Quality Car Rentals Inc. v. Sedaghat et al.

[Indexed as: Quality Car Rentals Inc. v. Sedaghat]

Ontario Reports

Ontario Superior Court of Justice

Divisional Court, Myers J.

September 19, 2019

148 O.R. (3d) 502 | 2019 ONSC 5431

Case Summary

Insurance — Automobile insurance — Interpretation and construction — S renting car pursuant to agreement that required him to pay rental company its $10,000 deductible regardless of fault if car was damaged — S involved in accident that resulted in damage of over $30,000 to car — Rental company suing S and S's automobile insurer for its own deductible — Action barred by s. 263(5)(a.1) of Insurance Act — Insurance Act, R.S.O. 1990, c. I.8, s. 263(5)(a.1).

The respondent S rented a car from the appellant. The rental agreement required S to pay the appellant its $10,000 deductible under its own insurance policy if the car was damaged, regardless of fault. S was involved in an accident that resulted in damage of over $30,000 to the car. The appellant sued S for the $10,000 deductible and also sued S's automobile insurer Aviva, claiming that it was entitled to make a direct claim against Aviva under the OPCF 27 coverage for the deductible. The action was dismissed on a pre-trial motion on the basis that the plaintiff's claims offended the statutory prohibition against suing anyone other than one's own insurer for damage to an insured car. The appellant appealed.

Held, the appeal should be dismissed.

The action was barred by s. 263(5)(a.1) of the Insurance Act. The first-party payor system is best implemented and protected by interpreting s. 263(5)(a.1) in accordance with its plain language so that rental companies and others with contracts providing indemnity for car damage or loss are prohibited under that section from suing their contractual counterparties for their deductibles incurred under their own first-party direct compensation property damage coverage.

Burridge v. Hardy, [2018] O.J. No. 618, 2018 ONSC 202, [2018] I.L.R. para. I-6031, 75 C.C.L.I. (5th) 267, 289 A.C.W.S. (3d) 392 (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, consd

Other cases referred to

583809 Ontario Ltd. (c.o.b. Car Rental Place) v. Kay (1995), 24 O.R. (3d) 445, [1995] O.J. No. 1626, 55 A.C.W.S. (3d) 646, 1995 7080 (Gen. Div.); Tilden Rent-A-Car Co. v. Clendenning (1978), 1978 1446 (ON CA), 18 O.R. (2d) 601, [1978] O.J. No. 3260, 83 D.L.R. (3d) 400, 4 B.L.R. 50, [1978] 1 A.C.W.S. 604 (C.A.)

Statutes referred to

Insurance Act, R.S.O. 1990, c. I.8, s. 263 [as am.], (2), (3), (4), (5)(a), (a.1), (b)

APPEALfrom an order of the Small Claims Court judge.

Cindy Cohen, for appellant.

Petros Yannakis, for respondent. [page503]

MYERS J.: —

The Appeal

[1] Quality Car Rentals Inc. appeals from the decision of Deputy Judge R. Freedman in the Small Claims Court dated November 2, 2018. The appeal raises a very narrow legal question concerning the interpretation of the Direct Compensation Property Damage first-party payor scheme set out in s. 263 of the Insurance Act, R.S.O. 1990, c. I.8.

[2] The deputy judge dismissed this action on a pre-trial motion on the basis that the claims brought by the plaintiff offend the statutory prohibition against suing anyone other than one's own insurer for damage to an insured car. For the reasons that follow, I agree with the Deputy Judge's finding of law on the principal issue and dismiss the appeal.

The Facts

[3] The facts are straightforward. Quality rented a car to Mr. Sedaghat. The rental agreement required Mr. Sedaghat to compensate Quality for any damage to the car. The agreement also provided that in the event that the car was damaged, Mr. Sedaghat has to pay Quality its $10,000 deductible with its own insurer "regardless of fault".

[4] Before agreeing to rent out its car, Quality also ensured that Mr. Sedaghat had his own insurance policy that included OPCF 27 coverage for "liability imposed by law or assumed by any written agreement for loss or damage to a non-owned automobile". Aviva is Mr. Sedaghat's insurer. Quality's evidence is that Aviva confirmed to it that Mr. Sedaghat was insured under a policy that included OPCF 27 coverage and that Aviva would make payment directly to Quality in response to a proper claim.

[5] Mr. Sedaghat drove the car and got into an accident that caused over $30,000 damage to Quality's car. Mr. Sedaghat's evidence is that another car cut in front of him and caused the accident. Quality relies on the fact that Mr. Sedaghat was charged with careless driving as some evidence that Mr. Sedaghat bears some degree of fault for the damage caused to the car.

[6] Quality had insured its car with another insurer. Its evidence is that its coverage for Direct Compensation Property Damage was subject to a deductible of $10,000. As the damage to the car covered by Quality's insurer exceeded the deductible amount, Quality has not been reimbursed by its insurer for the [page504] $10,000 deductible. This is the $10,000 deductible that Mr. Sedaghat agreed to pay to Quality in the rental agreement.

[7] In this action, Quality sues Mr. Sedaghat for the $10,000 deductible under the rental agreement and it sues Aviva claiming it is entitled to make a direct claim against Mr. Sedaghat's insurer under the OPCF 27 coverage for the deductible amount that Mr. Sedaghat agreed to pay.

The Statutory Scheme

[8] In Ontario, damage to cars is subject to a first-party payor system. That means, generally speaking, car damage is insured and paid for by one's own insurer. We no longer sue other people who cause damage our cars. Rather, the car owners' insurers are required to pay for the damage to insured vehicles for which the insured is not at fault. To avoid disputes about relative degrees of fault, there are prescribed rules to allow the insurer to assess fault simply and quickly. However, people are allowed to sue their insurers if they are dissatisfied with their insurer's fault assessment under the fault determination rules.

[9] This system is accomplished first by s. 263(2) to (4) of the Insurance Act as follows:

Damage recovery from insured's insurer

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.

Fault-based recovery

(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.

Dispute resolution

(4) An insured may bring an action against the insurer if the insured is not satisfied that the degree of fault established under the fault determination rules accurately reflects the actual degree of fault or the insured is not satisfied with a proposed settlement and the matters in issue shall be determined in accordance with the ordinary rules of law.

(Emphasis added)

[10] These provisions require the car owner's insurer to pay for damage to the insured's own car. To complete the system, it was necessary to also prohibit car owners from suing anyone other than their own insurers for damage caused to their cars. This was initially accomplished by s. 263(5)(a) and (b) as follows: [page505]

Restrictions on other recovery

263(5) If this section applies,

(a) an insured has no right of action against any person involved in the incident other than the insured's insurer for damages to the insured's automobile or its contents or for loss of use;

(b) an insurer, except as permitted by the regulations, has no right of indemnification from or subrogation against any person for payments made to its insured under this section.

(Emphasis added)

[11] Subsection (5)(a) prevents owners from suing anyone other than their own insurers for compensation for damage caused to their cars. Subsection (5)(b) prevents insurers from suing others by way of subrogation after they pay their insureds for the damage to their cars.

[12] The effect of the system then, is that by Direct Compensation Property Damage coverage, we are insured by our own insurers for the portion of any damage to our cars that is not caused by our own fault. If we want to buy insurance to protect us from having to pay for damage to our cars that is caused by our own fault, separate, optional "collision" coverage is available for a price. In this case, Quality does not say that it had collision coverage.

[13] In 583809 Ontario Ltd. (c.ob. Car Rental Place) v. Kay (1995), 24 O.R. (3d) 445, [1995] O.J. No. 1626, 1995 7080 (Gen. Div.), Somers J. held that s. 263(5) (a) prohibited only tort claims against others whose fault or neglect may have caused damage to a car. He held that the subsection did not prohibit claims by people under contracts including a claim by a rental company for indemnity for damage to its car.

[14] Aviva argues that this outcome produced an anomalous and unfair result. Recall that under the Direct Compensation Property Damage system, car owners are only entitled to receive compensation from their own insurers for the amount of the damage to their cars that was not caused by their own fault as fixed by the fault determination rules. Car rental companies though have rental agreements that require renters to pay complete indemnity for any and all damage sustained by their cars while rented. As a result of the Kay decision, rather than receiving part payment under their insurance, the rental companies could obtain full indemnity from their renters under their rental agreements. But, as a result of s. 263(5) (a) and (b), the renters were then left without any ability to sue the other people whose fault may have caused the damage to the rented cars. Renters [page506] were stuck with liability to pay the rental companies for damages or loss caused to rented cars by other peoples' fault. The rental companies received full indemnity without buying collision coverage and the renters were forced to pay unfair shares of liability without any recourse or compensation.

[15] These scenarios avoided or at least skewed the outcomes intended by the first-party payor system by making renters liable for more than losses that were their fault and leaving them without the ability to sue the person whose fault caused the loss.

[16] To address this issue, the government amended the statute to add s. 263(5)(a.1) that provides:

(a.1) an insured has no right of action against a person under an agreement, other than a contract of automobile insurance, in respect of damages to the insured's automobile or its contents or loss of use, except to the extent that the person is at fault or negligent in respect of those damages or that loss.

(Emphasis added)

[17] The effect of this clause, Aviva argues, is to prevent rental companies or others from bringing claims under contracts to recover for damage to their cars except against their own insurers or where the contractual counterparty defendant is at fault for the damage. Rental companies can still claim on their own insurance for Direct Compensation Property Damage coverage for damage which was not their fault (or their renter's fault). The rental companies can then claim against their renters for the amount of the damage caused by the renters' fault. So, the rental companies can still obtain complete indemnity for their losses. But renters can no longer be required to pay for damage to their rental cars for which they were not at fault.

[18] This section cures the unfair anomaly by which renters could previously have been required to pay for damage which they did not cause and be left without recourse or the ability to sue the person who caused the damage. Section 263(5) (a.1) leaves renters in the same position that they would have been in had they been able to sue the other party to the car accident. That is, if renters sued other parties to their car accidents, they could recover for losses caused by the other parties' negligence or fault but not for their own fault (or contributory negligence). So, while there are still some lawsuits possible and while rental companies can still achieve full indemnity, the amendment at least took away the unfair scenario of leaving the renters on the hook for losses that was not their fault without any ability to seek recovery from the persons who were at fault.

[19] It should be noted that the ability of the rental companies to achieve full indemnity is not offensive to the insurance scheme. As discussed above, car owners can buy collision insurance to [page507] keep them whole even from losses for which they are at fault. The exception in s. 263(5) (a.1) that allows rental companies to sue, frees them of the requirement to obtain collision coverage to protect themselves. But this makes sense because, unlike residential or business car owners, rental companies are not the drivers whose fault actually causes the losses. Renters too can pay for OPCF 27 coverage and collision deductible waivers to better protect themselves. Seen through this lens, the amendment in s. 263(5) (a.1) prevents the worst aspect of the unfair anomaly while leaving everyone able to insure for as much or as little as they want.

Quality's Claim

[20] As mentioned above, Quality seeks to recover from its renter and his insurer the $10,000 deductible that Quality's insurer did not have to pay to Quality on declaring the car a write-off. In its claim, Quality does not assert expressly that Mr. Sedaghat was at fault for the damage to the car. Rather, Quality claims under its rental agreement and pleads expressly, in para. 11 of the claim, that s. 263 "is a bar only to a claim in negligence and not a bar to a claim in contract".

[21] The defendants moved to dismiss the claim on the basis that, under s. 263(5)(a.1), Quality has no right to sue on its rental agreement. Below, the matter was argued on the basis that the plaintiff was not claiming that Mr. Sedaghat was at fault for the accident so as to plead into the exception in s. 263(5)(a.1). Before this court however, Quality has subtly altered its position to say that since it pleaded s. 263 generally and a copy of Mr. Sedaghat's ticket for careless driving was among the documents that Quality appended to its claim, the issue of fault was pleaded implicitly and all that may be required for it to plead into the "fault" exception in s. 263(5)(a.1) is a small amendment to its claim. It is difficult to square this argument with para. 11 of the claim, quoted above, that pleads simply that s. 263 does not bar contract claims. In any event, as discussed below, Quality's proposed change of position does not change the analysis or the outcome.

The Decision of the Deputy Judge

[22] The Deputy Judge gave a very brief oral decision on the motion to dismiss the claim. He held that the plain wording of s. 263(5)(a.1) bars Quality's claim under its rental agreement. He expressed concern that there are no cases that deal with the interpretation of whether a claim for a deductible is a claim for damage and loss for the purpose of s. 263(5)(a.1) of the statute. [page508] However, the Deputy Judge said that he found the arguments made by the defendants preferable in the absence of a case that specifically excludes claims for deductibles from the prohibition against suing contained in s. 263(5)(a.1). Accordingly, he held that Quality had no right to sue on its contract and dismissed the claim in full. The Deputy Judge did not deal with the possibility of the claim proceeding on the basis that Mr. Sedaghat may be liable to the extent that he was at fault. In addition, the Deputy Judge did not have to deal with Mr. Sedaghat's alternative argument that he is not bound by the rental agreement as a contract of adhesion under the Court of Appeal's seminal decision in Tilden Rent-A-Car Co. v. Clendenning (1978), 1978 1446 (ON CA), 18 O.R. (2d) 601, [1978] O.J. No. 3260 (C.A.). Neither did he have to deal with Aviva's alternative argument that Quality has no standing to sue Aviva directly under Mr. Sedaghat's OPCF 27 insurance coverage.

Standard of Review

[23] There was no issue taken by the parties that since the question of the scope and interpretation of s. 263 of the Insurance Act is a question of law, the applicable standard of review is correctness.

Analysis

[24] Quality submits that its deductible of $10,000 is an uninsured loss and therefore falls outside the reach of s. 263(5)(a.1). It relies on law describing the deductible as uninsured retention or a self-insured amount. It says that it is not suing for a loss that is covered by its own insurer and therefore it is not running afoul of the intention of s. 263(5)(a.1).

[25] Quality relies on a discussion of s. 263(5)(a.1) by the Court of Appeal in Clarendon National Insurance v. Candow (2007), 87 O.R. (3d) 728, [2007] O.J. No. 3797, 2007 ONCA 680, and specifically argues that the decision in Kay, allowing rental companies to sue under their contracts, was seemingly endorsed by the Court of Appeal even under the amendment to add s. 263(5)(a.1). The Court of Appeal wrote [at paras. 20 and 21]:

As the statutory regime applies, Mr. Bounthai's ability to sue in tort is restricted by the provisions of s. 263. Mr. Bounthai cannot maintain a tort action in negligence against the Candows. Section 263(5)(a) prevents him from suing anyone other than his own insurer for damages to his car. Sections 263(5)(a)'s general rule is subject to the exception set out in s. 263(5)(a.1). This exception permits a right of action where an action is brought "under an agreement, other than a contract of automobile insurance". It permits an action in contract and does not permit an action in tort. [page509]

(Emphasis in original)

The exception would apply, for example, where a provision of a lease agreement requires that the lessee return the vehicle to the lessor in an undamaged state. Where the lessee fails to do so, the lessor can bring an action against the lessee in contract: 583809 Ontario Ltd. v. Kay (1995), 1995 7080 (ON SC), 24 O.R. (3d) 445 (Gen. Div.), A Plus Car & Truck Rental v. Pun, [1999] O.J. No. 1291 (Div. Ct.). [The exception in s. 263(5)(a.1) has been applied also to situations where the defendant has agreed to pay for the damage to the plaintiff's vehicle without the parties resorting to their insurance -- in effect a claim on an oral contract. In Harpeet v. Markham (Town of), [2006] O.J. No. 2439 (S.C.J.), P. Gollom Deputy J. observed at para. 17 that the exception in 263(5)(a.1) "expands causes of action against a person involved in the incident provided the person has entered into a contract, and the person is at fault or negligent". McClinton v. Estien, [2003] O.J. No. 5680 (S.C.J.), is another such case.

(Emphasis added)

[26] I do not read these words to be a determination that under s. 263(5)(a.1), rental companies remain free to sue under their contracts regardless of fault as alleged by Quality. The Court of Appeal was discussing the general reach of s. 263(5)(a.1) rather than its precise terms. In the emphasized words quoted in para. 20 of Clarendon above, the Court of Appeal set out only the part of the exception in subs. (5)(a.1) that was of concern to it in that case. It left out the words "except to the extent that the person is at fault or negligent in respect of those damages or that loss"that were not germane to its discussion. That does not mean that those words do not have to be given effect. In fact, in the words emphasized above, in para. 21 of Clarendon, the Court of Appeal made note of the fault limitation in the section.

[27] In Burridge v. Hardy, [2018] O.J. No. 618, 2018 ONSC 202 (Div. Ct.), Verbeem J., sitting as a judge of the Divisional Court, discussed the limited scope of the fault-based exception to the prohibition against suing under contracts in s. 263(5)(a.1) [at paras. 115 and 116]:

For the foregoing reasons, I am of the view that pursuant to s. 263(5)(a.1), a right of action founded in a bailment agreement may be asserted by a bailor/owner against a bailee in circumstances that otherwise meet the criteria of s. 263(1), but only to the extent that the bailee is at fault or negligent for the damage or loss. In such a case, the bailor's right of action is not founded in the bailee's breach of a duty of care in tort. The bailee is, by virtue of his voluntary acceptance of possession of the bailor's automobile, a person obliged, in law, to return the automobile to the bailor in the same condition as he received it. On a breach of that obligation, whatever the cause (i.e. regardless of whether the vehicle was damaged by fire, collision conditions or some other peril), the bailee is prima facie liable to the bailor for damages. Although a gratuitous bailee is bound to exercise the strictest care and diligence in respect of the bailed property, his liability in bailment, does not depend on the bailor's ability to prove his or her neglect. [page510]

However, s. 263(5)(a.1) of the Act limits the bailor's right of action in bailment to the extent that the person against whom it is asserted is at fault or negligent in respect of the property damage to the bailor's automobile or its contents or loss of use. For example, where a bailee is 50% at fault for a motor vehicle accident, s. 263(5)(a.1) prohibits the bailor from recovering 100% of the value of the property damage from the bailee. Instead, the bailor would be limited to recovery of 50% of the value of the property damage from the bailee, which is consistent with the bailee's inability to assert a tort-based negligence claim for contribution and indemnity from the partially at-fault driver of the other insured vehicle involved in the incident (in accordance with s. 263's prohibition against such claims). In those circumstances and subject to the applicable deductible, the bailor would also be entitled to indemnity for 50% of the value of the damage or loss from his own insurer, pursuant to the provisions of direct compensation coverage.

(Emphasis added)

[28] I agree with Verbeem J.'s analysis. Of particular note is that the deductible relates to the portion of loss that is recoverable from the car owner's own insurance company. It is not loss caused by the renter's fault. Section 263(3) prevents recovery of losses caused by the owner's fault from its own insurer. Accordingly, the deductible amount referable to the claim under the Direct Compensation Property Damage coverage held by the owner with its own insurer cannot be damage or loss caused by the renter's fault or neglect under s. 263(5) (a.1).

[29] It seems to me that conceptually, the two pools of compensation available to Quality do not overlap. It can recover losses that are not caused by its or its renter's fault from its own insurer under s. 263(5)(2) and (3) and it can recover the rest of the loss caused by the renter's fault from the renter under the exception to the prohibition against suing in s. 263(5)(a.1). The deductible on the former does not fit within the latter.

[30] Moreover, this reading of the statutory scheme makes sense. Car owners can choose the level of their own deductibles. They pay more for their insurance to obtain a lower deductible amount. If rental companies can sue renters for their deductibles on their Direct Compensation Property Damage coverage, the rental companies will be incentivized to obtain high deductibles to save the cost of insurance premiums. They could seek a deductible that equals the value of the car in an extreme example. By manipulating the deductible, the owners could effectively pass on the renters the losses on the (not at fault) Direct Compensation Property Damage portion of their insurance despite the amendment that is s. 263(5) (a.1) being designed to prevent just that from happening.

[31] Quality argues that since it is not insured for its deductible, then that amount cannot bean amount of loss or damage [page511] under s. 263(5)(a.1). I disagree. Nothing in s. 263(5)(a.1) makes the question of whether an owner is insured or not relevant to the issues dealt with in the subsection. For a deductible to arise, the owner or car must suffer loss or damage respectively, as those words are understood in their plain meaning, Here the car suffered over $30,000 in damage and Quality suffered that amount of loss. The deductible represents the portion of that lossthat Quality has chosen to self-insure. That is its choice. It could reduce its deductible if it wished to do so. But what it is prohibited from doing by s. 263(5) (a.1) is suing under a contract "except to the extent that the person is at fault or negligent in respect of those damages or that loss". In my view, the amount for which Quality seeks to claim is part of the loss or damage suffered and, by definition, it cannot be loss or damage suffered due to Mr. Sedaghat's fault.

[32] Accordingly, Quality is prohibited from bringing its claim by s. 263(5)(a.1).

The Claim against Aviva

[33] Ignoring for the moment the question of whether Quality has standing to sue Aviva on Mr. Sedaghat's insurance policy, Quality's action must fail in any event. If Mr. Sedaghat cannot have liability under Quality's contract as a result of s. 263(5)(a.1), then there is no insured loss for Aviva to assume under its OPCF 27 coverage. The statute removes Quality's right of action against Mr. Sedaghat under the rental agreement. Therefore, he can have no liability for which Aviva might be liable under its insurance policy with him.

Outcome

[34] As noted above, as a fallback position, Quality now wants to argue that Mr. Sedaghat was at fault for the loss that caused it to incur the deductible. It wants to argue expressly under the exception for claims based on fault that is allowed in s. 263(5)(a.1). Quality relies on the fact that Mr. Sedaghat was charged with careless driving as some evidence of his fault. Moreover, it says that it is not right for it to be bound by Aviva's determination of whether its own insured was at fault for the accident. But, the deductible in this case arose because Quality's own insurer found that its insured loss for Direct Compensation Property Damage exceeded the deductible amount. That is, its insurer has determined that it would pay for damage for which Quality and its renter were not at fault and the deductible relates only to that payment. As such, the deductible simply cannot be a loss for which Mr. Sedaghat [page512] was at fault and therefore it cannot be the subject of a claim under s. 263(5)(a.1). Had there been evidence, for example, that Quality's insurer only paid a percentage of Quality's loss due to its fault determination, then the at-fault portion could be the subject of a lawsuit. But the deductible amount on the Direct Compensation Property Damage coverage is always a reduction of the payment for the "not at fault" portion of the damage or loss under s. 263(3) and therefore it can never be the subject of a claim under s. 263(5)(a.1).

[35] In my view, the first-party payor system is best implemented and protected by interpreting s. 263(5)(a.1) in accordance with its plain language to provide a clear demarcation so that rental companies and others with contracts providing indemnity for car damage or loss are prohibited under the section from suing their contractual counterparties for their deductibles incurred under their own first-party Direct Compensation Property Damage coverage. They can reduce their deductibles by paying appropriate insurance premiums like everyone else if they wish to do so.

[36] Accordingly, the decision of the Deputy Judge to dismiss the action was correct and the appeal is dismissed.

[37] The parties agreed that costs of $2,500 should be payable to the successful party. Accordingly, Quality shall pay the defendants one set of costs of $2,500, all in, within thirty days.

Appeal dismissed.

End of Document