Unnamed Insured under Section 1

[30] As noted above, the parties agreed that Francois Rochon is an unnamed insured under the Policy, which does not define “insured”. Instead, the definition of “you” and “your” on page 1-1 expressly applies to Sections 1, 2, 3 and 4.

[31] In Section 2, the terms are again defined: “‘You’ or ‘your’ in this Section have the same meaning as in the Definitions applicable to Sections 1, 2, 3 and 4 on page 1. In addition, the following persons are insured…” (emphasis added). On its face, this definition means that all persons listed in the definition of “you” and “your” in Section 2 of the Policy are “insured”, “[i]n addition” to the parties listed on page 1, who are also “insured”. In this way, the definition in Section 2 supports the trial judge’s interpretation.

[32] I agree with the trial judge’s finding that the Policy unambiguously defined Francois Rochon as an insured under Section 1. He fell under the definition of “you” and “your”, which applies to all sections of the Policy.

[33] My conclusion on this issue renders Morawietz inapplicable insofar as Grenville relies on it to support its argument that it is entitled to subrogate against an unnamed insured under the same policy. As previously mentioned, this court’s conclusion in that case depended on the finding that the son was not an insured under the section of the insurance policy that responded to the claim.

(b) Inconsistent Use of “You” and “Your”

[34] The relevant portion of Section 1 reads as follows:

[W]e insure your dwelling, detached private structures, and your personal property against direct loss or damage caused by the following perils as described and limited:

1. FIRE or LIGHTING. [Emphasis added.]

[35] Grenville submits that the inconsistent use of the words “you” and “your” throughout the Policy suggests that it cannot be safely assumed that the words “you” and “your” have their defined, extended meaning, wherever they appear in the Policy.

[36] According to Grenville, in Section 1 “your” means the person making the claim. Francois Rochon was not an insured under Section 1 because he made no claim. He suffered no loss.

[37] I would not give effect to this argument.

[38] I start by referring to the decision of the British Columbia Court of Appeal in Riordan v. Lombard Insurance Co., 2003 BCCA 267, 13 B.C.L.R. (4th) 335. In that case, the Court concluded that since the son of the named insured fell within the definition of “you” and “your”, he was an insured whose intentional and criminal acts were unambiguously covered by the exclusion clause.

[39] I note that the Court reached that conclusion notwithstanding “you” and “your” were sometimes used inconsistently in the policy; the meaning of insured within the exclusion clause was clear.

[40] I have similarly concluded that, here, the definition of “you” and “your” and its applicability to Section 1 is unambiguous. It is also clear that in Section 1, “your” is not confined to persons making the claim, but refers to unnamed resident insured.

[41] However, even if I were to hold otherwise, I would not give effect to Grenville’s position on this issue. I say this based on the well-established law concerning the interpretation of insurance contracts.

[42] In Non-Marine Underwriters, Lloyd's of London v. Scalera, 2000 SCC 24,[2000] 1 S.C.R. 551, the Supreme Court performed a comprehensive review of the general principles of interpreting insurance contracts. At para. 70, Iacobucci J. considered the existence of ambiguities in insurance contracts, which are “essentially adhesionary”:

[T]he standard practice is to construe ambiguities against the insurer. A corollary of this principle is that "coverage provisions should be construed broadly and exclusion clauses narrowly". Therefore one must always be alert to the unequal bargaining power at work in insurance contracts, and interpret such policies accordingly. [Citations omitted.]

[43] Following Scalera, the definition of “you” and “your” must be interpreted broadly and any ambiguity must be construed against Grenville.

[44] If Grenville wished, in these circumstances, to preclude coverage of Francois Rochon – someone who expressly fell within the definition of “you” and “your” in its own Policy – it was incumbent on Grenville to clearly so provide in the wording of its contract of insurance.

(c) Privity Argument

[45] Grenville further submits that because the definition of “you” and “your” provides that only named insured can take legal action against it, Francois Rochon lacks privity of contract with Grenville and therefore has no independent rights under the Policy. However, Grenville cites no authority for this proposition.

[46] In fact, there is authority to the contrary. I rely again on the decision in Riordan. In response to the same privity argument advanced in this case, the Court said, at para. 16, that “not being able to take legal action against the insurer does not…make [the son] any less an insured as a person in his situation as defined in ‘you’ and ‘your’ in the policy.”

[47] I agree with this reasoning and thus reject Grenville’s privity argument.

(d) Conclusion Regarding Issue 1

[48] I see no reason to interfere with the trial judge’s finding that Francois Rochon was an unnamed insured under Section 1 of the Policy – the section that responded to the claim in issue.

2. Did the trial judge err in finding that Francois Rochon had an insurable interest in the loss?

[49] Grenville submits that the trial judge erred in stretching the rationale of the Supreme Court in Kosmopoulos v. Constitution Insurance Co. of Canada, 1987 CanLII 75 (SCC), [1987] 1 S.C.R. 2, and in applying Scott, to find that Francois Rochon had an insurable interest in the garage.

[50] According to Grenville, his interest was separate from his parents and limited to the value of his personal property, because he did not rely on the garage as a source of accommodation and support. He cannot derive an insurable interest simply through his use and enjoyment of the garage.

(a) The Insurable Interest Requirement

[51] Essential to the disposition of this appeal is the determination of whether Francois Rochon had an insurable interest in the property, a requirement for recovery under an insurance policy: Zurich Insurance Co. v. Ison T.H. Auto Sales Inc., 2011 ONSC 1870, 106 O.R. (3d) 201, at para. 28, aff’d 2011 ONCA 663, 342 D.L.R. (4th) 501.

[52] Absent an insurable interest in the subject-matter of the insurance, an insurance contract is not legally enforceable: Barbara Billingsley, General Principles of Canadian Insurance Law, 2d ed. (Markham: LexisNexis Canada Inc., 2014), at p. 35.

[53] There are three reasons for mandating an insurable interest in property: (1) the policy against wagering; (2) the principle of indemnity (i.e. that the insured should not profit upon a loss occurring); and (3) the policy of preventing the insured from being tempted to intentionally destroy the insured property: Kosmopoulos, at p. 22; see also Billingsley, at p. 36.

The Supreme Court’s Decision in Kosmopoulos

[54] In Kosmopoulos, the Supreme Court defined the concept of insurable interest in terms of the “factual expectancy test”. At p. 30, Wilson J. borrowed the words of Lawrence J. in Lucena v. Craufurd (1806), 127 E.R. 630 (H.L.), at p. 643: “To ‘have a moral certainty of advantage or benefit, but for those risks or dangers’, or ‘to be so circumstanced with respect to [the subject matter of the insurance] as to have benefit from its existence, prejudice from its destruction’ is to have an insurable interest in it.”

[55] Thus, an insurable interest exists if, apart from the insurance contract itself, the insured would benefit or suffer from the continued existence or destruction of the subject-matter of insurance or from the occurrence of the insured-against risk: Billingsley, at p. 36.

[56] This takes me to the second basis upon which Grenville relies on Morawietz – to support its position that Francois Rochon did not have an insurable interest in the loss. In my view, it is clear that, to the extent that this court may have held in Morawietz that an insurable interest requires legal ownership, this position has been overtaken by the factual expectancy test articulated in Kosmopoulos: see also Scott.

[57] Kosmopoulos established that courts must determine the existence of an insurable interest on a case-by-case basis. The test is a flexible one based on the “the actual relationship between a particular individual and the item or risk insured rather than on the basis of a predetermined indicator, such as legal title”: Billingsley, at p. 40.

The Supreme Court’s Decision in Scott

[58] In Scott, the Supreme Court applied the factual expectancy test from Kosmopoulos and concluded that an insurable interest in a residence can exist absent legal ownership. The Scotts’ residence sustained damage from a fire deliberately set by their 15-year-old son.

[59] Under their policy, “insured” included named insured and any household resident under the age of 21 in the care of the insured, among others. However, an exclusion clause excluded loss or damage caused by a criminal or wilful act or omission of the insured or of any person whose property was insured under the policy.

[60] The majority of the Supreme Court of Canada upheld the insurer’s denial of coverage. The key passage is found at p. 1467:

[E]ven if we were to accept the more narrow definition… it would be impossible to say that the insurable interest of the infant…was limited to his personal possessions. He had a direct relationship to the family home and its contents, since they were his source of accommodation and support. To apply the analysis in Kosmopo[ulos], [the son] had occupation, use and enjoyment of the family home. He received a benefit from its existence. As a dependent living in that home, he suffered a direct prejudice when it was destroyed by fire. The interests of parent and child in this case…"are inseparably connected so that a loss or gain necessarily affects them both, the misconduct of one is sufficient to contaminate the whole insurance". [Citation omitted.]

(b) Francois Rochon’s Insurable Interest

[61] On this record, I see two areas in which Francois Rochon had an insurable interest in the loss.

[62] The first is mentioned in “Coverage C” under Section 1 of the Policy, which states: “We insure the contents of your dwelling and any other personal property you own, wear or use while on your premises which is usual to the ownership or maintenance of a dwelling.” The trial judge found as a fact that Francois Rochon had contents and tools on the premises and therefore that he had an insurable interest in the loss.

[63] Second, Scott shows that the rights and interests of parents and their children are highly interrelated when they are living together. A loss or gain in relation to the property necessarily affects them both.

[64] Applying the analysis in Kosmopoulos here, as in Scott, Francois Rochon had an insurable interest in the garage. As a dependent living with his parents, Francois Rochon’s interests are “inseparably connected” to those of his parents. Simply put, the garage formed a part of the residence that he enjoyed with his parents. Francois Rochon received a “benefit” from the family garage and its contents, and suffered “direct prejudice” when it was destroyed by fire. Francois Rochon had an insurable interest in the loss.

Applicability of the Supreme Court’s Decision in Scott

[65] Grenville contends that the trial judge erred in her application of Scott to the facts of this case. The policy reasons at play in Scott (i.e. preventing collusion between insured with a common interest in collecting under a homeowner’s policy) are not relevant in a contest between two insurers.

[66] I disagree. In my view, the factual expectancy test applies with equal force here.

[67] In Scott, the Supreme Court’s application of the factual expectancy test is not tied to any specific policy rationale as Grenville suggests. While the Court may have allowed subrogation, in part, to avoid the moral hazard of children and parents conspiring to collect insurance proceeds, as can be seen from the passage in Scott set out above, the Court’s analysis is expressly based on the nature of the relationship between children, their parents, and their shared residence.

[68] I find Scott to be dispositive of the issue whether Francois Rochon had an insurable interest in the loss.

(c) Conclusion Regarding Issue 2

[69] I would therefore not give effect to Grenville’s argument that the trial judge erred in concluding that Francois Rochon had an insurable interest in the loss.

3. Did the trial judge err in not giving effect to the policy argument for allowing subrogation in the circumstances of this case?

[70] Grenville contends that the rule against an insurer suing its own insured under the same policy, no matter how negligent they were in causing the loss, should not apply to a dispute between two insurers. There is nothing improper, unfair, or contrary to public policy when a home insurer subrogates against an automobile insurer for damages arising from the use or operation of a motor vehicle.

[71] I would not give effect to Grenville’s policy argument.

(a) Policy Reasons for not Allowing Subrogation

[72] There are powerful policy reasons working against Grenville’s position.

[73] I start with the fundamental notion that insurers should not be permitted to subrogate against their own insured: Commonwealth Construction Co. Ltd. v. Imperial Oil Ltd. et al., 1976 CanLII 138 (SCC), [1978] 1 S.C.R. 317. The fact that an insured may have other insurance is, in my view, irrelevant. A suit by an insurer against its own insured does not fulfil the aims of subrogation, which is to avoid overpayment of the insured: Condominium Corporation No. 9813678 v. Statesman Corporation, 2007 ABCA 216, 409 A.R. 152, at paras. 26-28, leave to appeal refused, 454 A.R. 102 (note).

[74] Further, subrogation against an insured should be barred because the insurer has contracted to take onto itself the very risk at issue, thereby taking it away from the insured: Statesman, at para. 49.

(b) Conditions 5, 6, and 11

[75] Finally, in terms of the policy supporting the decision that Grenville’s subrogation action must fail, I agree with the trial judge that Conditions 5, 6, and 11 would be contrary to Francois Rochon’s interest if his own insurer could sue him under the Policy. At para. 61 of her reasons, the trial judge noted the following:

[These] conditions…required the insured, [Francois Rochon], to take reasonable steps to recover lost property, transfer his right against others to the insurer Grenville and to submit to an examination under oath and produce all documentation in his possession at Grenville's request. In accordance with this contractual requirement, [Francois Rochon] was required to speak to Grenville's adjuster and provide a statement, which he did, to assist Grenville in recovering the loss.

(c) Conclusion Regarding Issue 3

[76] All said, there are several cogent policy reasons for dismissing Grenville’s subrogation claim against Economical.

CONCLUSION

[77] In my view, the trial judge correctly held that Grenville could not subrogate against its own insured, Francois Rochon.

DISPOSITION

[78] For these reasons, I would dismiss the appeal. In accordance with the parties’ agreement, I would award costs in favour of Economical in the amount of $10,000, including disbursements and applicable taxes.

Released: November 6, 2015 (GP)

“Gloria Epstein J.A.”

“I agree Janet Simmons J.A.”

“I agree G. Pardu J.A.”