Farmers' Mutual Insurance Company (Lindsay) v Ontario (Finance), 2017 ONSC 1192

2017 ONSC 1192

Court File and Parties

COURT FILE NO.: CV-16-549071 DATE: 20170302 SUPERIOR COURT OF JUSTICE – ONTARIO

RE: FARMERS' MUTUAL INSURANCE COMPANY (LINDSAY), Applicant AND: HER MAJESTY THE QUEEN IN RIGHT OF ONTARIO AS REPRESENTED BY THE MINISTER OF FINANCE and THE DOMINION OF CANADA GENERAL INSURANCE COMPANY, Respondents

BEFORE: Stinson J.

COUNSEL: Lee Samis and Jenna Meth, for the Applicant John Friendly, for the Respondent the Minister of Finance

HEARD at Toronto: January 19 and 20, 2017

Endorsement

Background

1On June 17, 2009, Samuel Windrem's 4-wheel all-terrain vehicle (“ATV”) was stolen from his barn, near Lindsay, Ontario. Mr. Windrem had insured the ATV under a motor vehicle liability policy issued by Farmers. Mr. Windrem reported the loss to his insurer.

2By the beginning of August 2009, the ATV had not been recovered and its location was unknown. On August 7, 2009, Mr. Windrem signed an automobile Proof of Loss Declaration and, in exchange for a payment of $5,915, transferred his rights to the ATV to Farmers. On August 12, 2009, Farmers registered its ownership of the ATV with the Ontario Ministry of Transportation under the Off-Road Vehicles Act.

3Just two days later, on August 14, 2009, on a rural property in Clearview Township, Ontario, some 200 miles away from Lindsay, 11-year-old Chase Nicholson suffered a serious head injury while on the ATV. There is no direct evidence with respect to how he came to be on the ATV or how it came to be in that location.

4At the time of the accident, Chase's parents were separated and he was living with his mother and her parents. Neither of Chase's parents had car insurance, but his grandfather did, with Dominion of Canada General Insurance Company. As a result, a claim for no-fault benefits under the Statutory Accident Benefits Schedule (“SABS”) was filed on his behalf with Dominion.

5In light of Dominion’s arguable nexus with the claimant and consistent with its "pay first – dispute later" obligations, Dominion began to adjust and pay Chase's SABS claim. Dominion disputed its liability to pay the claim, however, and it commenced a priority dispute with Her Majesty the Queen in right of Ontario as represented by the Minister of Finance, asserting that the Motor Vehicle Accident Claims Fund should be responsible for paying the claim. In turn, the Fund served a priority dispute notice on Farmers, asserting that Chase was entitled to payment of SABS benefits pursuant to one or more policies of insurance that Farmers had in place at the time of the accident.

6The priority disputes among Dominion, the Fund and Farmers ultimately proceeded to arbitration. Subsequent to the commencement of the arbitration, the parties agreed that Dominion was not the priority insurer because Chase was not principally dependent upon his grandfather. Accordingly, the arbitration was dismissed as against Dominion and the matter proceeded to a hearing involving only the Fund and Farmers.

7In an award released February 24, 2016, the Arbitrator concluded that the ATV was covered for SABS benefits under a commercial umbrella liability policy issued by Farmers. He therefore concluded that Farmers was the priority insurer responsible for payment of SABS benefits to Chase.

8Pursuant to the right of appeal contained in the parties' arbitration agreement, Farmers has brought an appeal to this Court and seeks an order setting aside the arbitration award and a declaration that the Fund is the priority insurer responsible for payment of SABS benefits to Chase. The Fund has brought a cross-appeal.

9For the reasons that follow, I conclude that the decision of the Arbitrator does not meet the test of reasonableness. Nevertheless, for different reasons I conclude that the Arbitrator reached the correct disposition of the dispute before him. I would therefore dismiss Farmers’ appeal, allow the cross-appeal and declare that Farmers is the priority insurer.

The insurance policies

10Farmers was and is a party to the arbitration and to this appeal in its capacity as an insurer. In relation to the underlying facts, and the three policies considered by the Arbitrator, Farmers had the status of both insurer and insured.

11At the relevant time, Farmers had a program of insurance on vehicles it operated in the course of its business and also on other liability risks associated with any business that carries on commercial operations. This program of insurance had three separate policies, all issued by Farmers as the insurer, with Farmers as the named insured, as follows:

a) A motor vehicle insurance policy, in the standard Ontario Automobile Policy form OAP 1 (“OAP policy”) providing coverage for defined or described vehicles. The coverage provided by this policy included coverage for damage to insured vehicles, liability coverage for losses arising out of the vehicles’ use and statutory accident benefits coverage. The liability coverage under this policy was $2,000,000. This policy also had "Newly Acquired Automobiles" coverage, which has some bearing on the issues before the court. b) A commercial general liability insurance policy (“CGL policy”) providing coverage mostly for liability not associated with the use or operation of automobiles, but which included an extension for liability arising out of the operation of non-owned vehicles. The liability coverage under this policy was $2,000,000. c) A commercial umbrella liability policy (“Umbrella policy”) that provided an additional “excess” layer of liability coverage above the limits of either of the other policies listed above.

12At the time of the accident, Farmers had listed two vehicles on the OAP policy that it owned and used in its business. It had not, however, taken any steps to add the ATV to the OAP policy, because it was not Farmers’ practice to do so for vehicles it came to own as a result of payment of theft claims. Thus, at the time of the accident, although Farmers was the owner of the ATV, the ATV was not expressly listed as an insured vehicle under any of the three policies.

The decision of the Arbitrator

13The first question addressed by the Arbitrator was whether the ATV could be considered an automobile, based on the reasoning that if an ATV was not an automobile, it could not be insured for the purposes of SABS benefits; in that event, neither Farmers nor the Fund would have an obligation to pay SABS benefits to the claimant. The Arbitrator applied the test in Adams v. Pineland Amusements Ltd., 2007 ONCA 844. He found that the ATV fell within the enlarged definition of automobile in s. 224(1) of the Insurance Act, R.S.O. 1990, c. I.8, because, under s. 15 of the Off-Road Vehicles Act, R.S.O. 1990, c. O.4 and Ontario Regulation 863, it was required to be insured under a motor vehicle liability policy. As such, for purposes of s. 224(1) of the Insurance Act, it was “a motor vehicle required under [an] Act to be insured under a motor vehicle liability policy” and hence fell within the definition of “automobile” in that section.

14Although one of the grounds of appeal initially advanced by Farmers was that the Arbitrator had erred in finding the ATV to be an automobile under the Insurance Act, the parties now agree that point is no longer in dispute.

15Next, the Arbitrator examined the question whether there was motor vehicle liability coverage, and hence SABS benefits coverage, for the ATV under the OAP policy. He determined that, since the ATV was not expressly listed as a covered vehicle, the question whether coverage existed under the OAP policy came down to whether the ATV came within the scope of the "Newly Acquired Automobiles" coverage provided in s. 2.2.1 of the OAP policy. Section 2.2.1 included the following pre-condition for the availability of coverage for a newly acquired vehicle: “we insure all automobiles that you own.” Thus, one of the prerequisites for coverage under s. 2.2.1 was that the insurer (Farmers) insure all automobiles owned by the insured (Farmers).

16At the arbitration hearing Farmers presented evidence to prove that, in August 2009 (the same time as the accident involving the ATV), it was the registered owner of a 2001 Ram truck. The Ram truck had initially been insured by its former owner under an automobile insurance policy issued by Farmers. The truck was stolen. Farmers paid the claim, and acquired and registered its ownership interest in the truck. It did not insure the truck under the OAP policy. The truck was subsequently located. The Arbitrator found as a fact that in August 2009 the truck was an operating vehicle. He concluded, therefore, that at the relevant time the truck was an automobile owned by Farmers (as owner) that was not insured by Farmers (as insurer).

17Based on the foregoing facts, the Arbitrator found that Farmers (as owner) did not insure all the automobiles that it owned, with Farmers (as insurer). He therefore concluded that the Newly Acquired Automobiles provision in the Farmers OAP did not provide coverage for the ATV, and thus the OAP policy did not respond to provide SABS coverage.

18I should note that, in relation to the Newly Acquired Automobiles provision, the Fund argued at the arbitration hearing that the 2001 Ram truck was insured under the Umbrella policy issued by Farmers. The Fund therefore contended that all vehicles owned by Farmers – including the 2001 Ram truck – were insured by Farmers as insurer (albeit under the Umbrella policy, not the OAP policy). In his reasons, the Arbitrator indicated that he would address this argument when he considered the applicability of the Umbrella policy. Despite that indication, however, he did not return to this subject later in his reasons. This omission is the subject of the cross-appeal by the Fund.

19Next, the Arbitrator considered the CGL policy. It contained an express exclusion for non-owned automobiles. Since, at the time of the accident, the ATV was owned by Farmers, the Arbitrator concluded that the CGL policy was inapplicable.

20Finally, the Arbitrator turned to the Umbrella policy. He first considered whether the Umbrella policy was an "owner's policy" within the meaning of that term as used in s. 1 of the Insurance Act, that is"a motor vehicle liability policy insuring a person in respect of the ownership, use or operation of an automobile owned by that person.” He reviewed two lines of authority addressing this subject. Ultimately, he chose to follow and apply Guardian Insurance Co. of Canada v. York Fire and Casualty Insurance Co., [1989] O.J. 2233, Avis Rent A Car System, Inc. v. Certas Direct Insurance Co. (2005), 75 O.R. (3d) 421 (C.A.) and ING insurance Co. of Canada v. Lombard General Insurance Co. of Canada, 2009 ONCA 570. He therefore concluded that the wording in Farmers' Umbrella policy was sufficient to make it an “owner's policy” of motor vehicle liability insurance.

21The Arbitrator then considered the applicability of s. 268(1) of the Insurance Act, which provides as follows:

Every contract evidenced by a motor vehicle liability policy … shall be deemed to provide for the statutory accident benefits set out in the Schedule.

Having found that Farmers' Umbrella policy was an “owner's policy” of motor vehicle liability insurance and thus a “contract evidenced by a motor vehicle liability policy”, the Arbitrator then applied the deeming language in s. 268(1) to conclude that the Umbrella policy included SABS benefits coverage.

22The Arbitrator then turned to the question whether the Umbrella policy covered the ATV on the date of the accident. In answering that question, he interpreted the definition of "automobile" set out in the definition section of the Umbrella policy, which reads as follows:

Automobile means any self-propelled land motor vehicle, trailer or semitrailer (including machinery, apparatus or equipment attached thereto), which is principally designed and is being used for transportation of persons or property on public roads.

23He concluded that the ATV came within that definition, reasoning that the term "principally" did not mean exclusively and that the definition was broad enough to include a vehicle like an ATV since its design made it capable of being used on public roads, noting that ATVs are commonly used on public roads.

24Next, the Arbitrator rejected the submission of Farmers that the Umbrella policy did not cover the ATV since it was an excess policy and there was no coverage for the ATV in the underlying OAP policy. He applied the following language in Endorsement No. 4 of the Umbrella policy:

In the event of the failure by the insured to maintain [the underlying] policies in force … the insurance afforded by this policy shall apply in the same manner it would have applied had such policies been so maintained in force.

The Arbitrator noted that Farmers maintained the OAP in force, albeit not in respect of the ATV. He further noted that, by reason of the words quoted above, the insurance in the Umbrella policy would still apply even if the insured had not maintained the underlying insurance, and reasoned that the wording excused any failure to maintain the underlying insurance. He concluded that the insurance in the Umbrella policy remained applicable.

25To summarize, the Arbitrator held that: (1) the Umbrella policy was an owner's policy of motor vehicle liability insurance which is deemed to provide SABS benefits coverage; (2) the ATV came within the definition of automobile in the Umbrella policy; and (3) the automobile coverage available under the Umbrella policy was not affected by the fact that there was no coverage for the ATV in the underlying insurance – the OAP policy. He therefore concluded that the ATV was covered for SABS benefits under Farmers' Umbrella policy, and consequently Farmers is the priority insurer. He therefore directed that Farmers was responsible to reimburse Dominion for SABS benefits paid to the claimant to date and that Farmers was also responsible for payment of future SABS benefits, if any.

Grounds of appeal

26In its factum, Farmers asserted four principal grounds of appeal, as follows:

1. The Arbitrator erroneously found that the ATV was an automobile under the Insurance Act. In light of the mandatory insurance provisions of the Off-Road Vehicles Act, the parties agree that the ATV falls within the extended definition of automobile that defines losses that give rise to payment of benefits under the SABS. As a result, this argument was not advanced before me.
2. The Arbitrator erred when he found that the ATV was an automobile defined in the Umbrella policy when he concluded that it met the definition of a motor vehicle principally designed and used on public roads.
3. The Arbitrator erred when he found that the ATV was covered by the excess automobile liability endorsement in the Umbrella policy, despite finding that it was not covered by the underlying OAP policy.
4. The Arbitrator erred in finding the Umbrella policy amounted to a motor vehicle liability policy that provided for the payment of SABS benefits.

27For its part, the Fund opposes Farmers’ appeal and asserts that the grounds advanced by Farmers do not warrant reversal of the arbitrator's decision. Additionally, the Fund cross-appeals and asserts that the Arbitrator erred when he failed to address the Fund’s argument that the 2001 Ram truck was insured by Farmers under the Umbrella policy and thus the Newly Acquired Automobile coverage in the OAP applied to the ATV. Had he done so, the Fund asserts, the Arbitrator would have concluded that the ATV was covered under Farmers' OAP and that SABS benefits are payable pursuant to that policy.

Analysis

(a) The standard of review

28The first issue to be address is the standard of review. The recent decision of the Court of Appeal in Intact Insurance Co. v. Allstate Insurance Co. of Canada, 2016 ONCA 609 deals with this topic as follows (at para. 53):

In general, an appeal to the Superior Court from an insurance arbitration regarding a priority dispute will engage questions of mixed fact and law that must be reviewed for reasonableness. Even if the appeal involves an extricable question of law regarding SABS, a reasonableness standard of review will still generally apply. In the unlikely scenario that the issue before the insurance arbitrator is an “exceptional” question (one of jurisdiction, a constitutional question, or a general question of law that is both of central importance to the legal system as a whole and outside the adjudicator’s specialized area or expertise), a correctness standard of review may be applicable.

29The present case, in my view, involves largely mixed questions of fact and law and, possibly, extricable questions of law. It involves questions that were within the scope of expertise of the Arbitrator, who is an experienced insurance law practitioner and arbitrator. It does not involve questions of jurisdiction or a constitutional question. As a result, the applicable standard of review is reasonableness.

30The concept of reasonableness in judicial review was described in Dunsmuir v. New Brunswick, 2008 SCC 9 as follows (at para 47):

Reasonableness is a deferential standard animated by the principle that underlies the development of the two previous standards of reasonableness: certain questions that come before administrative tribunals do not lend themselves to one specific, particular result. Instead, they may give rise to a number of possible, reasonable conclusions. Tribunals have a margin of appreciation within the range of acceptable and rational solutions. A court conducting a review for reasonableness inquires into the qualities that make a decision reasonable, referring both to the process of articulating the reasons and to outcomes. In judicial review, reasonableness is concerned mostly with the existence of justification, transparency and intelligibility within the decision-making process. But it is also concerned with whether the decision falls within a range of possible, acceptable outcomes which are defensible in respect of the facts and law.

31Bearing in mind the foregoing principles, I turn to the grounds relied on by the parties in support of the appeal and cross-appeal.

(b) Farmers' grounds for appeal

i. The Arbitrator erred in finding that the ATV was an automobile, as defined by the Insurance Act.

32As noted, the parties have now agreed that the Arbitrator was correct. This ground of appeal is no longer being advanced.

ii. The Arbitrator erred when he found that the ATV was an automobile as defined in the Umbrella policy.

33The following definition of automobile is contained in the Umbrella policy:

“Automobile” means any self-propelled land motor vehicle, trailer or semitrailer (including machinery, apparatus, or equipment attached thereto) which is principally designed and is being used for transportation of persons or property on public roads.

34Farmers argues that the Arbitrator fundamentally erred when determining whether the ATV fell within the concept of an automobile, as defined in the Umbrella policy. It submits that neither of the two tests required by the second part of the definition – i.e. (1) that the vehicle was principally designed for transportation and public roads and (2) that the vehicle was being used for transportation and public roads – was satisfied in this case.

35I agree with Farmers’ submission. If the basic definition of automobile contained in the Umbrella policy were the operative and applicable definition, I would find that the decision of the Arbitrator does not fall within a range of possible, acceptable outcomes which are defensible in respect of the facts and law and thus is unreasonable.

36In relation to the design of the ATV, the Arbitrator ventured into speculation. The best evidence before him was that it was an off-road vehicle and there was no evidence to found any contrary conclusion. The very fact that it had formerly been registered and licensed by its previous owner under the Off-Road Vehicles Act and that its ownership had again been registered under that statute by Farmers, both support the conclusion that it was not principally designed for transportation on public roads.

37As to the second half of the definition, the requirement for coverage is that the vehicle "is being used for transportation of persons or property on public roads". The uncontroverted evidence was that when the claimant was injured the ATV was being used off-road, on private property. The Arbitrator's finding in this regard was thus inconsistent with the evidence. Farmers therefore argues that the Arbitrator committed reviewable error when he found that the ATV fell within the definition of automobile contained in the Umbrella policy.

38It follows that, had the basic definition of automobile contained in the Umbrella policy (as quoted above) been the operative one, I would agree with Farmers' argument.

39The problem with Farmers’ argument is that it overlooks the more specific provisions contained in Endorsement No. 1, which is the portion of the Umbrella policy that expressly addresses excess automobile liability. The insuring agreement is contained in Endorsement No. 1. It expressly adopts "the terms, conditions, general provisions, definitions and exclusions set forth in the first loss policy … which said terms, conditions, general provisions, definitions and exclusions are by reference incorporated herein … .” [Emphasis added]. Thus, the insuring agreement expressly adopts and incorporates the definition of automobile in the standard underlying OAP policy. This makes sense, because, as a matter of logic, the definitions in the underlying policy and the Umbrella policy should align. It makes no commercial sense to insure an automobile in an underlying OAP policy and to purchase Umbrella coverage that would not apply to the same vehicle.

40In my view, therefore, the question whether the ATV qualifies as an automobile for purposes of coverage under the Umbrella policy, turns on the question whether the ATV was an automobile insured under the OAP. Since the ATV was not expressly covered under the OAP policy, this question depends on whether the ATV falls within the scope of the Newly Acquired Automobile coverage. This is the issue raised by the cross-appeal that was not addressed by the Arbitrator. Since it is germane to the resolution of this aspect of Farmers' appeal, I will address it now.

41At the arbitration hearing, the Fund argued that the ATV fell within the scope of the Newly Acquired Automobile coverage contained in s. 2.2.1 of the OAP policy, while Farmers asserted that it did not. Farmers based its argument on the factual premise that in August 2009 Farmers (as insured) was the owner of the 2001 Ram truck, but it did not insure the truck with Farmers (as insurer). As a consequence, it argued (and the Arbitrator agreed) that the prerequisite in s. 2.2.1 – "we insure all automobiles you own" – was not satisfied.

42At the arbitration hearing, the Fund argued that the 2001 truck was an automobile insured by Farmers because the truck was covered under the Umbrella policy. The Arbitrator indicated that he would deal with that argument in his analysis of whether the ATV was covered under the Umbrella policy, but he failed to do so.

43The 2001 Ram truck plainly falls within the definition of automobile contained in the Insurance Act, in the OAP, the Umbrella policy and in Endorsement 1. Unlike the ATV, no issues arise concerning its design or use.

44It is true that Farmers was the owner of the truck and that it did not insure it under the OAP policy. However, that does not end the analysis; instead, it leads to a consideration of the significance of Endorsement No. 4 contained in the Umbrella policy. Endorsement No. 4 states as follows:

It is agreed that, in respect to all automobiles owned or leased by the Insured, the Insured will maintain the following minimum underlying insurance in force during the currency of this policy covering the Insured's liability arising out of ownership, use of [sic] operation of such automobiles. In the event of failure by the Insured to so maintain such policies in force or to meet all conditions and warranties subsequent to loss under such policies, the insurance afforded by this policy shall apply in the same manner it would have applied had such policies been so maintained in force. [Emphasis added.]

The specified minimum underlying insurance is $2 million written on standard forms in general use.

45As Endorsement No. 4 makes plain, the excess coverage provided by the Umbrella policy applies despite the failure of the insured to maintain the underlying policy. As the Arbitrator himself noted, those words in Endorsement No. 4 had the effect of relieving against what would otherwise be a breach of condition of the Umbrella policy. As the Arbitrator put it "in practical terms, what the wording means is that the insurance in the commercial umbrella liability policy will still apply even if the insured has not maintained the underlying insurance as required by the endorsement."

46It follows from the foregoing that, although Farmers (as owner) did not expressly insure the 2001 Ram truck with Farmers (as insurer) under the OAP policy, because the Umbrella policy was in force in August 2009, Farmers (as owner) did insure the truck with Farmers (as insurer) under that policy. It therefore follows that Farmers (as owner) did insure all its vehicles with Farmers (as insurer). As a result, the prerequisite under s. 2.2.1 of the Newly Acquired Automobile provision (i.e. “we insure all automobiles that you own”) was met.

47It therefore follows that, when Farmers acquired ownership of the ATV, the Newly Acquired Automobile provision of the OAP policy was operative and the ATV fell within it. It further follows that the ATV was automatically covered under the OAP policy (at least for the first 14 days: see Hunter Estate v Thompson, [2003] O.J. No. 2395 at para. 10 (C.A.)). As a consequence all provisions of the OAP, including the SABS benefits coverage, applied to the ATV when the accident occurred. This means that Farmers was and is the priority insurer.

48Thus, while I agree that the Arbitrator erred and reached an unreasonable and reviewable conclusion when he interpreted the definition of automobile in the definition section of the Umbrella policy in the fashion that he did, in my opinion he reached the correct conclusion overall. Based on the foregoing analysis, the ATV was covered under Farmers’ OAP policy at the relevant time. It follows that I agree with the ultimate conclusion of the Arbitrator that Farmers is the priority insurer, albeit for different reasons.

iii. The Arbitrator erred when he found that the ATV was covered by the excess automobile liability endorsement in the Umbrella policy, despite finding that it was not covered by the underlying OAP policy.

iv. The Arbitrator erred in finding the Umbrella policy was a motor vehicle liability policy, and that SABS benefits are payable under that policy.

49In light of my analysis and the conclusions I have reached above, it is unnecessary for me to address the issues raised by Farmers’ third and fourth grounds of appeal.

(c) The Fund’s cross-appeal

50I have set out above my analysis and conclusions in relation to the Fund’s cross-appeal. In my view, the Arbitrator committed reviewable error when he failed to address the Fund’s argument that the 2001 Ram truck was insured by Farmers under the Umbrella policy and thus the Newly Acquired Automobile coverage in the OAP applied to the ATV. His failure to address these issues and to articulate any reasons or outcome in relation to them cannot be justified and thus his decision in relation to this topic does not pass the test of reasonableness.

51For these reasons, I would give effect to the cross-appeal and declare that the ATV was covered under Farmers’ OAP policy at the relevant time. It follows that Farmers is the priority insurer.

Conclusion and disposition

52As explained above, I conclude that the Arbitrator reached the correct disposition of the dispute before him, albeit for different reasons. I would therefore dismiss Farmers’ appeal, allow the cross-appeal and declare that Farmers is the priority insurer. As agreed by the parties, Farmers will pay costs to the Fund in the all-inclusive amount of $20,000.

Stinson J.