CITATION: Owasco Canadian Car & Camper Rental Ltd. v. Fitzgerald et al., 2021 ONSC 7235

COURT FILE NO.: DC-19-2155

DATE: 20211110

ONTARIO SUPERIOR COURT OF JUSTICE – DIVISIONAL COURT

RE: OWASCO CANADIAN CAR & CAMPER RENTAL LIMITED, Plaintiff/Respondent

AND:

THANE FITZGERALD and COACHMAN INSURANCE COMPANY, Defendants/Appellants

BEFORE: The Honourable J. Dawe

COUNSEL: B.L. Evans, Counsel, for the Plaintiff/Respondent

J. Anand, Counsel, for the Defendants/Appellants

HEARD: October 25, 2021

ENDORSEMENT

I. Overview and factual background

[1] The defendants, Thane Fitzgerald and his automobile insurer, Coachman Insurance Co., appeal from a small claims trial decision granting judgment against them and awarding the plaintiff Owasco Canadian Car & Camper Rental Ltd. (“Owasco”) $5,628.41 in damages, plus interest.

[2] The appeal turns on the correct interpretation of certain aspects of Ontario’s “Direct Compensation – Property Damage” auto insurance scheme, as established by s. 263 of the Insurance Act, R.S.O. 1990 c. I.8.

[3] In October 2017, Mr. Fitzgerald brought his car in for service to a Volkswagen dealership in Pickering. He was provided with a free “loaner”, supplied by Owasco, for him to drive while his own car was in the shop. Mr. Fitzgerald signed a rental contract in which he agreed to return the loaner in the same condition it had been in when he received it, and to pay Owasco for any damages it suffered while in his possession, “whether or not due to [his] fault”.

[4] While driving the loaner, Mr. Fitzgerald was involved in a collision with another vehicle that caused $5,628.41 in damage to the loaner. It is common ground that the accident was entirely the fault of the other driver, Mr. Dale. Both vehicles were insured by automobile insurance policies issued in Ontario.

[5] Property damage claims arising out of accidents between two or more vehicles that are insured in Ontario are governed by the “Direct Compensation – Property Damage” scheme in s. 263 of the Insurance Act. As discussed in greater detail below, s. 263 bars both Owasco and Mr. Fitzgerald from suing Mr. Dale in tort, even though it is an agreed fact between them that he was entirely at fault for the accident.

[6] Owasco, the owner of the loaner vehicle, had insured it with Lloyds Underwriters. However, it is an agreed fact that:

Owasco declined to make a claim to its First Party Insurer for direct compensation for the Property Damage on the basis that its First Party Insurer’s policy imposed a deductible of $25,000.

Instead, Owasco has sought to recoup its loss by suing Mr. Fitzgerald in small claims court under the term of rental agreement in which he had agreed to pay for any damage the loaner sustained while in his possession, regardless of whether it was his fault.

[7] Mr. Fitzgerald, whose own car was insured by Coachman, had bought additional optional collision coverage that extended his protection for damage to his own vehicle to also cover any “temporary substitute automobiles” he drove while his own car was unavailable. His policy incorporated the standard-form terms that are found in the Ontario Automobile Policy 1 (“OAP-1”), as established by regulation (R.R.O. 1990, Reg. 664). Under s. 7.4.3 of the OAP-1, Coachman agreed to pay Mr. Fitzgerald “for direct damage for which you or the driver are legally responsible, minus the deductible for that peril under this policy.”

[8] The main question in this appeal is whether Mr. Fitzgerald is legally bound by his contractual agreement to pay Owasco for the damage to the loaner car, or whether his contractual liability to pay for the damage is extinguished by s. 263(5)(a.1) of the Insurance Act.

[9] Section 263(5)(a.1) provides that in cases where s. 263 applies, an insured’s “right of action under an agreement … in respect of damages to the insured’s automobile” is limited “to the extent that the person is at fault or negligent in respect of those damages”. Since it is an agreed fact that Mr. Fitzgerald was wholly not at fault for the accident that damaged Owasco’s car, he argues that s. 263(5)(a.1) entirely eliminates Owasco’s right of action against him under the rental agreement in respect of this damage.

[10] The small claims trial judge disagreed, holding that s. 263 “was not designed to deprive a contracting party of its right to recover under the terms of the contract”. However, he reached this conclusion by relying on cases that predated the addition of s. 263(5)(a.1) to the s. 263 Direct Compensation – Property Damage scheme. As I will explain, I am satisfied that in doing so he erred in law.

[11] On appeal, Owasco seeks to defend the result the trial judge reached in this case, if not his reasoning, by arguing that the s. 263 first-payor scheme, including the limits on contractual rights found in s. 263(5)(a.1), should be interpreted as excluding cases that involve temporary substitute automobiles when are covered by the renter’s insurance under s. 7.4.3 of the OAP-1. In the alternative, Owasco argues that even if s. 263(5)(a.1) shields Mr. Fitzgerald from personal contractual liability to pay for the damage under the terms of the rental agreement, s. 262(1) of the Insurance Act permits Owasco to obtain compensation for the damage to its car directly from his insurer, Coachman.

[12] For the reasons set out below, I do not accept either of Owasco’s arguments. I am satisfied that s. 263(5)(a.1) applies in this case, and that since it is an agreed fact that Mr. Fitzgerald was wholly not at fault for the accident that damaged the car, this provision statutorily eliminates Owasco’s right of action against him under the rental agreement in respect of this damage.

[13] I am also satisfied that Owasco cannot do an end run around s. 263(5)(a.1) by seeking compensation from Coachman directly. Even assuming, arguendo, that Owasco has some legal entitlement to make claims against Coachman under Mr. Fitzgerald’s insurance policy, this policy only makes Coachman liable to pay for any damage to a temporary substitute automobile for which Mr. Fitzgerald is “legally responsible”. Since his legal obligation to pay for the damage to Owasco’s car under the rental agreement has been extinguished by s. 263(5)(a.1), Coachman also has no obligation to pay for this damage.

[14] As I interpret it, on the facts of this case the s. 263 Direct Compensation – Property Damage scheme requires Owasco to look to its own insurer for compensation. Owasco is unable to do so only because it chose to purchase insurance that has a very high deductible, presumably so that it could pay a smaller premium. Owasco must now live with the consequences of its choice.

[15] Accordingly, Mr. Fitzgerald and Coachman’s appeal is allowed, the judgment against them is set aside, and judgment is entered in their favour.

II. Analysis

A. The Insurance Act’s “Direct Compensation – Property Damage” scheme

[16] The first-payor “Direct Compensation – Property Damage” scheme established by s. 263 of the Insurance Act applies when two or more vehicles that are both insured in Ontario are involved in an accident that results in property damage. Section 263 requires the owner of a damaged vehicle to make a claim for compensation under his or her own insurance policy, instead of suing the other driver in tort and receiving compensation from the other driver’s insurer.

[17] As Juriansz J.A. explained in Clarendon National Insurance v. Candow, 2007 ONCA 680 at para. 7:

Section 263 of the Insurance Act replaced the tort system that resolved automobile damage claims prior to its enactment. In the new statutory scheme, insureds can no longer sue the tortfeasor driver whose negligence has caused damage to their cars. Rather, their own liability insurer pays for the damage, to the extent that they were not at fault, under the third party liability section of their motor vehicle liability policies. Insureds can recover the at-fault portion of their damage by purchasing collision coverage.

See also Quality Car Rentals Inc. v. Sedaghat, 2019 ONSC 5431 at para 12; Burridge v. Hardy, 2018 ONSC 202 at paras. 13-22.

[18] Specifically, s. 263(5)(a) states that when the s. 263 Direct Compensation – Property Damage scheme applies, “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”. Section 263(5)(b) likewise limits insurers’ ability to bring subrogated claims.

[19] Section 263(2) provides further that in situations where s. 263 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.

Under s. 263(3), “[r]ecovery under subsection (2) shall be based on the degree of fault of the insurer's insured as determined under the fault determination rules.”

[20] Since s. 239(1) provides for insurance “against liability imposed by law upon the insured named in the contract for loss or damage” resulting from the ownership or use of an automobile, including “damage to property”, the effect of these provisions is that insured persons can obtain compensation for damage to their own vehicle from their own liability insurer under the legal fiction that they are a third party, to the extent that they are not deemed at fault for the accident under the fault determination rules that have been established by regulation (R.R.O. 1990, Reg. 668).

[21] However, s. 263(6) preserves the ability of insured persons to purchase additional collision coverage for damage to their own vehicle that was their fault, by providing that s. 263 “does not affect an insured’s right to recover in respect of any physical damage coverage in respect of the insured automobile”.

[22] In summary, when an insured’s vehicle is damaged in an accident to which s. 263 applies, insured persons are potentially entitled to claim compensation from two different insurance pools. To the extent that they are not at fault for the accident, they can obtain compensation under their own liability insurance policies through the Direct Compensation – Property Damage scheme. To the extent that they are at fault for the accident, they can also obtain compensation under any additional optional “physical damage coverage” they have purchased.

[23] The legislative purpose behind the s. 263 first-payor scheme is to reduce overall insurance costs by avoiding expensive disputes between different insurance companies over questions of fault. Essentially, the scheme recognizes that insurance companies will be no worse off in the long run even if they have to pay for the damages sustained by their own not-at-fault customers while losing their right to bring a subrogated claim against the at-fault driver, because they will also no longer have to cover the damages caused by their own at-fault customers. As Juriansz J.A. observed in Clarendon, supra at para. 8:

Insurers have no right of subrogation for payments to their own insureds, but, on the other hand, do not have to pay the subrogated claims previously brought by other insurers in the tort system. The result is that the statutory regime eliminates the transactions costs that were inherent in the tort system.

B. Owasco’s and Mr. Fitzgerald’s insurance policies

[24] Section 263(5.1) of the Insurance Act permits insured and insurers to agree between themselves that any Direct Compensation – Property Damage scheme claim by the insured will be subject to a deductible. In this case, it is an agreed fact that the applicable deductible on Owasco’s insurance policy with Lloyds Underwriters was $25,000, which effectively prevents Owasco from seeking compensation in this case from its own insurer, since the damage its car sustained was well below this amount. Owasco is also barred by s. 263(5)(a) from suing the at-fault driver in tort and obtaining compensation from his insurer.

[25] Owasco accordingly sought compensation from Mr. Fitzgerald and his insurer, Coachman, by suing them in small claims court based on the contractual agreement in which Mr. Fitzgerald agreed to pay for any damage to the rental car, regardless of fault.

[26] Mr. Fitzgerald’s insurance policy for his own car included optional collision coverage that insured him against loss of or damage to his own vehicle. Section 7 of the OAP-1 gives insured persons the option of buying one of four different types of collision coverage. Under s. 7.4, everyone who buys one of these forms of collision coverage also receives several additional benefits, one of which is coverage for a “temporary substitute automobile”, defined in s. 2 of the OAP-1 to mean “an automobile that is temporarily used while a described automobile is out of service”. It is an agreed fact in this case that the “loaner” Mr. Fitzgerald received from Owasco while his own car was being repaired qualified as a “temporary substitute automobile”.

[27] Section 7.4.3 of the OAP-1 provides:

If you [the insured person] or anyone else drives a temporary substitute automobile (described in Section 2), you may be responsible for any damage to it as a result of liability imposed by law or agreed to by you or the driver. In that case, we will pay for direct damage for which you or the driver are legally responsible, minus the deductible for that peril under this policy.

However, if the owner of the substitute automobile has it insured for such losses, and the deductible on that policy is larger than the one on your policy for such loss, the most we will pay will be the difference between the two deductibles.

[28] People can also purchase more expansive insurance coverage that insures them against damage to rented vehicles that they are not using as “temporary substitute automobiles”, such as cars they rent while on vacation. In Quality Car Rentals Inc. v. Sedaghat, supra, Myers J. addressed the application of s. 263(5)(a.1) of the Insurance Act to a car rental contract that was similar to the one signed by Mr. Fitzgerald, in that it included a term in which the renter agreed to pay for all damage to the rented car regardless of fault. However, it appears that the rented car in Quality Car Rentals was not being used as a “temporary substitute vehicle” for the purposes of the OAP-1.

C. The trial judge’s decision

[29] The small claims trial in the case on appeal was conducted before Deputy Judge A.J. McMackin on the basis of an agreed statement of fact. Among other things, it was an agreed fact that the two vehicles involved in the accident were both insured under contracts issued by insurers who were “licenced to undertake automobile insurance in Ontario”. The agreed statement of fact stipulated further that Mr. Fitzgerald “was 0% at fault for the occurrence of the accident”, and that the other driver, Mr. Dale, was “100% at fault”.

[30] When the s. 263 Direct Compensation – Property Damage first-payor scheme was first enacted, it did not include the limits on contractual rights of recovery for damage that are now found in s. 263(5)(a.1). Accordingly, courts initially interpreted s. 263 as only applying to tort claims, holding that it did not prevent people from entering into car rental or lease contracts in which they agreed to indemnify the car’s owner for any damage to the vehicle, regardless of whether it was their fault.

[31] In 583809 Ontario Ltd. v. Kay, 1995 7080 (Ont. Gen. Div.), Somers J. stated:

I am not satisfied that s. 263 was designed to deprive a right of action to the owner of a vehicle who is bringing a claim for damage to that vehicle under its contractual rights. Clearly it intended to prevent the owner of the vehicle from bringing an action in negligence against the party who did the damage to his car. However, it is a principle of statutory interpretation that where the intended purpose of the Act was to restrict or remove a right that existed prior to its being passed, it should say so in clear and unambiguous terms. In my view if it had been the intention of the legislature to deprive a contracting party of its right to claim that to which it is entitled under the terms of its contract, it would have said so …

[32] Somers J.’s analysis was later adopted by the Divisional Court in A Plus Car & Truck Rental v. Pun, [1999] O.J. No. 1291.

[33] However, in 1996 the Ontario legislature amended s. 263 by adding s. 263(5)(a.1), which provides:

263(5) If this section applies,

(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;

[34] As Myers J. explained in Quality Car Rentals, supra at para. 18, by limiting an insured person’s contractual liability for damage to situations where he or she is “at fault or negligent”, s. 263(5)(a.1):

… 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.

[35] The trial judge found that notwithstanding s. 263(5)(a.1), Mr. Fitzgerald remained liable to Owasco under the term of the rental agreement in which he had agreed to pay for any damage to the rental car, regardless of fault. His analysis was as follows:

Does Sections 263 and 263(5)(a.1) apply to negate the contractual right of recovery?

The Court has ruled that s. 263 is not designed to deprive a contracting party of its right to recover under the terms of a contract. See A Plus Car & Truck Rental v. Pun, [supra], par. 1.

As a consequence, Fitzgerald is liable for the claimed damages.

[36] In my view, the trial judge erred by treating the Divisional Court’s appellate judgment in A Plus Car & Truck Rental as dispositive. Although the Divisional Court’s decision was rendered in 1999, which was some three years after s. 263(5)(a.1) was added to s. 263, the case on appeal concerned an accident that had occurred before this statutory amendment. The Divisional Court’s reasons accordingly made no mention of s. 263(5)(a.1), which did not apply retrospectively to the case it was addressing.

[37] In my view, the addition of s. 263(5)(a.1) to the s. 263 regime plainly changed the law as it had been set out in 583809 Ontario Ltd. v. Kay, supra and A Plus Car & Truck Rental v. Pun, supra. In 583809 Ontario Ltd., Somers J. declined to interpret s. 263 as limiting contractual rights on the grounds that if this was what the legislature had intended “it should say so in clear and unambiguous terms”. The legislature responded by adding s. 263(5)(a.1), which does just that: it explicitly limits the ability of contracting parties “to recover under the terms of a contract” in certain circumstances.

[38] The question of whether and how this section applies on a given set of facts is a question of law that is reviewable on a standard of correctness: see Housen v. Nikolaisen, 2002 SCC 33 at paras. 26-37.

[39] I am satisfied that if s. 263(5)(a.1) does properly apply in this case, it has the effect of entirely extinguishing Owasco’s ability to sue Mr. Fitzgerald under the rental agreement for the damage to the rental car that is at issue in this case. This conclusion necessarily follows from the subsection’s plain wording and from the agreed facts in this case:

i) Owasco, the owner of the damaged car, is “an insured” within the meaning of s. 263(5)(a.1);

ii) The term of the rental contract in which Mr. Fitzgerald agreed to be responsible for any damage to Owasco’s car, regardless of whether the damage was his fault, was “an agreement … in respect of damages to the insured’s automobile”;

iii) The rental agreement was not a “contract of automobile insurance” within the meaning of s. 263(5)(a.1). Even though Mr. Fitzgerald’s agreement to pay for any damage to the rental car can be viewed as giving Owasco a form of “automobile insurance”, s. 224(1) defines a “contract of automobile insurance” for the purposes of Part VI of the Insurance Act, where s. 263 is situated, to be one “undertaken by an insurer that is licenced to undertake automobile insurance in Ontario”, or a contract under a policy issued outside Ontario by an insurer “that has filed an undertaking under section 226.1”;

iv) Since the triggering conditions in s. 264(5)(a.1) are all satisfied, Owasco has “no right of action” against Mr. Fitzgerald under the contract “except to the extent that [he] is at fault or negligent” in respect of the damages to the rental car;

v) Since it is a stipulated fact that Mr. Fitzgerald is entirely blameless for the accident that caused damage to the rental car, Owasco is left with no right of action against him under the rental agreement in respect of this damage.

D. Does s. 263(5)(a.1) apply to “temporary substitute automobiles”?

[40] Owasco does not argue that there is any other way to read s. 263(5)(a.1) to avoid this conclusion, if the subsection applies in this case. Instead, Owasco takes a different tack and argues that the section 263 scheme as a whole, including the s. 263(5)(a.1) limits on contractual recovery, should be understood as not applying to cases involving damage to a “temporary substitute automobile” that is also insured under the renter’s own insurance policy.

[41] Owasco bases this argument on s. 263(6) of the Insurance Act and the wording of s. 7.4.3 of the OAP-1. Section 263(6) states:

236 (6) This section does not affect an insured’s right to recover in respect of any physical damage coverage in respect of the insured automobile.

Owasco argues that because coverage for damage to temporary substitute automobiles is offered to insured persons as part of their optional collision coverage in s. 7 of the OAP-1, s. 263(6) of the Act should be interpreted as carving out an exemption from s. 263 for claims involving damage to a temporary substitute automobile that is being used by a person who has purchased this optional collision coverage.

[42] Owasco argues further that this interpretation is supported by the wording of s. 7.4.3 of the OAP-1. As noted earlier, s. 7.4.3. informs insured persons who have purchased optional collision coverage:

If you or anyone else drives a temporary substitute automobile (described in Section 2), you may be responsible for any damage to it as a result of liability imposed by law or agreed to by you or the driver. In that case, we will pay for direct damage for which you or the driver are legally responsible, minus the deductible for that peril under this policy.

[43] Owasco argues that since the OAP-1 is established by regulation, the wording of s. 7.4.3 reveals that the legislature meant to allow people who rent or borrow a temporary substitute automobile to agree to reimburse the owner for any damage, regardless of their own fault. Since s. 263(5)(a.1) expressly states that when s. 263 applies an owner’s right of action for damages under an agreement is limited to “to the extent that the person is at fault or negligent in respect of those damages”, Owasco argues that the only way to reconcile this apparent conflict is to interpret s. 263(6) as exempting temporary substitute vehicles from s. 263 as a whole, at least in cases where the vehicle is also insured under the renter or borrower’s optional collision coverage.

[44] The trial judge appears to have accepted this argument, quoting s. 7.4.3 of the OAP-1 and then stating:

As this provision does not specifically nullify recovery where the owner has agreed by contract to assume liability, Fitzgerald and Coachman are liable for the damages.

[45] Owasco also suggests that the Divisional Court’s decision in 112063 Ontario Ltd. (c.o.b, Canadian Car Rentals) v. Ramnarine, [2000] O.J. No. 2252 (Div. Ct.) supports its argument, because the Divisional Court in that case permitted the owner of a car that being used as a temporary substitute vehicle to sue the renter under the terms of the rental agreement for damage arising out of an accident that occurred in 1997, a year after s. 263(5)(a.1) was added to s. 263.

[46] Finally, Owasco suggests that exempting temporary substitute automobiles that are also covered by the renter or borrower’s collision insurance from the s. 263 first-payor scheme is justified on policy grounds.

[47] For a number of reasons, I do not find any of Owasco’s arguments persuasive.

[48] First, it is well settled that when interpreting legislation, “the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament”: Re Rizzo and Rizzo Shoes, 1998 837 (SCC), [1998] 1 S.C.R. 27 at para. 21.

[49] The wording of s. 263(6) does not suggest that the legislature meant to entirely exempt cases where there are “physical damage coverage” claims from the s. 263 first-payor scheme. Read in its “grammatical and ordinary” sense, s. 263(6) merely clarifies that insured persons who have purchased optional collision coverage are not barred by s. 263 from making claims under this coverage. The subsection does not say that s. 263 becomes entirely inapplicable when such a claim is or can be made.

[50] In contrast, ss. 263(7) through (10) expressly state that s. 263 “does not apply” in certain specific situations, none of which arise here.[^1] If the legislature had intended to carve out a similar exemption for cases involving physical damage coverage claims generally, or for cases involving temporary substitute automobiles in particular, one would expect the legislature to have used similarly clear and unambiguous language.

[51] Second, giving s. 263(6) a literal and narrow reading makes sense when the “scheme and object” of the first-payor Direct Compensation Property Damage regime is considered. As discussed previously, s. 263 works by letting insured persons whose vehicles are damaged in qualified accidents obtain compensation under their own liability coverage as if they were third parties, to the extent that they are not deemed at fault for the accident. However, for obvious reasons the legislature wanted to also let people insure their own vehicles against damage for which they are deemed to be at fault. Section 263(6), when read in its ordinary and grammatical sense, simply makes this latter right explicit.

[52] Conversely, it is not apparent why the legislature would want to take cases involving “physical damage coverage” claims outside the s. 263 first-payor regime altogether. In this regard, there is no plausible way to read s. 263(6) as creating an a la carte exclusion that exempts these cases only from certain parts of the s. 263 scheme. Accordingly, if Owasco’s proposed interpretation of s. 263(6) were correct, cases involving physical damage coverage claims would be exempt not just from the limits on contractual rights in s. 263(5)(a.1), but also from the restrictions on the right to sue in tort under s. 263(5)(a). Such a result would fly in the face of the purpose and object of the s. 263 scheme, which is to reduce insurance costs by “eliminat[ing] the transactions costs that were inherent in the tort system”: Clarendon, supra at para. 8.

[53] Third, there is in my view no inconsistency between 7.4.3 of the OAP-1 and s. 263(5)(a.1) of the Act that requires resolution. Section 7.4.3 only says that insured persons who drive a temporary substitute automobile “may be responsible for any damage to it” that they have agreed to pay for (emphasis added). It does not say that they necessarily will be responsible for this damage. Indeed, s. 7.4.3 goes on to explain that the insurer will only pay for damages “for which you or the driver are legally responsible” (emphasis added). In situations where s. 263(5)(a.1) of the Act limits or eliminates the owner’s right of action under an agreement with the insured person, the insured person will no longer be “legally responsible” to pay for some or all of the damage. Accordingly, there is no operational conflict between the statutory provision and the standard contractual terms of the OAP-1. This makes it unnecessary for me to address Mr. Fitzgerald and Coachman’s argument that any conflicts between the Insurance Act and the OAP-1 would have to be resolved in favour of the Act.

[54] Fourth, I think that Owasco’s reliance on the Divisional Court’s decision in 112063 Ontario Ltd. v. Ramnarine, supra is misplaced. The temporary substitute automobile at issue in that case had been damaged in a single vehicle accident (see para. 2 of the decision). Section 263 only applies to accidents that involve at least two insured vehicles, so the Divisional Court made no mention of s. 263 in its decision. The Court’s reasons do not imply that cases involving temporary substitute automobiles are generally excluded from the s. 263 regime.

[55] Finally, I am not persuaded that Owasco’s policy arguments support its proposed interpretation of s. 263 as excluding rented temporary substitute automobiles when they are also covered by the renter’s collision coverage.

[56] Essentially, Owasco argues that if rental car companies cannot fully pass the risk of insuring temporary substitute automobiles on to renters and their insurance companies, they will no longer be able to save money by buying insurance policies with very high deductibles, as Owasco did in this case. According to Owasco, this will make it uneconomical for auto repair shops to keep offering “free” loaners to their customers, which Owasco suggests is an outcome the Ontario legislature would want to avoid.

[57] However, if the legislature agreed that it would be good policy to exempt temporary substitute vehicles from the s. 263 first-payor scheme in order to reduce rental companies’ insurance costs, one would expect this exemption to have been clearly and unambiguously set out in the legislation. If this was really what the legislature was trying to accomplish, it chose a very odd way of going about it.

[58] In any event, I am not prepared to assume that the Ontario legislature would necessarily agree that it is good policy to shift the cost of insuring temporary substitute automobiles from rental companies like Owasco to renters and their insurers. The cost to auto repair shops of providing “free” loaners is ultimately passed on to their customers as part of the price of repairs. While shifting the insurance cost to the customers’ own insurance companies might slightly reduce the price of car repairs, it will also correspondingly increase the cost to consumers of purchasing optional collision insurance. It is not self-evident that the legislature would consider this to be a good trade-off.

[59] In summary, I am satisfied that s. 263(6) should not be interpreted as excluding cases involving temporary substitute automobiles from the s. 263 Direct Compensation – Property Damage scheme. Rather, I think s. 263(6) should be understood as merely providing, for greater certainty, that insured persons may still purchase optional collision coverage that lets them insure against the at-fault portion of any damage their vehicles sustain in an accident.

[60] It follows that s. 263(5)(a.1) is properly applicable in this case. As I have already explained, the subsection by its plain wording limits Owasco’s right of action against Mr. Fitzgerald under the rental agreement to the extent to which he was at fault for the accident that damaged its car. Since it is an agreed fact that he was entirely not at fault for the accident in this case, Owasco’s right of action to sue him for the damage under the rental agreement is wholly extinguished. The trial judge accordingly erred in law by concluding otherwise and by finding Mr. Fitzgerald liable in contract to Owasco for the damage to Owasco’s car.

E. Does Owasco have a claim against Coachman directly?

[61] Owasco argues in the alternative that even if its right to obtain damages from Mr. Fitzgerald pursuant to the rental agreement is extinguished by s. 263(5)(a.1), as I have found, it still has a free-standing right to claim these same damages against Mr. Fitzgerald’s insurer, Coachman, pursuant to Mr. Fitzgerald’s own insurance policy.

[62] It is clear that if Mr. Fitzgerald’s obligation under the rental agreement to pay Owasco for the damages to the rental car were not negated by s. 263(5)(a.1), he would have been entitled to recoup from Coachman any money he had to pay to Owasco, less his $500 deductible. Although under s. 7.4.3 of the OAP-1 Coachman only agreed to pay for the damage up to the amount of Owasco’s own $25,000 deductible, this limitation would not have come into play here, since the damage to Owasco’s car was well below this amount.

[63] However, I have concluded that on the facts of this case Owasco’s right of action against Mr. Fitzgerald under the rental agreement is entirely extinguished by s. 263(5)(a.1). It follows that Mr. Fitzgerald has no need to seek any reimbursement from Coachman, since he is not legally required to pay Owasco anything.

[64] Owasco’s argument that it can nevertheless seek compensation from Coachman itself under Mr. Fitzgerald’s policy is based on s. 262(1) of the Insurance Act, which provides:

262(1) Where a claim is made under any contract other than a contract evidenced by a motor vehicle liability policy, the insurer shall, despite any agreement, adjust the amount of the claim with the insured named in the contract as well as with any person having an interest indicated in the contract.

[65] Owasco argues that because it has a claim against Mr. Fitzgerald under the rental contract, albeit one that it is statutorily barred from enforcing, if Mr. Fitzgerald had made a claim of his own to Coachman under his insurance policy Coachman would have been obliged by s. 262(1) to take Owasco’s interest into account when adjusting this claim. Owasco extrapolates from this that it can now make its own claim against Coachman, even though Mr. Fitzgerald no longer has any reason to make a claim himself.

[66] In my view, this argument is based on a misreading of what s. 262(1) says and how it operates.

[67] As a starting point, I agree that if Mr. Fitzgerald had made a claim to Coachman under his own optional collision coverage, s. 262(1) would have then applied to his claim. It applies to claims under contracts “other than a contract evidenced by a motor vehicle liability policy”, which is defined by s. 224(1) to mean only the part of an insurance contract that insures against liability to third parties. Since optional collision coverage protects insured persons against the risk of damage to their own property, a contract providing for such collision coverage is accordingly “a contract other than a contract evidenced by a motor vehicle liability policy”.

[68] It follows that Coachman would have been required to adjust any claim that Mr. Fitzgerald made under his collision policy taking into account “any person having an interest indicated in the contract”.

[69] However, I do not agree that this gives Owasco any right to make its own claim against Coachman in this case. I reach this conclusion for several different reasons.

[70] First, s. 262(1) only applies “where a claim is made under [a] contract”. Owasco is not a party to Coachman’s insurance contract with Mr. Fitzgerald, and would ordinarily have no standing to assert any contractual claims against his insurer. It is not apparent to me that s. 262(1) gives Coachman any expanded right to make a claim against Coachman in a situation when Mr. Fitzgerald has no need to make any claim himself.

[71] Second, it is questionable whether Owasco is a “person having an interest indicated in the contract”, since the terms of Mr. Fitzgerald’s collision coverage do not identify Owasco as an interested person.

[72] A somewhat similar situation was addressed by Haines J. in Giuliano v. Allstate Insurance Co., 2003 64297 at paras. 38-39 (Ont. S.C.J.). One of the issues that arose in that case was whether a company called Japetco Corp., which had leased a vehicle to a couple named the Tiffens, had standing to make a claim against the Tiffens’s insurer even though Japetco had not been named in their insurance contract. Haines J. concluded that it did not, explaining at para. 39:

The Tiffens' insurable interest in the subject vehicle arises from their obligation under the lease agreement to pay Japetco, the owner, for any damage to the vehicle. Japetco's entitlement to be paid arises from the lease agreement, not the insurance contract. Therefore, upon the leased vehicle being damaged, Japetco has a claim against the Tiffens, but it is only the Tiffens, as the named insureds, who have a claim against the insurer.

[73] The situation in the case at bar is arguably different. As I have already discussed, s. 7.4.3 of the OAP-1 expressly recognizes that the owner of a vehicle may be able to collect damages from an insured person who is using it as a temporary substitute automobile, and provides that the insurer will “pay for direct damage for which [the insured] or the driver are legally responsible”. It is at least arguable that this makes the owner of such a vehicle a “person having an interest indicated in the contract”, even if they are not specifically identified by name.

[74] However, even if I were to assume for the sake of argument that Owasco does qualify as a “person having an interest” in Mr. Fitzgerald’s collision coverage with Coachman, and that this somehow gives it standing to make an independent claim, I do not think this entitles Owasco to claim damages from Coachman in circumstances where Coachman has no obligation to pay them under the terms of its contract with Mr. Fitzgerald.

[75] As I have already discussed, s. 7.4.3 only provides that the insurer will “pay for direct damage for which [the insured is] ... legally responsible”. If the insured is not “legally responsible” for the damage, whether because of the operation of s. 263(5)(a.1) or for some other reason, s. 7.4.3 does not require the insurer to pay anything to anyone.

[76] I do not think s. 262(1) of the Insurance Act can be reasonably understood as forcing an insurer to make payments to a third party that the insurer has not agreed to make as a term of its insurance contract with the insured person. In my view, the combined effect of ss. 263(5)(a.1) of the Act and s. 7.4.3 of the OAP-1 lead to the conclusion that in the circumstances here, neither Mr. Fitzgerald nor Coachman are legally obliged to compensate Owasco for the damage to its car, which it is agreed was not Mr. Fitzgerald’s fault. Owasco cannot effectively perform an end run around s. 263(5)(a.1) by recasting its claim in this case as a claim against Coachman.

III. Disposition

[77] In summary, I am satisfied that Ontario legislature has decided that in circumstances like this one, where a rented vehicle is damaged through no fault of the renter, the s. 263 first-party payor system should require the vehicle’s owner to look to its own insurer for compensation. I am not persuaded that the legislature intended to treat rented vehicles that are being used as temporary substitute automobiles differently from automobiles that are rented for other purposes, such that the result in this case should be different from that reached by Myers J. in Quality Car Rentals, supra.

[78] I appreciate that on the facts here this means that Owasco will be left out of pocket, since the damage to its car was much less than the $25,000 deductible on its own first-party insurance policy. However, this is simply a consequence of the choice Owasco made to save money up front when it purchased insurance. To adopt what Myers J. said in Quality Car Rentals, supra at para. 35, rental companies like Owasco “can reduce their deductibles by paying appropriate insurances premiums like everyone else if they wish to do so”.

[79] In the result, Mr. Fitzgerald and Coachman’s appeal is allowed, and the judgment against them in favour of Owasco is set aside.

[80] Mr. Fitzgerald and Coachman submit that the appropriate remedy would be to substitute a judgment in Owasco’s favour, but to set the monetary amount of this judgment at zero dollars.

[81] I think that this proposed approach is needlessly complicated. As I have explained, I am satisfied that in the circumstances of this case s. 263(5)(a.1) entirely eliminates Owasco’s “right of action” against Mr. Fitzgerald under the rental agreement, and that Owasco also has no free-standing right to obtain compensation from Coachman. I think it follows from this that the appropriate judgment in this case is one that simply dismisses Owasco’s claims against both defendants. I see no principled or practical reason to frame the judgment as if Owasco’s action had been nominally successful, but to then award it no damages. To the contrary, I think that on the facts of this case s. 263(5)(a.1) has the legal effect of eliminating Owasco’s right of action in contract against Mr. Fitzgerald, and also extinguishes any statutory right of action it might otherwise have had against Mr. Fitzgerald’s insurer, Coachman. In my view, it follows that the appropriate and legally correct result in this case is to conclude that Owasco’s action against both defendants fails, and to enter judgment in accordingly.

[82] Counsel advise that they had previously agreed to reserve the issue of costs at the trial to be decided on the appeal, and that they have now agreed that the successful party on the appeal should receive $6,500 all inclusive for their costs at both levels of court. Awarding $6,500 in costs on a partial indemnity basis may initially seem somewhat disproportionate in a case involving a dispute over who should pay for $5,628.41 in damages to a car. However, I appreciate that Owasco and Coachman have both treated this appeal as something of a test case, and that they both have good reason to want to have the underlying legal question settled. Accordingly, I am prepared to give effect to counsels’ agreement and award Mr. Fitzgerald and Coachman their costs, fixed at $6,500 all inclusive.

Dawe J.

Date: November 10, 2021

[^1]: Specifically: subsection (7) exempts claims for damages to the contents of an automobile “that are being carried for reward”, subsection (8) exempts claims for damage occurring before June 22, 1990, subsection (9) exempts claims arising out of collisions where “both automobiles are owned by the same person”, and subsection (10) exempts claims for damage to an insured’s automobile “caused by the insured while driving another automobile”.