Coronation Insurance Co. v. Taku Air Transport Ltd., [1991] 3 S.C.R. 622

The Coronation Insurance Company Limited and The Eagle Star Insurance Company Limited Appellants

v.

Carol Florence, Andrew R. Florence and Russell A. Florence, infants by their guardian ad litem, Carol Florence Respondents

and

Deborah Passarell, Natasha Passarell, Jackelynn Passarell and Rocky Passarell, infants by their guardian ad litem, Deborah Passarell Respondents

and

Taku Air Transport Ltd., Robert Carl Berchtenbreiter, infant by his guardian ad litem, Ian D. Izzard; Gerald Abel, the Administrator of the Estate of Ben Abel, Deceased; Ray Frederick Smith and Nora Anias, the Administrators of the Estate of Shelley Smith, Deceased Defendants

Indexed as: Coronation Insurance Co. v. Taku Air Transport Ltd.

File No.: 22157.

1991: June 21; 1991: November 28.

Present: La Forest, L'Heureux‑Dubé, Sopinka, Cory, McLachlin, Stevenson and Iacobucci JJ.

on appeal from the court of appeal for british columbia

Insurance ‑‑ Aviation insurance ‑‑ Exclusions ‑‑ Carrier's policy containing exclusions pertaining to misrepresentation and number of seats declared ‑‑ Federal regulation authorizing such exclusions struck down after crash ‑‑ Whether insurers liable to families of passengers killed in crash ‑‑ Whether policy void ab initio on account of misrepresentation or extra passenger carried.

In 1986 appellant insurers issued a policy to Taku, a commercial air carrier. The policy stated that it would be void if the insured had misrepresented any material fact, and that it did not apply if the total number of passengers carried at the time of loss exceeded the number of seats declared. These insurers had provided coverage for Taku in 1978, but following three accidents in the first year had not renewed the policy. When Taku reapplied for a policy in 1986, the insurers did not check their files for its accident record, but instead asked Taku to disclose it. Taku reported only one accident. It also requested and obtained coverage for only four seats on one of its aircraft. That aircraft later crashed, killing all five passengers. The insurers denied coverage under the policy on the ground that Taku had misrepresented its accident record and brought an action against Taku to have the policy declared void ab initio. The respondent families of two of the passengers were joined as defendants in the action. At trial respondents requested an adjournment to permit them to bring an action in the Federal Court to quash the exclusion clauses pertaining to misrepresentation and the number of seats. These clauses had been approved by the Air Transport Committee as Regulations. The Federal Court granted the application. When the proceedings resumed, the trial judge found the insurance contract void ab initio as a result of Taku's misrepresentation of its accident record. He rejected arguments that the insurers could be taken to be aware of the misrepresentation because of the content of their own files. Costs were awarded to respondents. The Court of Appeal, in a majority decision, reversed the judgment and found the insurers liable on a valid policy.

Held: The appeal should be allowed.

Per La Forest, L'Heureux‑Dubé, Cory and Iacobucci JJ.: The insurers cannot escape liability on the grounds that Taku failed to disclose its accident record. While the uberrima fides doctrine as formulated in 1766 can still hold true where the policy is for the exclusive benefit of the insured, it should not be applicable in the highly regulated field of aviation insurance, where insurance for passengers has been made a condition for licensing air carriers. Where the insurance policy required by statute or regulation is primarily for the benefit of members of the flying public and not just the insured, the insurer must take some basic steps to investigate the flying record of the air carrier applying for insurance. At a minimum, it should review its own files on the applicant, and should make a search of the public record of the air carrier's accidents. This will not place too great a burden on an insurer since accident histories are easily available. In this case the insurers had within their own grasp information which would have provided a more accurate assessment of the risk entailed by the policy. At a minimum, they should have scrutinized their own records before issuing the policy.

The insurers were, however, entitled to rely on Taku's representation as to the number of passenger seats. It is really only the owner who can be aware of the number of passengers to be carried, and only the owner can know that modifications to the seating configuration have been made and what the insurance requirements may be. The load capacity of a particular airplane and the number of passengers to be carried is highly relevant information that is of critical importance to the insurer. The contract term which limits liability to an agreed number of passenger seats is not affected by the Federal Court decision. Since the insured violated this term, the contract is void ab initio against Taku. The respondents' statutory right of action is subject to any defence the insurers have against Taku, and the insurers must therefore succeed.

The insurers should pay the respondents' costs before this Court as well as in the courts below. The respondents are the victims of an inadequate regulatory scheme, while the insurers are not innocent parties but rather companies so eager for a premium they failed even to examine their own records.

Per McLachlin and Stevenson JJ.: The rights of the claimant families are grounded in the contract of insurance between Taku and the insurers, which cannot be taken to have been altered by the Federal Court ruling in this case. Since Taku could not succeed against the insurers because of its misrepresentations, the families cannot succeed. The insurers should bear the costs of the proceedings at trial and on the appeal below, and each party should bear its own costs of appeal to this Court.

Per Sopinka J.: At the time of contracting and at present, the regulators have seen fit to allow the contracting parties to put the ultimate risk of material concealment and misrepresentation on the flying public and not on the insurer, and there is no reason to interfere with that freedom. A decision as to whether an insurer should be required to conduct an independent investigation of an insured's accident record before providing coverage is a policy decision that is not for this Court to make. The trial judge in this case clearly found that the insurers did not know and cannot be presumed to have known the insured's accident record. Thus the insured cannot take advantage of the doctrine of uberrima fides. The failure of an insurer to investigate a risk should not, by itself, deprive it of the right to avoid the contract on the basis of a failure by the insured to disclose material facts.

Cases Cited

By Cory J.

Not followed: Carter v. Boehm (1766), 3 Burr. 1905, 97 E.R. 1162; referred to: Florence v. Air Transport Committee (1988), 34 Admin. L.R. 36; Canadian Indemnity Co. v. Canadian Johns‑Manville Co., 1990 CanLII 78 (SCC), [1990] 2 S.C.R. 549; Roberge v. Bolduc, 1991 CanLII 83 (SCC), [1991] 1 S.C.R. 374.

By McLachlin J.

Referred to: Florence v. Air Transport Committee (1988), 34 Admin. L.R. 36.

By Sopinka J.

Referred to: Canadian Indemnity Co. v. Canadian Johns‑Manville Co., 1990 CanLII 78 (SCC), [1990] 2 S.C.R. 549; Ford v. Dominion of Canada General Insurance Co., 1991 CanLII 118 (SCC), [1991] 1 S.C.R. 136.

Statutes and Regulations Cited

Aeronautics Act, R.S.C. 1970, c. A‑3, s. 17.

Air Carrier Regulations, C.R.C. 1978, c. 3 [am. SOR/83‑443, s. 9], ss. 20.3(1), (3), 20.4, 161.

Air Transportation Regulations, SOR/88‑58, s. 7(3)(d).

Canadian Aviation Safety Board Regulations, SOR/84‑929 [am. SOR/87‑642], ss. 3(1), 5(3).

Family Compensation Act, R.S.B.C. 1979, c. 120.

Insurance Act, R.S.B.C. 1979, c. 200, s. 26(1).

National Transportation Act, R.S.C. 1970, c. N‑17, s. 3.

National Transportation Act, 1987, S.C. 1987, c. 34, s. 3.

APPEAL from a judgment of the British Columbia Court of Appeal (1990), 1990 CanLII 1442 (BC CA), 48 B.C.L.R. (2d) 222, 72 D.L.R. (4th) 184, [1990] I.L.R. 1‑2643, reversing a judgment of the British Columbia Supreme Court (1989), 1989 CanLII 10400 (BC SC), 37 C.C.L.I. 271, [1989] I.L.R. 1‑2458, holding appellant insurers not liable. Appeal allowed.

Stephen D. Gill and Eric M. Lane, for the appellants.

J. J. Camp, Q.C., Gary V. Lank, David Church and Shawn Neylan, for the respondents.

//Cory J.//

The judgment of La Forest, L'Heureux-Dubé, Cory and Iacobucci JJ. was delivered by

Cory J. -- This appeal illustrates the difficulties that arise when principles of insurance law set forth by the courts in 1766 are strictly applied to policies of insurance mandated by statute or regulation and which are purportedly for the benefit of third parties (here passengers carried by commercial airlines) and not for the sole benefit of the insured party.

Factual Background

Taku and the Insurers

Taku was a small commercial air carrier which operated in northern British Columbia. When it began to operate in 1978, the appellants (Coronation) provided the insurance. During the first year of the policy, Taku had three accidents. As a result, Coronation refused to renew the policy. In a telex dated September 24, 1979, Peter May, an employee of the insurer's agent, wrote:

. . . although I mentioned to Doug that I would be able to quote renewal having now looked at the file I believe we will not be able to help STOP. Our contract is out of the question . . .

Taku then obtained coverage from the British Aviation Insurance Company. Between 1979 and 1986 Taku was involved in further accidents. Its insurance was terminated and Taku began a new search for insurance coverage. The carrier applied for a policy from Coronation. Peter May again handled the request from a broker. The names Taku and Bond apparently "rang a bell" with Mr. May. He testified:

He gave me details about the Taku risk, and I specifically remember asking him because the name of Bond and/or Taku rang bells with me, and as a result of that I specifically wanted a ten-year accident history of his client.

Despite the ringing bells he did not check the insurance company's files. Instead he asked Taku to disclose its record. This Taku did not do. Rather it reported but one accident which it stated occurred in 1978 when it was insured by a policy with BAIC. In reality, the reported accident occurred in 1979 at a time when Coronation still insured Taku. In any event Coronation did not undertake an investigation of Taku. It simply calculated the risk of the policy on the basis of the false information it received from Taku. It did not consult its own records. It did not contact the previous insurer BAIC. Nor did it make inquiries at the Canadian Aviation Safety Board as to accidents in which Taku was involved.

As well, Coronation asked Taku to declare the number of seats it wished to insure for each aircraft. Taku requested and obtained coverage for only four seats on its Beaver aircraft.

The Contract

As might be expected the appellants drafted the contract of insurance with Taku. The policy ostensibly complied with the Regulations. It included terms and conditions approved by way of Regulation by the Air Transport Committee (A.T.C.) in August 1983. The first term appears in the policy under the heading "conditions":

22. Misrepresentation and Fraud

This entire Policy shall be void if the Insured has concealed or misrepresented any material fact or circumstance, whether under the Declarations or otherwise, concerning this insurance or the subject thereof, or in the case of any fraud, attempted fraud or false statement by the Insured touching any matter relating to this insurance of the subject thereof, whether before or after the loss.

This second term the A.T.C. purported to approve appeared under the heading "exclusions":

1. This Policy does NOT apply and the Company shall not be liable to indemnify or defend any Insured where, the Aircraft is ...

(h)in flight, unless the total number of passengers, (excluding the aircrew for the flight) carried in the aircraft at the time loss or damage occurs is equal to, or less than, the number of "seats" stated in the Declarations for the aircraft;

As will be seen from the proceedings in this case the Federal Court (Strayer J.) found that these terms and conditions could not be approved as Regulations by the A.T.C. and they were therefore void.

To comply with the regulatory requirements for the licensing of an air carrier, the insurers also issued Endorsement No. 3 which provided that, subject to enumerated conditions, the policy was in accordance with the Air Carrier Regulations, C.R.C. 1978, c. 3. The endorsement restated the clauses removing the insurers' liability in the event of misrepresentation of a material fact and provided:

The terms, conditions and exclusions of this Policy are hereby amended to provide coverage in accordance with the provisions of Air Carrier Regulations, C.R.C. c. 3; C.T.C. 1983-7 AIR subject to the following conditions: -

1.Such amendment is strictly in accordance with the Certificate of Insurance filed with the Secretary, Air Transport Committee, Canadian Transport Commission . . .

3.IN THE EVENT OF ANY CLAIM, AWARD, PAYMENT OF COST BEING PAID OR INCURRED BY THE COMPANY OR INSURERS . . . WHICH WOULD NOT HAVE BEEN PAID OR INCURRED BUT FOR THE PROVISIONS OF THIS ENDORSEMENT, THEN UPON SUCH MONIES BEING PAID THE INSURED SHALL IMMEDIATELY REIMBURSE THE COMPANY OR INSURERS THE ENTIRE AMOUNT SO PAID PLUS ANY INVESTIGATIVE, LEGAL, DEFENCE, INTEREST OR OTHER EXPENSES INCURRED BY THE COMPANY OR INSURERS.

4.The entire Policy shall be void if the Air Carrier has concealed or misrepresented any material fact or circumstance concerning the insurance or the subject thereof, or in case of any fraud, attempted fraud or false statement by the Air Carrier touching any matter relating to the insurance or the subject thereof, whether before or after a loss.

The contract of insurance drawn by the insurers reveals that the drafters possessed a detailed knowledge of the contents of the Regulations as they stood at the time of drafting. The policy placed the entire risk of misrepresentation by Taku, the insured, on its passengers.

The Accident

On September 27, 1986, a Beaver aircraft owned and operated by Taku crashed into a lake. At the time of the crash the plane carried five passengers rather than the four declared by Taku in its application. All the passengers including Mr. Passarell and Mr. Florence were killed.

The Procedural History

Coronation denied coverage under the policy after the accident on the grounds of the misrepresentation of Taku as to its accident record. Coronation commenced an action against Taku to have the policy declared void ab initio or, in the alternative, for a declaration that they were not liable to indemnify Taku.

The widows of the passengers and guardians ad litem of the children of Messrs. Florence and Passarell applied and were joined as defendants in the action. They counterclaimed for a declaration that Coronation was obliged to indemnify Taku. Alternatively they claimed that the appellant insurance companies were obliged to satisfy any judgments that might be obtained by the families of the passengers pursuant to the Family Compensation Act, R.S.B.C. 1979, c. 120, since Taku had become insolvent. It must be borne in mind that pursuant to s. 26 of the Insurance Act, R.S.B.C. 1979, c. 200, the insurance companies may raise any defences against the passengers which would be available against the insured Taku. The section provides that:

26. (1) Where a person incurs liability for injury or damage to the person or property of another, and is insured against that liability, and fails to satisfy a judgment awarding damages against him in respect of that liability, and an execution against him in respect of it is returned unsatisfied, the person entitled to the damages may recover by action against the insurer the amount of the judgment up to the face value of the policy, but subject to the same equities as the insurer would have if the judgment had been satisfied.

At trial, the respondents requested an adjournment. This was to permit them to bring an action in the Federal Court to quash the exclusion clauses pertaining to misrepresentation and the number of seats. These clauses had been approved by the A.T.C. as Regulations in August 1983. Strayer J. granted the respondents' application (Florence v. Air Transport Committee (1988), 34 Admin. L.R. 36 (F.C.T.D.)). He concluded that s. 20.3(3)(b) of the Air Carrier Regulations, which authorized the A.T.C. to give its approval to additional conditions, amounted to an unlawful delegation of the power of the Canadian Transport Commission (C.T.C.) to make regulations. He held that the C.T.C. could not redelegate the power it had been granted by Parliament to enact Regulations to another body. This finding of Strayer J. has not been challenged and it should be accepted for the purposes of this appeal.

Proceedings in the Courts Below

At Trial ((1989), [1989 CanLII 10400 (BC SC)](https://www.canlii.org/en/bc/bcsc/doc/1989/1989canlii10400/1989canlii10400.html), 37 C.C.L.I. 271)

At trial, Meredith J. found the contract of insurance void ab initio as Taku had violated its conditions by concealing and misrepresenting its accident record. He rejected arguments that the insurers could be taken to be aware of the misrepresentation because of the content of their own files. In reaching his decision he considered Strayer J.'s finding that s. 20.3(3)(b) was an improper delegation of discretion. As a result of this finding, any approval of conditions made pursuant to that section was invalid. In Meredith J.'s view, as a consequence of this invalidity the policy issued to Taku did not comply with the requirements of the Regulations. The C.T.C., therefore, should not have licensed the air carrier. He found that the failure to comply with the valid Regulations did not affect the validity of the contract between the appellant insurance companies and Taku.

Meredith J. expressed regret at the hardship imposed by the strict application of insurance contract law on the passengers. He granted costs to the respondents giving two reasons. First, he noted that the appellants must have known that Taku's licence depended upon proof of insurance against its own negligence for the protection of passengers. By drawing up a contract that placed the entire risk of misrepresentation of a material fact by the insured on the passengers, the insurers removed any financial self-interest they would have to investigate Taku. Second, Meredith J. found that the families were justified in attempting to establish that the insurers were aware of all material risks to the policy. Although the contract of insurance purported to be for their benefit, they had no means of knowing what had occurred when it was negotiated.

Court of Appeal ((1990), [1990 CanLII 1442 (BC CA)](https://www.canlii.org/en/bc/bcca/doc/1990/1990canlii1442/1990canlii1442.html), 48 B.C.L..R. (2d) 222)

Anderson J.A.

Anderson J.A. held that while Strayer J.'s decision did not retroactively amend the contract of insurance, the effect of the decision was that s. 20.3(3)(b) was void ab initio and thus, as a matter of law, it never existed. Endorsement 3 provides that the policy coverage is in accordance with the Regulations. Anderson J.A. interpreted this provision as an expression by the parties of the intended amendment of the contract so that it would always be in accord with the Regulations as they might be amended. As a result of Strayer J.'s judgment he read the endorsement as if the conditions which were invalidly approved by the A.T.C. were not present. Accordingly, he found the insurers liable on a valid policy.

Locke J.A.

Locke J.A. concurred with Anderson J.A. He found that since s. 20.3(3)(b) had been declared void the exclusions approved pursuant to it had vanished from the policy and the endorsement. Counsel for the insurers submitted that the policy would never have been issued to Taku without the conditions approved under the invalid Regulation. In response, Locke J.A. acknowledged the obvious conflict which existed between the contract law rights of the parties and the public policy expressed in the Regulations. He noted that the insurers had chosen to enter a highly regulated field. The decision to draft policies in accordance with "a sea of regulations" demonstrated that the insurers intended to adhere to whatever might be the valid regulations in force at any given time. Any subsequent court decision holding a regulation void he found to be a "hazard of doing business". The insurers therefore remained liable on the contract in compliance with the valid Regulations.

Gibbs J.A.

Gibbs J.A., dissenting, held that there was no link between the striking down of s. 20.3(3)(b) and the validity of the insurance contract. In his view, the impact of Strayer J.'s decision was only upon Taku's licence. He found that the fact that Taku had operated in a manner that contravened the requirements of the (valid) Air Carrier Regulations did not affect the validity of the contract between the appellants and Taku. Gibbs J.A. found that the endorsement was an incorporation by reference into the contract of the Regulations in the form the insurers believed them to be when issuing the policy. He rejected the submission that the insurers had any duty to investigate the air carrier. He also would have overturned the trial judge's award of costs to the families as he found that Meredith J.'s first reason ignored the fact that costs should relate to the "proceedings" and not to events leading to them. He added that he could not understand the logic of awarding costs to the families when the insurers had won the issue and there was no suggestion of improper conduct.

Issue

Do the appellants have a defence under common law doctrines of insurance law or alternatively by the terms of the contract to avoid liability for the claim?

The Purpose of the Regulations

The claims of the parties to this action should be addressed in the light of the regulatory context in which the insurance companies and Taku carried on their affairs. The aviation industry falls within the general category of transportation. The National Transportation Act, R.S.C. 1970, c. N-17, applies to air transport covered by the Aeronautics Act, R.S.C. 1970, c. A-3. Section 3 of the former Act expresses the over-riding rationale for regulation in this field:

3. It is hereby declared that an economic, efficient and adequate transportation system making the best use of all available modes of transportation at the lowest total cost is essential to protect the interests of the users of transportation . . .

I would note in passing that the word "safe" was added to the section in 1987.

Passengers, as users of transportation, are the intended beneficiaries of state intervention in this field.

To implement the goals of the legislation, the C.T.C. passed regulations designed to protect passengers by requiring that every commercial air carrier as a condition of receiving a licence obtain insurance coverage for passengers killed or injured as a result of the negligence of the carrier. In 1983, the C.T.C. approved amendments to the Air Carrier Regulations. Among other changes the amendments provided for an increase in the minimum insurance coverage required for each passenger from $40,000 to $300,000. The coverage was to be based upon the number of passenger seats. This substantial increase indicates the importance attached by the regulators to the goal of protecting the ability of passengers, or their dependants, to recover for an air carrier's negligence. These amendments also included a provision that attempted to constrain insurers from placing exclusions or conditions on liability. The text of those regulations is as follows:

20.3 (1) No air carrier shall provide a commercial air service unless it maintains for each incident related to the operation of that service

(a) liability insurance covering risks of injury to or death of passengers in an amount that is not less than the amount determined by multiplying $300,000 by the number of passenger seats on board the aircraft engaged in the commercial air service; and

(3) No air carrier shall take out liability insurance to comply with subsection (1) that contains an exclusion or waiver provision reducing insurance coverage for any incident below the applicable minima determined pursuant to that subsection, unless that provision

(a) is in respect of standard exclusion clauses adopted by the international aviation insurance community dealing with

(i) war, hi-jacking and other perils,

(ii) noise and pollution and other perils, and

(iii) aviation radioactive contamination; or

(b) has been approved in writing by the Committee.

20.4 (1) Every licensed air carrier and every air carrier on the eligible list shall file with the Committee a valid certificate of insurance in the form set out in Schedule XVI signed by an authorized officer or agent of its insurer.

(2) A certificate of insurance referred to in subsection (1) shall not be accepted by the Committee unless it

(a) demonstrates to the Committee's satisfaction that the requirements specified in section 20.3 have been met; and

(b) contains an undertaking by the insurer or its agent to notify the Secretary forthwith in writing when an insured air carrier's coverage

(i) is changed or is intended to be changed in a manner that results in the air carrier's failure to comply with section 20.3, or

(ii) is cancelled or is intended to be cancelled.

The "Committee" referred to in the Air Carrier Regulations is the A.T.C.

If the Air Carrier Regulations are breached the air carrier is liable to lose its licence and is guilty of an offence under s. 17 of the Aeronautics Act and s. 161 of the Regulations. Nonetheless it is evident that the Regulations were enacted for the protection and benefit of the passengers. Clearly their aim is to provide insurance coverage for passengers who are killed or injured as a result of the negligence of the air carrier. This regulatory regime demands the active participation of the insurance company. The insurer must draft a contract that satisfies these Regulations and it must submit a certificate of insurance to the C.T.C. The insurer benefits from the scheme as it forces all air carriers to purchase policies as a condition of licence.

Common Law Duties of Disclosure Placed on the Insurer and the Insured

Although it is the state which has determined by Regulations the conditions for the coverage to be provided by the contract of insurance, the appellants have raised two private law doctrines to deny liability. They cite both the insurance doctrine of uberrima fides and general contract principles to support the position that the policy issued to Taku was void ab initio. The uberrima fides doctrine is a longstanding tenet of insurance law which holds parties to an insurance contract to a standard of utmost good faith in their dealing. It places a heavy burden on those seeking insurance coverage to make full and complete disclosure of all relevant information when applying for a policy.

In argument, the appellants referred to and relied upon the doctrine as formulated by Lord Mansfield in Carter v. Boehm (1766), 3 Burr. 1905, 97 E.R. 1162. Mansfield L.J. understood the duty of disclosure to flow from the nature of a typical insurance contract. An insurer must accurately assess the risk of issuing a policy to determine an appropriate premium. Drawing on the experience of the insurance industry in eighteenth-century Britain, he assumed that the party applying for insurance had superior knowledge of the matters affecting the risk. Because of the disparity in access to relevant and essential information between the insurer and the insured, he found that a prospective insured had an obligation at common law to communicate all relevant factors to the insurer. He held that if an insured should fail, even inadvertently, to fulfil this duty then the policy would be void. He wrote (at p. 1909):

Insurance is a contract upon speculation.

The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist, and to induce him to estimate the risque, as if it did not exist.

The keeping back such circumstance is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the under-writer is deceived, and the policy is void; because the risque run is really different from the risque understood and intended to be run, at the time of the agreement.

The insured has no obligation to provide any information that is generally available. The insurer may not rely on an applicant to provide information on prevailing circumstances in an industry or to do the insurer's work of evaluating the risk. In Lord Mansfield's words (at p. 1910):

There are many matters, as to which the insured may be innocently silent -- he need not mention what the under-writer knows -- Scientia utrinque par pares contrahentes facit.

An under-writer can not insist that the policy is void, because the insured did not tell him what he actually knew; what way soever he came to the knowledge.

The insured need not mention what the under-writer ought to know; what he takes upon himself the knowledge of; or what he waves being informed of.

When Lord Mansfield set the principle governing insurance contracts the world was a little different. It was a simpler if not, in some respects, a gentler place. The business of insurance was very different. Then policies of insurance were issued most frequently to cover a vessel, or its cargo. The contract was issued for the benefit of the insured. It was the owner as insured who would have the detailed knowledge of the vessel or its cargo. No one would know better than the owner of the incipient dry rot or the tendency of the ship to take on water in a fresh breeze. This was knowledge that the insurance company could not readily attain and it was appropriate to relieve the insurer of all responsibility for obtaining it. That principle held true in 1766. It can hold true today where the policy is for the exclusive benefit of the insured.

However, I do not think it should be applicable to the situation presented in this case. Here the insurer was entering into a field known to be highly regulated. The Regulations provided that before a commercial air carrier could obtain its licence it was required to obtain and file proof of insurance coverage for its passengers to the extent of $300,000 per passenger.

Thus the Regulations require a carrier to have insurance which will benefit members of the public flying as passengers. These members of the public who are beneficiaries of the insurance are excluded from the negotiations leading to the placement of the policy. It is they who are at risk. It is they who are purportedly the beneficiaries of the policy yet it is they whose claims can be so easily frustrated.

The Regulations provide that insurance for the passengers is mandatory. They represent public policy. The insurance is primarily for the benefit of the flying public and not for the air carrier. If it can be so readily frustrated by the automatic application of principles enunciated by a court two hundred years ago in a different time and circumstances then the law seems grossly unfair. It was the court not the legislature which expounded the principles applicable to the placement of insurance policies in 1766. It does not seem inappropriate for a court to set out the principles applicable in today's society.

The present situation can really be stated in this way. Insurance for passengers has been made a condition for licensing air carriers. A carrier in order to obtain a licence must seek out an insurer and obtain a policy. Without a policy they cannot fly. The Regulations provide the insurance companies with a captive clientele. Yet, on the strength of Lord Mansfield's doctrine the insurer is not bound to pay in case of death or injury of a passenger resulting from the negligence of the carrier if that carrier misrepresented the extent of its accident history on the application. This is so even if the insurer's own records would disclose the misrepresentation. It is a situation that discourages both investigation by the insurer and disclosure by the insured. In a highly regulated, and potentially dangerous, field the passenger is left unprotected.

Both the risk and the unfairness may be greater for passengers flying with smaller carriers in isolated areas of the country. They may not have an alternative means of transportation available to them. It is unlikely that passengers boarding aircraft in remote localities will be able to assess the financial condition of the carrier. The carrier may not have the assets of the larger airlines. As a result it might not be able to meet the claims made on behalf of its passengers. Without valid insurance the passenger claimants may not be able to recover anything for their losses. Nor will they be able to obtain their own insurance from insurance vending machines, so much in evidence in larger airports. They are very vulnerable and they are at risk. Yet they will often be unprotected and the Regulations readily frustrated.

I would think that where the policy of insurance required by statute or regulation is primarily for the benefit of members of the flying public and not just the insured, the insurer must take some basic steps to investigate the flying record of the air carrier applying for insurance. At a minimum, it should review its own files on the applicant. Further the insurer should make a search of the public record of accidents of the air carrier.

The heavily regulated nature of the aviation industry makes accident histories easily available. The regulators collect information for all such incidents even when they choose not to investigate. In 1984, the Canadian Aviation Safety Board was created by an Act of Parliament. The Canadian Aviation Safety Board Regulations provide for the mandatory reporting of all incidents in ss. 3(1) and 5(3) (SOR/84-929 as amended by SOR/87-642). Although no evidence was presented on this point it is apparent that it was the salutary practice of this board, also adopted by its successor the Canadian Transportation Accident Investigation and Safety Board, to store this information on a database which is made accessible to the public. The database includes all accidents occurring since 1976.

Surely the imposition of these modest requirements on the insurer is not placing too great a burden on an insurer entering the field of aviation insurance in which the passengers will be the beneficiaries. In this case the insurers had within their own grasp information which would have provided a more accurate assessment of the risk entailed by the policy. At a minimum, the insurers should have scrutinized their own records before issuing the policy. They did not meet the standards required of an insurer operating in this field. Having failed in exercising the required standard of diligence, the insurers cannot escape liability to the passengers on the policy because the insured also failed in its duty.

I find some support for the position I have taken in Canadian Indemnity Co. v. Canadian Johns-Manville Co., 1990 CanLII 78 (SCC), [1990] 2 S.C.R. 549. There, Gonthier J. noted that while the duties imposed by the doctrine on the insured have frequently attracted comment, the corresponding obligations of the insurer have received less attention. In that case an insured did not give a report in its possession on the health risks posed by asbestos to the insurer. At that time the dangers of asbestos were known in the industry. Gonthier J. commented (at pp. 619-20) that:

. . . the law will not forgive the insured its failure to disclose material facts unless the insurer knew of such facts (and here it clearly did not) or can be presumed to know because the matter is of the type that would be notorious to the reasonably competent underwriter. As stated earlier, an insurer which is underwriting risks in an industry for the first time will have to find ways to bring its knowledge up to the minimum level. It cannot simply rely on the insured and later place the blame on that insured for the gaps in knowledge of the risk. To do so would not be fraudulent, but it would certainly amount to bad faith.

Accordingly, it is in the interests of stability of such contracts that the insured be able to rely on the diligence and professionalism of the insurer so as to avoid having the insurance contract annulled on the basis of facts which were not disclosed but which should have been notorious to the insurer had it acquired the level of knowledge of a reasonably competent underwriter.

I believe that in the case at bar the information available in the files of the insurers and that available to the public concerning the accident record of Taku should be considered information that an insurer would be presumed to know. It is information that would readily become notorious to a reasonably competent underwriter working in the field of aviation. Thus the appellant insurers failed to meet the duty imposed by the Canadian Indemnity case.

The insurers failed to meet the relatively light and minimal duty of investigation of the accident record of the applicant for insurance that rests upon an insurer providing coverage for passengers. As a result of this finding it is not necessary, on the issue of the accident record, to consider the effect of the finding of Strayer J. that the Regulations set out earlier were invalid. No matter what the state of the Regulations the insurers cannot escape liability on the grounds that the insured failed to disclose its accident record.

The appropriate standard of diligence for an insurer operating in this field demands an independent investigation by the insurer of the accident record of the applicant before issuing a policy. The insurer should not be able to readily avoid this duty.

However, whether or not the case at bar comes within the purview of Canadian Indemnity Co., supra, the standard of inquiry I have recommended represents no more than a reasonable incremental change in the existing law. It has been said that one of the greatest attributes of the common law is its ability to change and to respond to new social pressures and the evolving requirements of the modern community. If that be so, then judge-made law should within appropriate limits advance with the times. Lord Mansfield could not have foreseen the statutorily required insurance policy which is under consideration in this case. He would not have conceived of public policy requiring protection for third parties (passengers) by an air carrier. In the circumstances it is I think appropriate to provide guidelines for those in the business of providing state-mandated insurance for passengers of air carriers. To that narrow extent it is I believe appropriate to vary slightly the position taken in 1766. It constitutes no more than a reasonable incremental change.

The Number of Passenger Seats

When the accident occurred the DHC-2 Beaver in question was equipped with five passenger seats. Taku, however, requested coverage for only four.

The question of the number of passengers to be covered by the policy raises very different considerations from those considered with regard to the accident record of a carrier. It is really only the owner who can be aware of the number of passengers to be carried. An owner might have determined that it would be more advantageous to carry additional cargo than a passenger. Only the owner can know that modifications to the seating configuration have been made and what the insurance requirements may be. Thus when Taku specifically sought coverage for only four passengers the insurers were entitled to rely upon this representation without further investigation. This is the very sort of information that Lord Mansfield described as being in the special and unique knowledge of the owner.

The load capacity of a particular airplane and the number of passengers to be carried is highly relevant information that is of critical importance to the insurer. It is essential information the insurer must have in order to assess the risk and set the premium. It is the owner that sets out the number of passengers to be covered. By requiring the insured to carry only the specific number of passengers declared in advance, the insurer is merely requesting the insured to operate the aircraft in compliance with the carrier's own specified requirements.

Only Taku would know of seating changes it might be making. It requested coverage for only four passenger seats. The insurer was entitled to rely on the representation of Taku. The insurer need not continuously monitor the number of passenger seats the insured provides in an aircraft as a result of changes made in the seating configuration. It is not a violation of the common law duty outlined above for an insurer to limit liability to coverage for the number of seats specifically requested by the carrier in applying for insurance.

I concur with my colleague Justice McLachlin that the contract term which limits liability to an agreed number of passenger seats is not affected by the Federal Court decision. The insured violated this term of the contract. Although the endorsement purported to amend the contract to bring it into accordance with the Regulations, that amendment was subject to a clause contained in the Certificate of Insurance limiting liability to the declared number of passenger seats. The contract is, therefore, void ab initio against Taku.

Although I have reached this conclusion I must add that I cannot concur in the reasoning of Gibbs J.A. accepted by my colleague. Gibbs J.A. found that the interpretation of the majority that the endorsement amended the contract to conform to the valid Regulations introduced a "commercial absurdity" into the policy. He took the position that it should be assumed that the parties intended the premium set between the insurer and insured to remain fixed regardless of how the risk might vary either as a result of a change in the Regulations at the "whim of a regulator" or by a decision of the court. I cannot accept this position. An insurer is always at "the whim" of a court's decision. For example a court may be called upon to give an interpretation of a policy or a statute which affects the position of the insurer. Nonetheless, the insurer must accept the risk of a court's interpretation as an aspect of doing business. The effects of a court decision are as binding upon an insurer as on any other member of the community who may be affected by an interpretation of a statute, a regulation, or a contract clause.

The conclusion that either amendments or the passage of new Regulations would lead to "commercial absurdity" for an insurer may also be discounted. The drafters themselves recognized the possibility that additional liabilities might arise through the endorsement. This recognition is evident from clause 3 which provides that the insured is responsible to indemnify the insurer for any liabilities incurred by the endorsement. The contracting parties acknowledged and accepted this risk of amendment or change in the Regulations by the terms of the contract of insurance.

In any event, a company insuring an air carrier must be aware it is entering one of the most highly regulated commercial fields. The Regulations are not passed on the "whim" of the regulator but usually respond to needs and requirements for the safety of those flying. The amending of Regulations or the passage of new Regulations is as much a risk of doing business in this field as a court's interpretation of a policy. It must not be forgotten that the insurer drafts the contract. It is the insurer that can make provisions to limit or exclude its liability in case of changed circumstances.

The respondents' statutory right of action is subject to any defence the insurer has against Taku according to the provisions of the Insurance Act, s. 26(1). The insurer could defend any claim brought by either Taku or the blameless passengers on this basis. The appellants, therefore, must succeed. The result is unfortunate and makes the Regulations meaningless from the point of view of the passengers. The passengers are at risk. They will remain at risk until either the B.C. Insurance Act or the Regulations are amended; there is no alternative to this result.

The Current Regulation

In response to the Federal Court ruling on the validity of s. 20.3(3)(b) the regulators have added to those exclusions allowed (see Air Transportation Regulations, SOR/88-58, s. 7). The relevant subsections now read:

7. . . .

(3) No air carrier shall take out liability insurance to comply with subsection (1) that contains an exclusion or waiver provision reducing insurance coverage for any incident below the applicable minima determined pursuant to that subsection, unless that provision

(d) is to the effect that the entire policy shall be void if the air carrier has concealed or misrepresented any material fact or circumstance concerning the insurance or the subject thereof or if there has been any fraud, attempted fraud or false statement by the air carrier touching any matter relating to the insurance or the subject thereof, whether before or after a loss.

The regulators did not see fit to allow an exclusion similar to the clause in this contract which restricts the number of passengers covered. It appears, however, that any deception by the insured as to the number of seats in use in the aircraft would be caught by s. 7(3)(d).

The existing regulatory scheme, like the earlier one, appears on the surface to fulfil the goal of protecting the recovery rights of passengers and their families. In effect, however, the exclusions may well make the protection illusory. The present Regulations continue to discourage investigation and disclosure. I would simply observe that this may again create a tragic situation for passengers. As third parties they have no way of knowing whether the carrier has dealt honestly and completely with the insurer. Furthermore, passengers will not be aware of how many seats the carrier has actually insured. Until either the Regulations or the B.C. Insurance Act are amended the potential for tragedy will continue. In the meantime as a minimal protection of the flying public it would be more appropriate for the Regulations to require the carriers flying smaller aircrafts to post notices informing passengers of the number of seats approved for insurance purposes. This is a practice that is often required for other carrying devices from elevators to buses. It would provide more protection for passengers than the present Regulations.

Costs

I agree with the disposition of costs proposed by my colleague McLachlin J. except that I would order the appellants to pay the costs of the respondents before this Court as well as the courts below.

Meredith J. awarded costs to the respondents at trial. The Court of Appeal also awarded costs at trial and on appeal at an increased scale because of the difficulty of the issue and the significance of its resolution to the aviation industry. The courts below exercised their discretion judicially in this matter and this Court should not alter the results.

The conduct of the insurers in this transaction supports an award of costs to the respondents. The appellants voluntarily entered into a highly regulated field. They drafted the contract with a firm grasp of the applicable Regulations. As evidence of this they were instrumental in gaining approval for conditions to this policy which, in the event, circumvented a minimum requirement of insurance per passenger seat envisaged by the Regulations.

The insurers failed to take the simple step of examining their own files for a record of Taku before issuing the policy. This lapse occurred despite the fact that the name "rang a bell" with an employee involved in the transaction.

The families legitimately pursued this litigation. As third parties to the contract they did not have first-hand knowledge of the circumstances of its negotiation. In initiating the action they could reasonably have hoped to succeed in proving that the insurers did know of the prior history of Taku when issuing the policy and that in fact there was no misrepresentation.

Finally, the appellants applied for leave and obtained it on the basis of the importance of the issue to the insurance industry. This Court has previously awarded costs to a private individual in such circumstances in Roberge v. Bolduc, 1991 CanLII 83 (SCC), [1991] 1 S.C.R. 374. The case at bar is significant to the insurance industry but there is no reason to require the unfortunate victims of an air disaster to pay the appellants' costs or indeed to be deprived of their own costs. They are the victims of an inadequate regulatory scheme. The insurers are not innocent parties on whom a fraud was perpetrated but rather companies that were so eager for a premium they failed even to examine their own records.

Disposition

I would allow the appeal and dismiss the action but for reasons different from those expressed by Gibbs J.A. and my colleague McLachlin J. The respondents should have their costs throughout including the costs in this Court.

//Sopinka J.//

The following are the reasons delivered by

Sopinka J. -- I have had the advantage of reading the reasons of Justices McLachlin and Cory in this matter and agree that the appeal should be allowed. As to how I arrive at that conclusion and as to the disposition of costs, I concur with the reasons of McLachlin J. While I would otherwise be drawn to the general approach of Cory J., the legislative context of this appeal prevents me from agreeing with his analysis.

Cory J. focuses his reasons on the protection of the flying public through the legislative imposition of public liability aviation insurance. While this is undoubtedly a laudable goal, I draw different conclusions from the extensive regulation and mandatory insurance provisions involved in air carrier licensing. The legislation in issue in this appeal explicitly regulates the attributes of insurance an air carrier must hold in order to be licensed. It provides not only the amount of insurance that must be carried but also provides the terms under which the contract of insurance can be avoided. At the time of contracting and at the present time, the regulators have seen fit to allow the contracting parties to put the ultimate risk of material concealment and misrepresentation on the flying public and not on the insurer. The current Regulation states that the parties are free to contract in regard to an exclusion clause:

. . . to the effect that the entire policy shall be void if the air carrier has concealed or misrepresented any material fact or circumstance concerning the insurance or the subject thereof or if there has been any . . . false statement by the air carrier touching any matter relating to the insurance or the subject thereof . . . [Air Transportation Regulations, SOR/88-58, s. 7(3)(d)].

While I may not agree that the public is the proper risk bearer, it is an inevitable consequence of the ability to include material concealment and misrepresentation exclusions in aviation insurance contracts. The insurer therefore has the statutory ability to contract out of any risk investigation and place the risk of material concealment or misrepresentation on the insured and thus ultimately on the flying public.

The Canadian Transport Commission (the "C.T.C.") (now the National Transportation Agency) is the regulator in this field. It is a specialized body whose sole duty is to regulate transportation. It has a mandate to balance the needs of the public and the transportation industry together with the diversity of transportation problems presented by this vast country. Such is a task for which this Court is ill-equipped. If, as is the case on this issue, the C.T.C. has made a decision, it is not for this Court to circumvent that decision under the guise of a "reasonable incremental change". It does no good to alter the law of contract between insurers and insured simply to respond to an unsympathetic set of facts. In such a heavily regulated environment a decision as to whether an insurer should be required to conduct an independent investigation of the accident record of an insured before issuing a policy, as is required by Cory J., is a policy decision for the C.T.C. to make and not this Court. Such a requirement will inevitably raise transaction costs and thus insurance premiums. As well, the insurance industry may decide to refuse to insure small carriers due to the costs of investigation; this would prevent the carrier from operating. It should also be noted that s. 3 of the then National Transportation Act, R.S.C. 1970, c. N-17, declared that one of the principles of Canada's national transportation policy was that "an economic, efficient and adequate transportation system . . . at the lowest total cost [was] essential to protect the interests of the users of transportation" (emphasis added). A similar declaration is made in s. 3 of the current legislation (S.C. 1987, c. 34). Finally, the purpose of the data kept by the various aviation safety boards is not to provide data for the insurance industry but to assist in the prevention of future accidents. Should such data be incorrect or incomplete, the resulting errors should not be borne by the insurance industry. All of these issues are complex and multifaceted; they are also issues upon which this Court has no evidence to determine the appropriate balance that should be struck but which the C.T.C. was specifically set up to investigate and consider. We did not have the benefit of submissions from the C.T.C. as to what motivated its decision. We do not know, therefore, how shifting the duty of disclosure would affect the industry. For these reasons I feel that the "reasonable incremental change" as proposed by Cory J. is inappropriate for the Court to impose on the insurance industry.

The trial judge found that the prior accident record of Taku was not within the knowledge of the insurers. He also rejected any imputed knowledge on the part of the insurers. He specifically concluded that the insurers "are not to be taken to have been aware of the facts concealed or misrepresented either by virtue of the contents of [their] own files or by virtue of such information that there may have been in the hands of [their broker]" (1989 CanLII 10400 (BC SC), 37 C.C.L.I. 271, at p. 278). Thus the accident record of the insured was not a notorious fact that should have been known to a competent insurer but was particularly within the personal knowledge of the insured. The doctrine of uberrima fides, therefore, does not help the insured. The reliance of Cory J. on Canadian Indemnity Co. v. Canadian Johns-Manville Co., 1990 CanLII 78 (SCC), [1990] 2 S.C.R. 549, at pp. 619-20, to support a duty of investigation by the insurer is somewhat misplaced as that case primarily involved the interpretation of provisions provided in the Quebec Civil Code. Statutes in other provinces have left it to the parties to contract in regard to the allocation of the duty to investigate in the insurance context. Even so, Gonthier J. makes it clear in Canadian Indemnity, supra, that "the law will not forgive the insured its failure to disclose material facts unless the insurer knew of such facts . . . or can be presumed to know" (p. 619). The trial judge in this case clearly finds that the insurer did not know and cannot be presumed to have known the accident record of the insured. The failure of an insurer to investigate a risk should not, by itself, deprive the insurer of the right to avoid the contract on the basis of a failure by the insured to disclose material facts. In Ford v. Dominion of Canada General Insurance Co., 1991 CanLII 118 (SCC), [1991] 1 S.C.R. 136, Cory J., speaking for the Court, agreed with the minority reasons of Philp J.A. in the Manitoba Court of Appeal which provided that:

A contract of insurance is uberrima fides; utmost good faith must be observed by both parties. It has been said that the relationship between an insurer and an insured is one in which the insurer knows nothing of the risk to be undertaken, and the insured knows everything. From this relationship arises the obligation of the insured to disclose all material facts so that the risk the insurer undertakes will be the risk he intends to undertake.

This fundamental principle of insurance law has been applied by the courts for over 200 years. . . .

This is the principle that DeGraves, J., applied in arriving at his conclusion that Ford failed to make full disclosure of all material facts, and that, therefore, his policies of insurance were void. [(1989), 1989 CanLII 7494 (MB CA), 62 Man. R. (2d) 244, at p. 249.]

As the C.T.C. and the legislation at issue in this case allow the parties to contract freely in relation to the allocation of the risk of material concealment and misrepresentations (and hence the duty to investigate risks), I see no reason to interfere with that freedom just because I might have decided the issue differently. It is the duty of the regulators to decide who can and who cannot bear such risks. The regulators have spoken and it is not for this Court to undermine that decision.

//McLachlin J.//

The reasons of McLachlin and Stevenson JJ. were delivered by

McLachlin J. -- I would allow this appeal largely for the reasons enunciated by Gibbs J.A. in the Court of Appeal (1990), 1990 CanLII 1442 (BC CA), 48 B.C.L.R. (2d) 222, except for his ruling on costs.

In my view, Gibbs J.A. correctly concluded that the rights of the claimant families are grounded in the contract of insurance between Taku and the insurers (Coronation and Eagle Star), which cannot be taken to have been altered by the ruling in the Federal Court: Florence v. Air Transport Committee (1988), 34 Admin. L.R. 36. That contract excluded the liability for which the families contend.

As Gibbs J.A. observed in his reasons, the families' claim against the insurers is based on the statutory right to sue found in s. 26 of the British Columbia Insurance Act, R.S.B.C. 1979, c. 200. That section provides:

26. (1) Where a person incurs liability for injury or damage to the person and property of another, and is insured against that liability, and fails to satisfy a judgment awarding damages against him in respect of that liability, and an execution against him in respect of it is returned unsatisfied, the person entitled to the damages may recover by action against the insurer the amount of the judgment up to the face value of the policy, but subject to the same equities as the insurer would have if the judgment had been satisfied. [Emphasis added.]

Counsel for the families concedes that under the contract Taku could not succeed against the insurer because of its misrepresentations. Since the families' right to sue is subject to the same equities as the insurers could assert against Taku, it follows that the families cannot succeed.

The Court of Appeal was faced with an argument that a tort action by a third party against an insurer should be recognized, as it purportedly has been in some cases in California. This particular issue was not urged before this Court, and I therefore make no comment on that part of Gibbs J.A.'s reasons.

I would not depart from the trial judge's conclusion that the plaintiffs should bear the costs of the proceedings at trial, and would extend this to the appeal below. Each party should bear its own costs of appeal to this Court.

I would allow the appeal.

Appeal allowed with costs to respondents.

Solicitors for the appellants: Lane, Allen, Toronto; Edwards, Kenny & Bray, Vancouver.

Solicitors for the respondents Florence: Ladner, Downs, Vancouver.

Solicitors for the respondents Passarell: Lauk & Associates, Vancouver.