Court File and Parties

COURT FILE NO.: 16-67844 DATE: 2018/10/04 SUPERIOR COURT OF JUSTICE - ONTARIO

RE: THE COMMONWELL MUTUAL ASSURANCE GROUP, Applicant AND: SHAYNE CAMPBELL, Respondent

BEFORE: MR. JUSTICE CALUM MACLEOD

COUNSEL: Cynthia Verconich, for The Commonwell Mutual Assurance Group (“CMAG”) Christine A. Powell, for Shayne Campbell David Thompson for The Guarantee Company of North America (“Guarantee”)

HEARD: May 29, 2018

Reasons for Decision

[1] This is an application by CMAG seeking a declaration that it is not obliged to defend or indemnify Shayne Campbell in a personal injury action. [1] The insurer has been providing Mr. Campbell with a defence under his general liability policy since 2015. Coverage was declined by Guarantee under his automobile policy. The application came on for hearing in May of this year along with a parallel application by Mr. Campbell seeking coverage from Guarantee. [2] Mr. Campbell does not wish to be left uninsured. I reserved to give written reasons.

[2] As set out below, I have concluded that, Guarantee was within its rights to deny coverage and took the necessary steps to do so. Whether or not CMAG could also have denied coverage, it is too late to abandon Mr. Campbell at this stage of the proceeding. CMAG has been defending the main action on Mr. Campbell’s behalf without a non-waiver agreement or reservation of rights. In doing so, it has created a situation of reliance and is now estopped from denying coverage.

Background

[3] The accident giving rise to the main action took place in April of 2013 and was a collision between an all-terrain vehicle (ATV) operated by Evan Rodger and a dirt bike operated by Mr. Campbell. Mr. Campbell had borrowed the bike from a shed to which he had access on property located on River Road in Vankleek Hill and owned by his girlfriend’s father, John Russell. At the time in question, a number of people including Mr. Campbell had apparently been engaged in off road activity at a local gravel pit. Apparently several of those involved decided to visit the home of one of the participants a short distance away and this required them to travel along the roadway.

[4] According to the allegations in the statement of claim, Mr. Campbell caused the accident by turning abruptly in front of the ATV driven by Mr. Rodger which then struck the dirt bike. Mr. Rodger subsequently struck his head on a mailbox and he claims to have suffered a traumatic brain injury. The statement of claim was issued in April of 2015 and served on Mr. Campbell shortly thereafter.

[5] Coverage issues arise because the accident took place between off-road vehicles on a municipal highway and the dirt bike was unlicenced. There are also issues of ownership and consent. As it happens, Mr. Russell is also the owner of RCOMM Radio Inc. [3] which is Mr. Campbell’s employer and it appears RCOMM is the registered owner of the dirt bike.

[6] Mr. Campbell was well insured. He carried a standard policy of motor vehicle insurance on his own vehicle with Guarantee and he had home insurance and general liability insurance through CMAG. He was also a named insured under RCOMM’s policy for the purpose of operating company vehicles in the course of his employment.

[7] Following receipt of the statement of claim in the main action, Mr. Campbell immediately contacted his insurance broker and he was contacted by adjusters on behalf of both Guarantee and CMAG. Guarantee apparently presented him with a non-waiver agreement and a reservation of rights letter but ultimately denied coverage. CMAG did not do either of these things but instead appointed counsel who delivered a statement of defence on his behalf and has been representing Mr. Campbell in the main action ever since.

[8] It appears the main action had proceeded to the stage of discoveries when plaintiff’s counsel [4] asked defence counsel [5] whether there was any issue about coverage. At that time CMAG appointed separate coverage counsel and it ultimately took the position it had been an error to defend Mr. Campbell. Although CMAG has continued to fund the defence in the interim, it now brings this application asking for a finding that Mr. Campbell is not insured for this loss.

[9] I will deal firstly with the position of Guarantee. As it is the insurer of Mr. Campbell’s own RAM pickup truck, it would normally be the primary insurer in connection with a motor vehicle accident.

Coverage Under the Guarantee Policy

[10] In its denial of coverage, Guarantee relies upon a special condition and certain exclusions. The condition is set out in paragraph. 2.2.3 of the standard Ontario Automobile Insurance Policy. That section extends coverage to any motor vehicle operated by an insured but not to vehicles “owned, hired or leased” by the employer of the insured or the employer of anyone living in his household.

[11] The purpose of this condition is to limit coverage under the standard policy to personal motor vehicles operated by an insured and to avoid providing coverage for an employer’s vehicles which would be insured under a different policy. As mentioned, Mr. Campbell is a named insured under the RCOMM insurance policy. There is no doubt that ordinarily if Mr. Campbell was operating one of RCOMM’s company vehicles he would be covered under the RCOMM policy and not under his own motor vehicle policy.

[12] The dirt bike was not a vehicle regularly used by RCOMM and of course Mr. Campbell was not using it for business purposes at the time but it does appear that RCOMM was the registered owner of the bike. Guarantee takes the position that the exclusion does not depend on the purpose for which the vehicle is used or whether it is in fact insured under another policy. There is simply no coverage for employer owned vehicles.

[13] On behalf of Mr. Campbell, Ms. Powell argues that despite the registration of ownership to RCOMM, it was Mr. Russell who had possession and control over the vehicle and who controlled access to it. She argues that Mr. Russell was the owner of the bike at common law. Mr. Campbell could not reasonably have been aware that RCOMM was the registered owner as the dirt bike was in a shed with other recreational vehicles used by the Russell family.

[14] These points are certainly arguable based on the evidence. In addition, the pleadings in the main action assert that Mr. Russell is an owner. This however does not take the situation outside the exclusion in order to provide coverage for Mr. Campbell while operating a vehicle owned by his employer. It is certainly possible that Mr. Russell is also an owner. There can be more than one owner for the purposes of vicarious liability and he may be jointly liable with RCOMM. [6] This does not in my view avoid the plain language of paragraph 2.2.3.of the policy. [7] It is undisputed that RCOMM is the registered owner.

[15] Even if there is a question about the ownership of the vehicle, Guarantee also takes the position that coverage is excluded due to policy breaches. Paragraph 1.4.5.of the standard policy excludes coverage if the insured is driving a vehicle when not authorized by law to do so. Mr. Campbell did not have a motorcycle licence and he was operating a vehicle which was neither licenced for use on a highway nor apparently covered by a certificate of insurance. The absence of an insurance certificate may be a circular argument since it depends on whether or not there is coverage. On the other hand it is clear that Mr. Campbell did not have a class M driver’s licence and it is clear the vehicle was neither licenced under the Highway Traffic Act nor the Off-road Vehicles Act.

[16] Driving a vehicle on a highway without a valid driver’s licence or a valid vehicle registration would render operation of the vehicle unlawful. Mr. Campbell admits that had he thought about it he would have realized it was a policy breach to operate the motorcycle on the roadway under those circumstances.

[17] It is also clear that Mr. Campbell did not have the specific permission of John Russell to use the dirt bike and in the RCOMM / Russell defence to the main action, it is alleged that Mr. Campbell was operating it without any kind of permission. Paragraph 1.8.2. of the policy excludes coverage if the insured is operating a vehicle without the owner’s consent. While it is possible consent can be implied, this is a live issue and a possible policy breach.

[18] In these circumstances, Guarantee denied coverage.

[19] I agree with Guarantee that if it was defending the action it would be doing so under the provisions of s. 258 of the Insurance Act. Insurance companies and insurance policies in Ontario are heavily regulated. In particular, policies of automobile insurance are subject to statutory conditions related to the fact that motor vehicle insurance in this province is mandatory when using a vehicle on a public roadway. The legislation has been frequently amended as various governments have attempted to strike a balance between consumer protection, safety on the roads and reduction of insurance rates.

[20] Pursuant to s. 258., an insurer may be liable to compensate an injured plaintiff even if the owner or operator of a motor vehicle has committed a policy breach but to a maximum of $200,000 and subject to a right of recovery against the insured as well as a right to contribution from other insurers. Under this section of the Act an insurer may take an off coverage position, refuse to provide a defence to the insured but may nevertheless defend the action in its own name by adding itself as a statutory third party. It is not required to do so.

[21] Guarantee may remain potentially liable to the plaintiff in the main action pursuant to s. 258 but this does not require it to defend the insured or to take over the defence if it is being provided by another insurer.

[22] In this case Guarantee made it clear to Mr. Campbell that any steps it took to investigate or adjust the claim were subject to a reservation of rights. It ultimately denied coverage and refused to defend him. Although Guarantee would have been the primary insurer if the claim fell within the scope of its policy [8], in the circumstances of this case and given the result in the CMAG application, I find no obligation on Guarantee to provide or to take over the defence.

Coverage Under the CMAG Policy

[23] CMAG is in a different position. Mr. Campbell’s policy with CMAG is not an automobile insurance policy but a general liability policy attached to his house insurance. As such, it is not subject to the same statutory conditions or complexity. By and large the question of coverage falls to be determined under ordinary contractual principles.

[24] The CMAG policy provides coverage for liability arising from use or operation of “any self propelled land vehicle” which the insured does not own provided that the vehicle is not “required to be registered under any government authority” and is primarily designed for use off public roads and provided the vehicle is being used with the owner’s consent.

[25] CMAG now takes the position that Mr. Campbell did not have the owner’s consent. It is true that this is a live issue in the main action. Mr. Campbell admits that he did not obtain specific consent from Mr. Russell on the day in question and Mr. Russell has pleaded lack of consent in his own defence in the main action. On the other hand, Mr. Campbell believes he had implicit consent because he had ready access to the shed and had used the dirt bike on at least one other occasion when Mr. Russell was present. Although the dirt bike did not require an ignition key, the evidence is that the keys for other vehicles were hung on the wall for the use of the family members including Mr. Campbell. In my view a court might well conclude that Mr. Campbell had implied permission to use the dirt bike in common with the other vehicles and equipment in the shed.

[26] As the courts have held repeatedly, the obligation to defend is broader than the obligation to indemnify. All that is required for the former is a claim that is potentially within the scope of coverage [9]. An insurer may therefore be obligated to defend a claim but it remains possible that the facts as established at trial may fall within an exclusion. In that instance, the insurer may provide a defence but reserve its right to refuse indemnity if the facts proven at trial demonstrate that the exclusion applies. In my view CMAG could not have refused to defend the action based on lack of consent but it could have provided a defence under a reservation of rights. Of course it did not do so.

[27] CMAG also argues that although the dirt bike was clearly a self-propelled land vehicle primarily designed for off road use, it should nonetheless have been licenced under the Off Road Vehicles Act or under the Highway Traffic Act. It is obvious that the dirt bike in question meets the definition of an off road vehicle. Unless it was being used solely on the owner’s property, or fell under another exemption, it would have required a licence plate under the ORVA. It seems improbable that the bike was sufficiently equipped to be “street legal” so it may not have been eligible for registration under the HTA in any event but ordinarily a vehicle must be registered under s. 7 of the HTA if it is driven on a highway. The application of this exclusion in the policy is not as clear as it may seem because of complexity in the interaction between the ORVA, Part X.3 of the HTA and various regulations and municipal by-laws which may provide exemptions permitting off-road vehicles to travel on a road. Nevertheless, it seems highly probable that at the moment of the accident, the dirt bike was a vehicle that required registration.

[28] Had circumstances been different, I might well have found that the operation of an unregistered vehicle on a roadway or highway fell within the exclusionary language. I am unable to do so in this case because I have concluded that in the absence of a reservation of rights, CMAG is obliged to provide coverage.

Waiver and Estoppel

[29] An insurer must defend a claim against its insured that is potentially within coverage and it must indemnify the insured up to the policy limits if liability is established providing the facts do not fall within an exclusion or demonstrate a policy breach.

[30] It should be noted that an insurer may elect to disregard a policy breach or it may waive reliance on an exclusion. Where a breach has been waived, the insurer cannot later resile from such waiver. Accordingly, there is a duty on the insurer to be clear about its position and not to leave an insured with a false belief that its interests are protected.

[31] Where a claim clearly falls outside the scope of an insurance policy or falls within an exclusion or exception, the insurer should deny coverage clearly and unequivocally. In cases where there is doubt about a duty to defend or where there may be a duty to defend but there may not be a duty to indemnify, the insurer must take steps to bring the possibility the claim will be denied to the attention of the insured. Non-waiver agreements or reservation of rights letters are important tools to ensure an insured clearly understands she or he may be without coverage.

[32] If there is some doubt about coverage and the insurer requires time to investigate, the general practice is to obtain a non-waiver agreement or to reserve rights. This is precisely what Guarantee did before ultimately denying coverage. An insurer that proceeds to defend an action, or even an insurer which unequivocally states that it will defend an action, may be taken to have waived reliance on the exclusion or it may be estopped from later denying coverage.

[33] As long ago as 1921, the Supreme Court of Canada held that having elected to defend an insured rather than contesting coverage, the insurer could not avoid paying the judgment after it took the matter to trial and obtained an unfavourable result. [10] In the circumstances of that case, the insurer was found to have made an election not to rely on a condition in the policy.

[34] It is not necessary for there to be an adverse judgment. If the facts as pleaded clearly give rise to an exclusion and the insurer ignores it and proceeds to defend the action it may be deemed to have waived its right to rely on the exclusion. [11]

[35] This principle is partially codified in s. 131 (1) (b) of the Insurance Act. That provision provides that the obligation of an insured to comply with a requirement under a policy of insurance is excused to the extent that the insurer’s conduct reasonably causes the insured to believe that compliance is excused in whole or in part and the insured acts on such belief to his or her detriment.

[36] An insured must not be prejudiced by a false sense of security. Quite apart from election or waiver, an insurer that provides a defence to the insured without a reservation of rights may be estopped from taking an off coverage position later in the litigation. In Rosenblood Estate, it was held that by defending a claim without a reservation of rights, the insurer did so at its own risk. By defending the insured through production, discovery and the start of settlement negotiations, the insurer was estopped from denying coverage. [12]

[37] It has also been held that where the litigation is at an advanced stage, prejudice to the insured is inferred, estoppel applies and in that case there is no need to decide if the actions of the insurer also constitute a waiver. [13]

[38] In the case at bar, CMAG retained Louise Morel to defend the action on behalf of Mr. Campbell in June of 2015 and a detailed statement of defence was delivered on August 14, 2015. All of the facts on which CMAG now purports to rely were readily apparent at the time. Specifically it was known that Mr. Campbell was operating a “red 2001 Honda R4-C off-road dirt bike owned by the defendants John Russell and /or RCOMM Radio Inc.” and it was known that Ontario Regulation 316/03 dealing with operation of off-road vehicles on highways was applicable legislation. It was also known that Guarantee was Mr. Campbell’s motor vehicle insurer and it was known that Mr. Campbell was an employee of RCOMM.

[39] It is Mr. Campbell’s evidence that he was never told of any issue with coverage and he was never asked to sign a non-waiver or given a reservation of rights letter. At the time the statement of defence was provided he knew what those documents were because he had been asked to sign a non-waiver by Guarantee and had been told they would send a reservation of rights letter when he declined to sign. As of June of 2015 he understood that Ms. Morel was his lawyer and was defending him. He states that he relied upon this and did not follow up with Guarantee nor did he retain his own counsel or have any reason to think that CMAG was not protecting his interests.

[40] Guarantee formally denied coverage under the automobile policy in January of 2016 based on the fact that RCOMM (his employer) was the registered owner of the dirt bike. It was not until March of 2016 that CMAG wrote to Mr. Campbell to advise him that there was no coverage under the general liability policy and to advise him it would be bringing this application. As noted earlier in these reasons, that position was triggered only when Mr. Lundrigan asked Ms. Morel to confirm whether or not there was an issue. It appears from the affidavit of Iain Convery that it was only then CMAG turned its mind to the question and sought an opinion from coverage counsel. By that time not only had Guarantee denied coverage but the litigation was well advanced.

[41] Although CMAG launched this application in August of 2016 and cannot be faulted for much if any of the intervening delay, it cannot be ignored that the matter only came on for a hearing in May of this year. In the interim the plaintiff in the main action has amended his pleadings and Ms. Morel has continued to act for Mr. Campbell. I am not basing my decision on the additional passage of time but it is part of the context. I consider that it would have been unfair to allow CMAG to abandon Mr. Campbell in 2016. It is even more so today.

[42] In my view it is too late for CMAG to now deny coverage. Either waiver or estoppel would apply. There was no hint of a reservation of rights. There will be therefore be a declaration that the applicant is entitled to coverage under the policy. CMAG is required to both defend and indemnify Mr. Campbell.

Summary and Conclusion

[43] In summary, CMGA’s application is dismissed. There will be a declaration that CMGA is required to provide Mr. Campbell with defence and indemnity under its policy.

[44] Mr. Campbell’s application against Guarantee is also dismissed.

[45] These findings are without prejudice to any claims for contribution and indemnity as between defendants or insurers that may properly be made following judgment in the main action.

Costs

[46] I did not hear argument on costs and I am not privy to any offers to settle which may have been made.

[47] I invite counsel to seek agreement but I will otherwise entertain submissions in writing. Any party seeking costs may make written submissions of no more than 3 pages (not including cost outlines or bills of costs) to be delivered within 30 days. The responding parties may deliver responding submissions of similar length within 15 days thereafter.

Mr. Justice C. MacLeod Released : October 4, 2018

Footnotes

[1] Mr. Campbell is a defendant in court action no. 15-64061 (“the main action”) [2] Court file no. 17-71234. [3] A business owned by Mr. Russell, employing about 10 people and involved in installing and maintaining telecommunications equipment. [4] Mr. Lundrigan [5] Ms. Morel [6] See Graham v. Lemay, 2016 ONCA 55 [7] I recognize that if there is any ambiguity it should be resolved in favour of the insured. See Halifax Insurance Co. v. McMahon, [1997] OJ No. 3418 (Quicklaw); 1997 CarswellOnt 2946 (CA) [8] See Schneider v. Maahs Estate, (2001), 56 OR (3d) 321 (CA) for an example of the manner in which different policies of insurance may be required to respond to different aspects of a claim. [9] Nichols v. American Home Assurance Co., [1990] 1 SCR 801; (1990) 68 DLR (4 th ) 321 (SCC) @ para. 13 & 14 [10] Western Canada Accident & Guarantee Insurance Co. v. Parrott, [1921] 61 SCR 595 [11] See Economical Insurance Group v. Fleming, (2008), 89 OR (3d) 68; (2008) 57 CCLI (4 th ) 246 (SCJ) [12] Rosenblood Estate v. Law Society of Upper Canada, [1989] O.J. No. 240 (Quicklaw); (1989) 37 CCLI 142 (Ont. HCJ) [13] See Rosenblood Estate, supra. See also Snair v. Halifax Insurance Nationale-Nederlanden North America Corporation, [1995] NSJ No. 424 (Quicklaw); (1995) 418 APR 132; (1995) 31 CCLI (2d) 279 (NSSC), Western Canada Accident &