Court of Appeal for Ontario
Date: April 25, 2019
Docket: C64596
Judges: Feldman, Pepall and Pardu JJ.A.
Between
Karla Garay Merino, Margarita Merino, Adis Perez Charles and Lou Ann Garay
Appellants (Plaintiffs)
and
ING Insurance Company of Canada, also known as, or formerly, ING Halifax Insurance Company
Respondents (Defendant)
Counsel
Myron W. Shulgan and Donald W. Leschied, for the appellants
Douglas A. Wallace and Sean T. Miller, for the respondents
Heard: October 15, 2018
On Appeal
On appeal from the judgment of Justice Gregory J. Verbeem of the Superior Court of Justice, dated October 20, 2017, with reasons reported at 2017 ONSC 6281.
Feldman J.A.:
Introduction
[1] The appellant, Karla Merino, a pedestrian, was catastrophically injured when she was struck by a car driven by Timothy Klue. Mr. Klue and his wife, Sonia Abou-Khalil, were joint owners of the car. They had applied for automobile insurance coverage over three months before the accident and the respondent insurer had issued a one-year policy. However, because of misrepresentations in the application regarding Ms. Abou-Khalil's driving record, the respondent insurer purported to rescind the policy shortly after issuing it, a couple of months before the accident. Mr. Klue did not drive the car from then until the day of the accident.
[2] By Statement of Claim issued on August 19, 2004, the appellants sued Mr. Klue and Ms. Abou-Khalil, and obtained judgment on July 28, 2011 for $2,000,000. Having been told by the respondent that Mr. Klue and Ms. Abou-Khalil were not insured by it because the policy had been rescinded, the appellants also sued Ms. Merino's mother's insurer, Allianz, in the same action pursuant to the uninsured automobile coverage it provided to the appellants. After non-pecuniary accident benefits of $181,107 paid by the Société de l'assurance automobile du Québec were deducted, Ms. Merino obtained a net award of $18,893 against Allianz. The respondent did not seek to be added to that action.
[3] In the context of an arbitration hearing regarding a dispute among insurers over the obligation to pay accident benefits, the respondent insurer delivered a copy of its underwriting file to counsel for the appellants on September 1, 2005. However, the respondent insurer continued to contend that the policy had been rescinded before the accident.
[4] On April 16, 2012, after obtaining judgment against Mr. Klue, Ms. Abou-Khalil, and Allianz, the appellants commenced the action under appeal against the respondent insurer under s. 258(1) of the Insurance Act, R.S.O. 1990, c. I.8 (the "Insurance Act" or the "Act") on the basis that the insurance contract had not been properly terminated by the respondent, and Mr. Klue and Ms. Abou-Khalil were in fact insured by the respondent on the date of the accident.
[5] On summary judgment, the motion judge was required to determine whether the respondent insurer was entitled to rescind the insurance contract with Mr. Klue and Ms. Abou-Khalil, and if so, whether the purported rescission had the effect of precluding the injured appellant, as an innocent third party, from making a claim against the respondent under s. 258(1) of the Insurance Act. That section provides:
Any person who has a claim against an insured for which indemnity is provided by a contract evidenced by a motor vehicle liability policy, even if such person is not a party to the contract, may, upon recovering a judgment therefor in any province or territory of Canada against the insured, have the insurance money payable under the contract applied in or towards satisfaction of the person's judgment and of any other judgments or claims against the insured covered by the contract and may, on the person's own behalf and on behalf of all persons having such judgments or claims, maintain an action against the insurer to have the insurance money so applied.
[6] The motion judge dismissed the appellants' action on summary judgment. He found that the respondent insurer was entitled to rescind the insurance contract based on material misrepresentation, making it void ab initio; that it had done so effectively; and that, as a result, s. 258(1) was not available to the appellants, as there was no contract with the respondent that provided indemnity to the at-fault driver or owner at the time of the accident.
[7] The appellants appealed each of those findings. For the reasons that follow, I would allow the appeal. The scheme of the automobile insurance provisions of the Act prescribes how an insurer may terminate its obligations under a contract it has issued, including for misrepresentation. That scheme makes it clear that an insurer may not effectively rescind a contract at common law, making it void ab initio; it must comply with the Act. One of the sections in that scheme is s. 258, which allows innocent third parties to sue and recover from the at-fault driver's insurer, at least up to the statutory minimum liability coverage of $200,000 prescribed in s. 251, as long as the automobile insurance contract had not been validly terminated by the insurer before the accident.
Factual Background
(1) The insurance policy issued by the respondent
[8] On May 29, 2002, Mr. Klue and his spouse, Ms. Abou-Khalil, attended at the offices of Gulliver Insurance Brokers in Windsor. There, an application for insurance for a one-year coverage term for both of them as owners and drivers of a 1994 Jeep Cherokee was executed by Mr. Klue but not by Ms. Abou-Khalil, and was submitted to the respondent. The application contained accurate information about Mr. Klue and his past driving record, which was clean, but inaccurate information about Ms. Abou-Khalil's record, which was not clean. Gulliver provided a 30-day binder to both as insureds, followed by a one-year automobile insurance contract.
[9] The respondent's subsequent underwriting investigation disclosed Ms. Abou-Khalil's true driving record, which included an at-fault accident, convictions for speeding and careless driving, a license suspension for non-payment of fines, and the cancellation of a previous policy for non-payment of premiums. The respondent therefore decided to treat the insurance contract as void based on misrepresentation or failure to disclose required information.
[10] On July 2, 2002, the respondent sent a registered letter to the insureds, advising that because of the non-disclosure of Ms. Abou-Khalil's previous driving record, the insurance coverage was "void from the inception date" and their right of indemnity was forfeited. Both Mr. Klue and Ms. Abou-Khalil read the letter. Believing that the vehicle was uninsured, they did not drive it until Mr. Klue drove on the date of the accident, after he had lost his job and consumed alcohol.
(2) The accident
[11] The accident occurred on September 12, 2002. The appellant, Ms. Karla Merino, was a University student at the time. As she was crossing the road, she was hit by Mr. Klue, driving the 1994 Jeep. She was catastrophically injured as a result.
(3) The action against the owner and driver and the claim for uninsured coverage
[12] On March 19, 2003, counsel for the appellants wrote to Ms. Abou-Khalil giving notice of the accident and the claim and asking her to notify her insurer, the respondent, identifying a specific policy number. A field adjuster for the respondent responded on March 25, 2003, stating that neither Ms. Abou-Khalil nor Mr. Klue had an automobile policy with the respondent, and enclosed a copy of the letter that the respondent had sent to them purporting to rescind their insurance policy.
[13] As a result of the respondent's position, the appellants sued the owners and driver of the car, Mr. Klue and Ms. Abou-Khalil, as well as Allianz, Ms. Merino's mother's insurer, for uninsured motorist coverage. Mr. Klue and Ms. Abou-Khalil did not defend the action, but through counsel appointed by the Superintendent of Insurance, Mr. Klue's liability was admitted. The respondent was not joined in the action as a third party. Following trial, in July 2011, the appellants obtained judgment against Mr. Klue and Ms. Abou-Khalil in the amount of $2,000,000, but they were unable to collect from them. Since the accident was in Ontario, the Allianz policy was required to provide coverage of $200,000, the minimum limits of uninsured coverage in accordance with the Ontario Insurance Act. The appellant also received accident benefits paid by the Société de l'assurance automobile du Québec. After deduction of the non-pecuniary benefits, she recovered a net award of $18,893.00 plus interest from Allianz.
(4) The action against the respondent
[14] In the context of the 2005 accident benefits arbitration, which was a dispute among insurers, counsel for the appellants obtained the respondent's complete underwriting file on the policy it had issued to Mr. Klue and Ms. Abou-Khalil. While the respondent continued to maintain that it had validly rescinded the policy, in April 2012, the appellants brought the within action under s. 258(1) of the Insurance Act against the respondent on the basis that the policy was not validly terminated before the accident. Both sides brought summary judgment motions.
(5) The motion judge's findings
[15] The motion judge found that the Insurance Act provisions that govern how an automobile insurer may terminate an automobile policy and the effect of termination do not preclude an automobile insurer from rescinding a contract at common law and making the contract void ab initio. He concluded that the respondent was entitled to rescind its contract with the insureds, Mr. Klue and Ms. Abou-Khalil, based on material misrepresentation, and that the respondent's July 2, 2002 letter to them had the effect of rescinding their insurance contract, making it void ab initio and of no effect.
[16] On this summary judgment motion, in order to determine whether the respondent had the right to rescind, the motion judge had to decide whether there was a genuine issue requiring a trial regarding the events surrounding the application, including the materiality of the misrepresentation, how it happened that Mr. Klue signed the application and not Ms. Abou-Khalil, whether he signed on her behalf, and whether either of them knew that the application contained false information about her driving record. The information before the court consisted of: (1) the transcripts or partial transcripts of the examinations for discovery of Mr. Klue and Ms. Abou-Khalil, taken in 2006 for the appellants' original action against them; (2) some hearsay information from the Gulliver representative contained in a letter from Gulliver's solicitor to ING's solicitor; and, (3) some unsworn and undated statements. The motion judge gave no effect to the latter evidence.
[17] The motion judge concluded that because the record before him was what it would be at a future trial, there was no purpose in deferring any issue to a trial. He noted that by 2006, Mr. Klue said he did not have a specific recall of what occurred during the meeting at the brokerage. By the time of the motions, 15 years had passed since the accident.
[18] I will discuss the details of the motion judge's findings with respect to the misrepresentation in the context of the analysis of that issue on the appeal.
[19] Having found that the respondent had validly rescinded the insurance contract, the motion judge went on to consider whether the appellants could still sue the respondent for indemnity under s 258(1) of the Act. In concluding that they could not, the motion judge found that this case was distinguishable from the case law that held that ss. 258(4) and (5) precluded a defence based on misrepresentation. In the cases where the court applied ss. 258(4) and (5), the insurer had sought to avoid its obligations only after the accident on the basis that the misrepresentation in the application voided the contract, whereas in this case, the insurer rescinded the contract before the accident. Because the contract was rescinded before the date of the accident, the appellants could not recover under s. 258(1) because there was no contract of indemnity in place when the accident occurred.
[20] As a result of these findings, it was not necessary to address other issues, including whether the appellants had waived their rights under s. 258(1) by electing to seek coverage based on the vehicle being uninsured, the quantum of any damages claimed, and whether the respondent could rely on ss. 258(11) because it had not been properly pleaded.
Issues
[21] The following issues are raised on this appeal:
Are the appellants entitled to recover against the respondent under s. 258(1) of the Insurance Act if the contract was not validly rescinded?
Is an automobile insurer entitled to rescind an automobile insurance contract at common law, making it void ab initio, based on misrepresentation in the application?
If the contract was not validly rescinded, is the appellants' recovery limited to the statutory minimum of $200,000 under s. 251 of the Insurance Act, based on the defence of knowing misrepresentation, asserted under s. 258(11)?
Are the appellants barred from recovery under s. 258(1), based on the doctrine of waiver or abuse of process, because they initially pursued uninsured motorist claims against Allianz?
Analysis
(a) Issue 1: Are the appellants entitled to recover against the respondent under s. 258(1) of the Insurance Act if the contract was not validly rescinded?
[22] Subsections 258(1), (4) and (5) are known as the absolute liability provisions of the Insurance Act: Campanaro v. Kim (1998), 41 O.R. (3d) 545, at p. 547 (C.A.). Subsection (1) permits an injured plaintiff who has recovered judgment against a negligent driver to sue the driver's automobile insurer directly and have the insurance money payable under the contract applied in satisfaction of the judgment. Subsections (4) and (5) preclude the insurer from defending on the basis that because the insured made a misrepresentation in the application for insurance, including a misrepresentation as to ownership of the vehicle, there never was an insurance policy. However, subsection (11) limits that restriction to the $200,000 minimum liability that every automobile policy is required to provide under s. 251.
[23] Subsections (4) and (5) provide:
258(4) The right of a person who is entitled under subsection (1) to have insurance money applied upon the person's judgment or claim is not prejudiced by,
(a) an assignment, waiver, surrender, cancellation or discharge of the contract, or of any interest therein or of the proceeds thereof, made by the insured after the happening of the event giving rise to a claim under the contract;
(b) any act or default of the insured before or after that event in contravention of this Part or of the terms of the contract; or
(c) any contravention of the Criminal Code (Canada) or a statute of any province or territory of Canada or of any state or the District of Columbia of the United States of America by the owner or driver of the automobile,
and nothing mentioned in clause (a), (b) or (c) is available to the insurer as a defence in an action brought under subsection (1).
(5) It is not a defence to an action under this section that an instrument issued as a motor vehicle liability policy by a person engaged in the business of an insurer and alleged by a party to the action to be such a policy is not a motor vehicle liability policy, and this section applies with necessary modifications to the instrument.
[24] Subsection (5) was added to the Act in 1947 to overcome and preclude the interpretation given to the comparable section in the New Brunswick Act by the New Brunswick Court of Appeal in Bourgeois v. Prudential, [1946] 1 D.L.R. 139 (N.B.C.A.). In Bourgeois, the court held that in the case of a material misrepresentation by an insured as to ownership of the vehicle, there was no insurance policy because the policy never came into existence.
[25] However, despite the addition of subsection (5), this court held in Ministry of Transport et al v. London & Midland General Insurance Co., [1971] 3 O.R. 147-149 (C.A.), that an insurer could still defend a third-party action if the insured's misrepresentation was with respect to the ownership of the vehicle. The court found that where the insured misrepresents that he is the owner of the vehicle, the policy cannot be an owner's policy and therefore cannot cover the risk.
[26] In Campanaro, a five-judge panel of this court was struck to reconsider London & Midland and to clarify the extent of the protection the legislature intended to provide to third parties in s. 258. Osborne J.A., speaking for the court, made the following statements, at pp. 560, 562, 563:
I think that it is clear that the 1947 Insurance Act amendment was intended to overcome the effect of Bourgeois and preclude an insurer from defending an innocent third party judgment creditor's claim on the basis of any material misrepresentation, including a misrepresentation as to ownership of the insured automobile.
In my opinion, for the purposes of the action contemplated by s.258(1), s. 258(5) prevents the insurer from relying upon material representations made by, or on behalf of, the named insured, if the insurer issued an instrument "as a motor vehicle liability policy".
With respect, I think that in exempting one type of misrepresentation, that is a misrepresentation about ownership, from the defence-limiting provisions of s. 258(5), London & Midland was wrongly decided. In my opinion, if s. 258(5) precludes the insurer from contending that the instrument it issued as a motor vehicle liability policy is not a motor vehicle liability policy, it must follow that the insurer cannot rely on any misrepresentation which, if given effect to, would result in the instrument issued by the insurer as a motor vehicle liability policy being taken not to be a motor vehicle liability policy.
[27] Osborne J.A. also explained that the addition of uninsured motorist coverage as part of the no-fault scheme for comprehensive coverage does not influence or change the interpretation of s. 258 in order to relieve the insurer from its absolute liability obligation imposed by that section. He commented, at p. 563, that:
The absolute liability provisions of s. 258 have remained unchanged since the introduction of uninsured motorist coverage. It seems to me that the language of s. 258 is clear and I see no basis to change the interpretation of the section because there is another available payer. In the present scheme of things the tortfeasor's insurer is the first payer.
[28] To summarize, the court found and clearly stated that s. 258(1) applies to give an injured third party the right to collect his or her judgment against the at-fault driver from that driver's insurer where the insurer issued an automobile insurance policy that provided for indemnity, regardless of any misrepresentation that the insured may have made in the application for insurance.
[29] The motion judge acknowledged the meaning and legal effect of s. 258. However, he observed that in every reported case where the insurer sought to rely, as a defence under s. 258(1), on a misrepresentation by the insured in the application to obtain the policy, the policy had not been validly terminated before the accident. Conversely, in this case, the insurer rescinded the insurance contract before the accident occurred. Therefore, there was no policy in existence at the date of the accident in this case, not because of the legal effect of misrepresentation, but because the policy had actually been rescinded before the accident occurred. The motion judge accordingly found that because the respondent rescinded the insurance contract ab initio, and there was no contract at the date of the accident, s. 258 of the Act did not apply.
[30] I agree with the motion judge that s. 258 can have no application where an automobile insurance policy is no longer in existence at the date of the accident because it was properly and effectively terminated by either party before that date. However, in this case, the respondent did not terminate the contract in accordance with the provisions of the Act and the regulations: see infra, at paras. 32-34 of these reasons. Therefore, the next issue is whether the motion judge erred in law by finding that an automobile insurer may effectively terminate the contract by rescinding the contract ab initio at common law, and that the respondent did so in this case.
(b) Issue 2: Is an automobile insurer entitled to rescind an automobile insurance contract at common law, making it void ab initio, based on misrepresentation in the application?
[31] For the reasons that follow, I conclude that the motion judge erred in finding that the respondent was entitled to rescind the contract at common law based on misrepresentation in the application, making it void ab initio. After summarizing the motion judge's reasons for concluding that the respondent was entitled to rescind the contract in this manner, I will explain why, in my view, he erred in so finding.
(i) The motion judge's reasons
[32] In dealing with the rescission issue, the motion judge first considered the common law right of a party to rescind a contract that was induced by a material misrepresentation. Referring to the written application for insurance that was signed by Mr. Klue but contained information about both applicants, the motion judge found that the misstatement or omission of the significant negative features of Ms. Abou-Khalil's driving record in the application constituted a material misrepresentation that entitled the respondent to rescind the contract. Further, he found that the respondent had in fact rescinded the contract by its July 2, 2002 letter.
[33] Second, in discussing the "options" open to an insurer to avoid liability under an automobile policy, the motion judge set out the termination provisions of the Act and the regulations. Section 11 of O. Reg. 777/93 (the "Regulation") provides the methods by which an insurer may terminate an automobile insurance contract. Under that section, an insurer may either give 15 days' notice by registered mail, or five days' notice by personal delivery. In both cases, the insurer must refund the excess premium paid by the insured. However, an insurer's ability to terminate a contract by notice and return of premium is not unlimited. Section 11 is subject to s. 12 of the Compulsory Automobile Insurance Act, R.S.O. 1990, c. C.25, which precludes an insurer from terminating a contract after 60 days, except in four prescribed circumstances. One of those circumstances is where there has been a knowing misrepresentation of a fact in an insurance application.
[34] While the respondent could have terminated the policy it issued in accordance with s. 11, it did not do so. The July 2, 2002 letter was sent by registered mail, but it did not give 15 days' notice of termination. There was no return of premium because no premium had been paid. Because the contract was not terminated in accordance with the Regulation, if the respondent's attempt to rescind was not effective, the contract remained in force and the respondent's position would be governed by ss. 233 and 258 of the Act.
[35] Third, the motion judge discussed s. 233 of the Act, which provides the consequences as between the insured and the insurer of a knowing misrepresentation made by the insured in a signed written application for insurance.
[36] Section 233 provides that:
(1) Where,
(a) an applicant for a contract,
(i) gives false particulars of the described automobile to be insured to the prejudice of the insurer, or
(ii) knowingly misrepresents or fails to disclose in the application any fact required to be stated therein;
(b) the insured contravenes a term of the contract or commits a fraud; or
(c) the insured wilfully makes a false statement in respect of a claim under the contract,
a claim by the insured is invalid and the right of the insured to recover indemnity is forfeited.
(2) Subsection (1) does not invalidate such statutory accident benefits as are set out in the Statutory Accident Benefits Schedule.
(3) No statement of the applicant shall be used in defence of a claim under the contract unless it is contained in the signed written application therefor or, where no signed written application is made, in the purported application, or part thereof, that is embodied in, endorsed upon or attached to the policy.
[37] The section does not contain the terms "void" or "voidable". It neither requires nor contemplates any action by an insurer to terminate the contract. Rather, it describes the consequences, as between the insured and the insurer, when the insured has knowingly misrepresented or omitted a fact in a signed application. Those consequences are three-fold: 1) a claim by the insured (for own property damage or own loss due to injury) is invalid; 2) the right of the insured to recover indemnity (from a claim by a third party who suffered damage where the insured was at fault) is forfeited; but 3) the insured remains entitled to certain statutory accident benefits under the Statutory Accident Benefits Schedule: see O. Reg. 403/96, s. 30.
[38] While a number of cases still express the effect of s. 233 as rendering the contract "void" as between the insurer and the insured, it is clear that that language is intended to do no more than reflect the express consequences of s. 233, which makes claims by the insured for personal loss or indemnity invalid and unrecoverable. As Wittman J.A. stated in Schoff v. Royal Insurance Co of Canada, 2004 ABCA 180, 348 A.R. 366, at para 49, "s. 613 [of the Alberta Act], however, only renders the insured's claim invalid. It does not end all of the insurer's obligations." He went on to refer to the insurer's direct obligation to third parties under the Alberta equivalent of s. 258(1) of the Act.
[39] The motion judge noted that the appellants provided no authority to support their position that rescission was not an available alternative remedy for an insurer to either terminating under s. 11 of the Regulation or relying on s. 233 of the Act, and concluded that an insurer may still elect the common law remedy of rescission ab initio. In my view, for the following reasons, that conclusion constitutes an error in law.
(ii) Analysis
[40] Automobile insurance is compulsory in Ontario. Section 2(1) of the Compulsory Automobile Insurance Act prohibits an owner or lessee of a vehicle from driving it or permitting it to be operated unless the vehicle is insured under a contract of automobile insurance. The purpose of the legislative policy requiring all vehicles that operate on Ontario highways to be insured is to protect innocent victims of automobile accidents, and to provide some statutory accident benefits to everyone who is involved in an accident: Matheson v. Lewis, 2014 ONCA 542, 121 O.R. (3d) 641, at paras. 20, 22; Insurance Act, s. 233(2).
[41] The motion judge's conclusion on this issue is inconsistent with the statutory scheme created by the Compulsory Automobile Insurance Act and the Insurance Act. If an insurer were permitted to rescind an insurance contract at common law ab initio, a person who believed they were operating a vehicle with insurance could have that contract rescinded with retroactive effect, putting the person in automatic contravention of the Compulsory Automobile Insurance Act, a result which is clearly inconsistent with the intent of the legislature.
[42] The termination and renewal provisions of the Act and regulations provide notice periods to allow an insured time and opportunity to obtain alternate coverage when they receive notice that their insurance is going to be terminated or not renewed. There are also restrictions on when an insurer may refuse to renew: Compulsory Automobile Insurance Act, s. 12(1); O. Reg. 777/93, ss. 11(1.1), (1.2); Insurance Act, ss. 236(1), (2). The purpose of these requirements is to ensure that a person who drives a car always knows whether they are insured, so that they can take steps to bridge any gap in their coverage, both for their own benefit and for the benefit of other drivers. If they are not able to secure alternate coverage, they must not drive the vehicle or allow it to be driven.
[43] The scheme of the Act and its regulations prescribes the rights and obligations of the insured and the insurer under the automobile provisions, requires strict compliance, and provides an orderly and predictable set of consequences for compliance and non-compliance. For example, if a notice of termination does not comply with s. 11 of the Regulation, then the insurance contract remains in force: Ontario (Finance) v. Traders General Insurance (Aviva Traders), 2018 ONCA 565, 142 O.R. (3d) 45, at para. 43. That predictable set of consequences would be undermined if an insurer could circumvent the requirements of the Act by rescinding the contract at common law, making it void ab initio.
[44] Sections 233 and 258 are consistent with the legislative scheme. Section 233 addresses the rights of an insurer under an existing automobile contract that it did not terminate before an accident, but which was obtained by an insured who knowingly made misrepresentations in the applications for insurance. As I discussed in para. 32, an insurer may terminate the contract of insurance for misrepresentation by providing notice to the insured. However, if the insurer does not take that step and an accident occurs, then s. 233 governs the rights as between the insurer and the insured, while s. 258 gives the injured third party the direct right to sue the at-fault driver's insurer.
[45] Additionally, unlike earlier statutory provisions, a misrepresentation does not render the automobile insurance contract void under s. 233 of the Act. Prior to the uniform automobile insurance legislation in 1932, which introduced the concept of compulsory minimum third-party liability automobile insurance, the effect of misrepresentation was to void the contract. Section 177(5) of The Insurance Act, R.S.O. 1927, c. 222 then provided:
Upon every written application there shall be printed or stamped in conspicuous type, not less in size than ten point, and in red ink, the following words:
"If the applicant falsely describes the property to the prejudice of the insurer or knowingly misrepresents or conceals or omits to communicate any circumstances required by this application to be made known to the insurer, the contract shall be void as to the property insured or risk undertaken in respect of which the misrepresentation or omission is made. [Emphasis added.]
[46] Appellate cases interpreting the pre-1932 version of the misrepresentation provision held that untrue statements in the application for insurance rendered the policy void and, in first-party claims, insureds were unable to recover under the policy: Rocco v. Northwestern National Insurance Co., [1930] 1 D.L.R. 472 (Ont. S.C.A.D.); Holdaway v. British Crown Assurance Corp., [1925] 3 D.L.R. 269 (Ont. S.C.A.D.).
[47] That is no longer the law. Under s. 233, a misrepresentation does not render the contract void; it is neither terminated, nor rescinded as void ab initio: see Craig Brown and Thomas Donnelly, Insurance Law in Canada (Toronto: Thomson Reuters Canada Ltd., 2002) (loose-leaf updated 2019, release 1), at p. 5-14, n. 63. The contract remains in effect, but the insured's rights are limited to his or her right to receive certain statutory accident benefits; the insurer is not obligated to compensate the insured for other losses, or to indemnify the insured's obligation to third parties. Also, because the automobile insurance contract remains in effect, third parties injured by the insured or the insured's automobile retain the right to recover the losses they suffer from the insured's insurer under s. 258 of the Act.
[48] Consequently, allowing an insurer to rescind at common law for misrepresentation would undermine the policy of the legislature in ss. 233 and 258 to provide certain statutory accident benefits to every person who obtains a policy of insurance, including by misrepresentation, and to provide protection to innocent third parties.
[49] The respondent relies on a statement made in Hansra v. York Fire & Casualty Insurance Co. (1982), 38 O.R. (2d) 281 (Ont. Co. Ct), that an insurer has three options when it learns of a misrepresentation in an insurance application: it may a) refund the premium and treat the policy as void ab initio; b) retain the premium and treat the policy as valid and subsisting; or c) treat the policy as valid but cancel unilaterally in accordance with the statutory conditions: Hansra, at p. 286. The motion judge also referred to this statement.
[50] However, the statement in Hansra that an insurer may treat an automobile policy as rescinded was made per incuriam, and does not represent the law in Ontario. The case of General Security Insurance Co. v. Howard Sand & Gravel Co., [1954] S.C.R. 785 was cited as authority for the proposition, but Howard Sand does not so state. There is no analysis in Hansra of the issue, or of the conflict between the policy of the automobile insurance scheme contained in the two Acts – the Insurance Act and the Compulsory Automobile Insurance Act – and the ability of an automobile insurer to rescind ab initio.
[51] The respondent also argued that this court's decision in Ontario (Finance) v. Elite Insurance Company, 2018 ONCA 809, 143 O.R. (3d) 1, allows an automobile policy to be terminated other than in accordance with the statutory provisions. In that case, the court upheld a decision of an arbitrator who found that the insured and the insurer had mutually agreed to terminate the policy. The case did not involve a unilateral termination by the insurer. In upholding the arbitrator's decision, the majority found that on the facts of the case it was open to the arbitrator to conclude that both the insured and the insurer had agreed to terminate the policy, referring to the unfettered ability of an insured to terminate its automobile policy under s. 11(2) of O.Reg. 777/93, and that s. 236(5) of the Act did not preclude such an agreement. The court summarized its conclusion to give deference to the arbitrator's decision at para. 59, stating:
Section 236(5) may well oust the common law that a policy will lapse when it is not renewed, but it does not preclude the consideration of other circumstances that may have arisen and brought the policy to an end. In my view, this is a reasonable interpretation that does not undermine the policy behind s. 236(5) to ensure continuous coverage.
[52] I conclude that an automobile insurer in Ontario does not have the option of unilaterally rescinding a contract of insurance at common law ab initio, but is bound by the statutory scheme contained in the two Acts and the Regulation. The rights and obligations of insurers and insureds, as well as those of injured third parties, are governed by those statutory provisions.
(c) Issue 3: Has the respondent proved the defence of knowing misrepresentation in the application for insurance, and can it rely on s 258(11) to limit its liability to the statutory minimum of $200,000?
[53] Section 251 of the Insurance Act provides that every motor vehicle liability policy is required to insure for liability to a minimum amount of $200,000 for any one accident. Section 258(11) allows an insurer to raise against a third-party claimant any defence it could have raised against its insured in respect of any amount of coverage that the policy provides that exceeds the $200,000 minimum. In this case, the policy provided $1,000,000 of liability coverage. Therefore, the respondent may raise the defence of knowing misrepresentation in respect of the $800,000 coverage in the policy it issued to Mr. Klue and Ms. Abou-Khalil that exceeds the statutory minimum requirement.
[54] The appellants submit that the respondent is precluded from relying on s. 258(11) because, although it pleaded reliance on s. 258, it did not particularize this subsection when asked. The motion judge did not find it necessary to deal with this position.
[55] I would not give effect to this technical argument. Much of the focus of the motion was on the issue of whether there was a material misrepresentation that could be the basis for rescission. While the respondent relied mainly on its rescission position, it also sought to minimize any liability it might have based on the circumstances that occurred. It was clear that the respondent was seeking to rely on a misrepresentation defence.
[56] In order to rely on the knowing misrepresentation defence, the insurer must prove that "the applicant for a contract knowingly misrepresent[ed] or fail[ed] to disclose in the application any fact required to be stated therein": Insurance Act, s. 233(1)(a)(ii). Further s. 233(3) goes on to specify that "[n]o statement of the applicant shall be used in defence of a claim under the contract unless it is contained in the signed written application therefor…".
[57] In this case, only Mr. Klue signed the application, while the misrepresented facts related only to Ms. Abou-Khalil's application for insurance. Section 232(1) of the Act recognizes that an application may be signed by the insured "or his agent". Therefore, the first issue is whether Mr. Klue signed the application as agent for Ms. Abou-Khalil.
[58] Fortunately, there was evidence in the record on that issue from Mr. Klue. In the examination for discovery transcript of Mr. Klue from the tort action that was filed on the motion, he was asked directly about the agency issue in the following exchange. He clearly denied that he signed on Ms. Abou-Khalil's behalf:
Q115. When you were signing this application did you realize you were signing on behalf of Sonia?
A. No I didn't.
Q 118. Here's my puzzle. The application on the face of it says you and Sonia were applying for insurance and yet you signed the application, not Sonia. Did you believe you were the one applying for insurance or that both of you were?
A. I can't answer that because regardless of whether we're both there it wouldn't have been my responsibility to sign for Sonia. Now if I was asked to sign that document from their staff, then it would have been their responsibility to ask Sonia to sign it as well.
Q 126. Did you believe that you were signing for you and you alone?
A. I only sign for myself, sir. I can't forge other people's signatures.
[59] There was no other evidence in the record on the issue. The respondent did not provide sworn evidence from either of the two insurance agents from Gulliver who took the insurance application and witnessed Mr. Klue's signature, and Mr. MacLean, ING's Senior Claims Examiner, could provide no explanation for why Ms. Abou-Khalil did not sign the application.
[60] From a procedural point of view, where s. 258(11) permits an insurer to avail itself of any defence it is entitled to set up against the insured, including a misrepresentation defence pursuant to s. 233, the onus is on the insurer to prove a breach of the insured's disclosure obligation on a balance of probabilities: Barbara Billingsley, General Principles of Canadian Insurance Law 2nd ed. (Markham: LexisNexis Canada Inc., 2014), at p. 114; Denis Boivin, Insurance Law, 2nd ed., (Toronto: Irwin Law Inc., 2015), at p. 175; Barsheshet v. Aviva Canada Inc., 2015 ONSC 4439, [2015] I.L.R. I-5766.
[61] In the summary judgment context, because both parties moved for summary judgment, at least as respondents they were each required to put their best foot forward. Moreover, the motion judge found that, given the passage of time (15 years at the time of the motions), he had the best evidence before him on the issues surrounding the insurance application. I agree. As a result, it is appropriate for this court to make the necessary findings based on the record that the parties placed before the motion judge.
[62] On that record, there is no basis to find that Mr. Klue signed the application for insurance as Ms. Abou-Khalil's agent or on her behalf. He denied doing so, and there is no evidence from the respondent that it had any contrary belief.
[63] Since Ms. Abou-Khalil was an applicant for insurance who did not sign the application either personally or by her agent, the respondent cannot rely on the defence of knowing misrepresentation contained in ss. 233(1)(a)(ii) and (3): Ontario (Finance), at para. 37; Campanaro, at p. 550.
[64] Another position may be that, as the person who signed the application, Mr. Klue was the applicant who made the misrepresentations. However, it is not possible to find on a balance of probabilities that he knowingly misrepresented the facts about Ms. Abou-Khalil. Had he signed as agent for his wife, her knowledge would be the relevant knowledge: Sleigh v. Stevenson, [1943] 4 D.L.R. 433, at para. 42 (Ont. C.A.). However, as he did not do so, it is his knowledge that is relevant.
[65] The motion judge did not make a finding that Mr. Klue knowingly misrepresented his wife's driving record. The motion judge only went so far as to find that Mr. Klue had the means to ask her whether the facts were true. Mr. Klue was not asked on his discovery whether he knew the facts were false. Again, there is no evidence from the agents on the point. In oral argument, counsel suggested that one could speculate that a husband would know his wife's driving record. However, because the issue was not explored in the evidence that was put before the motion judge, there is no basis to draw that inference from the record.
[66] In conclusion, as the respondent did not prove the defence of knowing misrepresentation, the appellants' entitlement is not limited to the $200,000 minimum liability limit. They are entitled to the policy limit of $1,000,000, subject to the waiver and abuse of process arguments.
(d) Issue 4: Is the appellants' claim under s. 258 barred by waiver or abuse of process?
[67] The respondent submitted to the motion judge that if he found that the appellants were entitled to claim under s. 258, their claim was barred by waiver and by abuse of process. The motion judge did not find it necessary to deal with these submissions because he found that the contract had been rescinded. The respondent renews these positions on this appeal.
[68] The respondent says that by suing Allianz under the uninsured motorist provisions of its policy on the basis that the 1994 Jeep was an uninsured vehicle, the appellants waived their right to claim against the respondent under s. 258. They rely on the Supreme Court of Canada's decision in Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., [1994] 2 S.C.R. 490.
[69] This submission can be dealt with summarily. While counsel for the appellants was aware that the respondent had issued a policy to Mr. Klue and Ms. Abou-Khalil, the reason the appellants resorted to a claim against Allianz under the uninsured motorist coverage was because the respondent denied it had a contract with them on the date of the accident.
[70] As the respondent properly states in its factum, Saskatchewan River Bungalows provides that, for waiver to be established, the waiving party must have had full knowledge of its rights and an unequivocal and conscious intention to abandon those rights. Not only was that clearly not the case here, but it lies ill in the mouth of the respondent to suggest that it was when it was the respondent that told the appellant's counsel that it had no contract with the at-fault driver.
[71] Furthermore, under s. 258(14), the respondent had the right to apply to be added as a third party to the tort action. It did not take advantage of that right.
[72] Nor has the respondent provided any authority for the proposition that s. 258 can be waived. It is a right of action given to an innocent third party. There is nothing in the section to suggest that that right can be waived. As I have found there was no waiver, it is not necessary to finally decide the issue in this case.
[73] Finally, the respondent also submits that this action is an abuse of process, relying on an obiter statement in this court's decision in Loftus v. Robertson, 2009 ONCA 618, 96 O.R. (3d) 721.
[74] In Loftus, the plaintiff was stopped at a red light when she was struck by an uninsured vehicle that was being chased by police. The plaintiff sued the driver and her own insurer under the uninsured coverage provisions of her policy. Her insurer claimed over against the police involved in the chase for contribution and indemnity. The issue was whether the innocent injured third party could sue her own insurer under the uninsured motorist coverage provision without also suing potential third parties who may have caused or contributed to the accident.
[75] The court held that an injured party may choose whether to pursue potential joint tortfeasors in the action against the uninsured driver and its own insurer for the uninsured coverage: citing July v. Neal (1986), 57 O.R. (2d) 129 (C.A.). But, recovery against the joint tortfeasor will preclude recovery against the insurer under the uninsured coverage. And if the injured party elects to sue only the insurer for the uninsured coverage and not the possible joint tortfeasors, then she cannot later sue the possible joint tortfeasors. The court stated, at para 47:
If an injured insured chooses to obtain judgment against his or her own insurer under the uninsured coverage in an action that does not include other potential joint tortfeasor(s), in our view, that choice signifies an election. It signifies that the insured has elected not to subsequently pursue a claim against the potential joint tortfeasor(s) to the extent that a judgment on the claim would have barred recovery under the uninsured coverage if brought in the same proceeding as the claim on the uninsured coverage. In these circumstances, in our view, any attempt to pursue such a claim would constitute an abuse of process.
[76] The court's reference to an abuse of process is of course, obiter dictum in the Loftus case. However, the impugned conduct is seeking to obtain double recovery, first from the uninsured driver coverage and then from possible tortfeasors who may be jointly liable with the uninsured driver.
[77] On its face, it may appear that that is what occurred here: the appellants first sued their own insurer, Allianz, under the uninsured coverage provision of the policy, then later, the respondent as the insurer of the at fault driver, Mr. Klue. Clearly, the driver cannot be both insured and uninsured.
[78] However, there was no election here. The appellants were misled by the respondent regarding the status of the policy it issued to the at-fault driver and they first acted on that information.
[79] In any event, the appellants make it clear that they do not seek to obtain an improper benefit by double recovery. They state in their factum that "[a]ny recovery by the appellants of funds for claims for which they were compensated by Allianz will be received in trust by the appellants for Allianz benefit." They may also have to address the amount that Allianz set off as against Société de l'assurance automobile du Québec.
[80] I would not give effect to this ground of appeal.
Conclusion
[81] I would set aside the judgment and reasons of the motion judge. An automobile insurer in Ontario cannot rescind an automobile insurance contract at common law ab initio, and the respondent's letter purporting to do that was not effective. Because the letter did not give 15 days' notice of termination, it also did not have the effect of terminating the contract under s.11 of the Regulation. The contract therefore remained in effect on the date of the accident.
[82] The appellants were entitled to sue the respondent under s. 258 of the Act to directly recover the amount of the judgment awarded against the at-fault driver and owner of the 1994 Jeep up to the policy limits. Because the respondent did not establish on the record that Mr. Klue knowingly misrepresented facts in the application or acted as the agent of Ms. Abou-Khalil, the respondent has not established a defence under s. 258(11) of the Act. It is accordingly liable for the full amount of the policy limits.
[83] There was no waiver or abuse of process. The appellants have undertaken to the court that they will account for any double recovery.
[84] I would therefore allow the appeal with costs fixed in the amount of $40,000 on the partial indemnity scale, inclusive of disbursements and HST.
Released: April 25, 2019
"K. Feldman J.A."
"I agree. S.E. Pepall J.A."
"I agree. G. Pardu J.A."
Footnotes
[1] See e.g. Campanaro; Ashton v. Tu (1998), 40 O.R. (3d) 690 (C.A.); Burns v. Hedge (2001), 146 O.A.C. 333 (C.A.).
[2] The three options were stated by McRuer C.J.H.C. in the trial decision in Ellis v. London-Canada Insurance Co., [1952] O.R. 644 (H.C.), rev'd, [1953] O.R. 141 (C.A.), aff'd, [1954] S.C.R. 28, but were not endorsed by the Court of Appeal or the Supreme Court of Canada.
