ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Jeremy Euler
Mr. B. Hardick, for the Applicant
Applicant
- and -
Economical Insurance
Mr. E. Zadro, for the Respondent
Respondent
HEARD: March 16, 2021 at Thunder Bay, Ontario via Zoom
Mr. Justice D. C. Shaw
Reasons on Application
1This is an application to determine coverage under a motor vehicle insurance policy.
Background
2On August 13, 2014, the respondent, Economical Insurance, issued a standard form OAP 1: Ontario Automobile Owner’s Policy to the applicant, Jeremy Euler, in respect of a 2006 Chevrolet Cobalt.
3The policy was renewed for successive yearly terms. It was in force for the August 13, 2017/2018 term for a declared premium of $733.
4The policy was issued based on information contained in an Ontario Application for Automobile Insurance Owner’s Form (OAF 1) signed by Mr. Euler. The application form required the applicant to indicate any business use of the insured vehicle. Mr. Euler left that area of the form blank, indicating no business use.
5The premium for Mr. Euler’s policy was rated on the basis that the vehicle was used primarily for “pleasure” with a stated two kilometre commute to work. This information was endorsed on the Certificate for Automobile Insurance for each successive term, including the 2017/2018 terms.
6The policy contained Statutory Conditions, incorporated pursuant to s. 234 of the Insurance Act. Statutory Condition 1(1) provides:
Material change in risk
1(1) The insured named in this contract shall promptly notify the insurer or its local agent in writing of any change in the risk material to the contract and within the insured’s knowledge.
7The policy also contained the following term:
1.4 Your responsibilities
If you fail to meet your responsibilities, claims under this policy, with the exception of certain Accident Benefits, may be denied.
By accepting this contract you agree to the following conditions:
1.4.1 You agree to notify us promptly in writing of any significant change of which you are aware in your status as a driver, owner or lessee of a described automobile. You also agree to let us know of any change that might increase the risk of an accident or affect our willingness to insure you at current rates.
You must promptly tell us of any change in information supplied in your original application for insurance such as additional drivers, or a change in the way the automobile is used.
8On November 23, 2017, Mr. Euler reported to Economical that on October 28, 2017, he had been involved in a motor vehicle accident with another vehicle while he was using his vehicle to deliver pizzas. On March 5, 2018, Mr. Euler advised a claims adjuster that he was employed by Domino’s Pizza on the date of the accident and was returning from a delivery when the accident occurred.
9On November 28, 2017, five days after reporting the accident, Mr. Euler cancelled the policy, signing a Cancellation Agreement, effective October 29, 2017. His vehicle had been scrapped following the accident. Economical refunded $92.56 in unearned premium.
10Mr. Euler subsequently obtained a new insurance policy from Economical for another vehicle, with a guarantee that he no longer worked as a delivery driver.
11In 2019, Mr. Euler was notified of a claim against him arising out of the October 28, 2017 accident. He reported this claim to Economical.
12By letter dated May 22, 2019, Economical denied Mr. Euler’s claim for indemnity and defence costs arising out of the accident, stating that Mr. Euler had breached the policy by failing to disclose on his application for insurance and at any point in the duration of the policy that he used his vehicle for business, delivering pizza, which was a change in risk material to the policy.
13On the hearing of the application, the parties agreed to what were described as three “clarifying points”:
Mr. Euler admits that he was delivering pizzas at the time of the accident.
The isnurance policy was cancelled by Mr. Euler on November 28, 2017, effective as of October 29, 2017.
No premiums were remitted by Economical other that the sum of $92.56, representing insured premiums after the date of the accident.
14Mr. Euler submits that Economical has both a duty to defend and to indemnify under its policy with respect to the accident of October 28, 2017.
15Mr. Euler submits that the intended use of the vehicle, to deliver pizzas, was not a term or requirement of the contract of insurance. Alternatively, Mr. Euler submits that Economical has waived its right to deny coverage by treating the policy as valid and subsisting, by failing to rescind the policy, ab initio, and by failing to refund the premiums that it had received, dating back to when Mr. Euler began using his vehicle to deliver pizzas. In his application, Mr. Euler also advanced a claim for relief against forfeiture. However, that claim for relief was abandoned at the hearing of the application.
16In support of his position that his insurer’s decision not to rescind the policy ab initio and to keep the premiums up to the date of the accident required it to defend and indemnify the insured, Mr. Euler cites Howard Sand and Gravel Co. v. General Security Insurance Co., 1959 Carswell Ont. 142 (S.C.C.); Shepley v. Guarantee Co. of North America, 1988 Carswell Ont. 4086 (Ont. Gen. Div.); and Grant. v. Prudential Assurance Co., 1989 Carswell Ont. 665 (Ont. Dist. Ct). In particular, Mr. Euler relies on this statement in Grant, at paras. 7 and 8:
On learning of the non - disclosure the defendant [insurer] had three courses open to it as set out by McRuer C.J.H.C. in Ellis v. London – Can. Insurance Co. (citations omitted):
to return the premium and to repudiate the ground of fraudulent and material representations and give notice accordingly;
to retain the premium (for unexpired term) and thereby treat the contract as valid and subsisting;
to give notice of cancellation.
Discussion
17I have determined that Economical is not required to defend and indemnify Mr. Euler under the policy.
18The fact that Mr. Euler used his vehicle for the business of delivering pizzas and not for the declared purpose of pleasure and commuting to and from his work, was a change in the risk material to the insurance contract and within Mr. Euler’s knowledge. As such, Statutory Condition 1(1) required Mr. Euler to promptly notify Economical of the change in risk. He did not do so.
19In both McCormick and Grant, cited by Mr. Euler, the court found that a change in use of the insured vehicle, from pleasure to delivering pizzas, was a change material to the risk, the non – disclosure of which constituted a breach of the policy.
20Economical correctly submits that the test for materiality in an insurance contract is whether a reasonable insurer, if properly informed of the fact, would have acted differently by refusing to accept the risk or by imposing special conditions. See Lavoie v. T.A. McGill Mortgage Services Inc., 2014 ONCA 257, at para. 29. The uncontradicted evidence was that fast food delivery was not a qualifying risk under Economical’s underwriting criteria.
21I also accept Economical’s submission that the principle stated in Grant (and in McCormick and in Shepley) namely, that an insurer, having discovered a material change, must void its policy and return the unearned premium in order to deny coverage for a claim, is no longer good law since the decision of the Court of Appeal in Merino v. ING Insurance Company of Canada, 2019 ONCA 326, leave to appeal to SCC refused.
22In Merino, the Court of Appeal discussed s. 233 of the Insurance Act, which provides the consequences as between the insured and the insurer of a knowing misrepresentation made by the insured in a signed written application for insurance, or for a contravention of a term of the contract.
23Section 233 provides that:
(1) Where,
(a) an applicant for a contract,
(i) gives false particulars of the described automobile to be insured to the prejudice of the insurer, or
(ii) knowingly misrepresents or fails to disclose in the application any fact required to be stated therein;
(b) the insured contravenes a term of the contract or commits a fraud; or
(c) the insured willfully makes a false statement in respect of a claim under the contract,
a claim by the insured is invalid and the right of the insured to recover indemnity is forfeited.
(2) Subsection (1) does not invalidate such statutory accident benefits as are set out in the Statutory Accident Benefits Schedule.
(3) No statement of the applicant shall be used in defence of a claim under the contract unless it is contained in the signed written application therefor or, where no signed written application is made, in the purported application or part thereof, that is embodied in, endorsed upon or attached to the policy.
24At para. 44 of Merino, the Court of Appeal held that an insurer may terminate the contract for misrepresentation by providing notice to the insured, However, if the insurer does not take that step and an accident occurs, then s. 233 governs the rights as between the insurer and the insured, while s. 258 gives the injured third party the direct right to sue the at-fault driver’s insurer, up to the minimum limits of $200,000, subject to the insurer’s right to seek recovery from the insured. (Economical acknowledges that s. 258 is applicable in the instant case).
25The Court of Appeal observed, at para. 45:
…unlike earlier statutory provisions, a misrepresentation does not render the automobile insurance contract void under s. 233 of the Act. Prior to the uniform automobile insurance legislation in 1932, which introduced the concept of compulsory minimum third – party liability automobile insurance, the effect of misrepresentation was to void the contract.
26At paras. 46 and 47, the Court of Appeal stated:
Appellate cases interpreting the pre - 1932 version of the misrepresentation provision held that untrue statements in the application for insurance rendered the policy void and, in first party claims, insured were unable to recover under the policy. (Citations omitted).
That is no longer the law. Under s. 233, a misrepresentation does not render the contract void, it is neither terminated, nor rescinded as void ab initio….The contract remains in effect, but the insured’s rights are limited to his or her right to receive certain statutory accident benefits, the insurer is not obliged to compensate the insured for other losses, or to indemnify the insured’s obligation to third parties. Also, because the automobile contract remains in effect, third parties injured by the insured or the insured’s automobile retain the right to recover the losses they suffer from the insured’s insurer under s. 258 of the Act.
27In its discussion of s.233, the Court of Appeal observes, at para. 37:
The section does not contain the terms “void” or “voidable”. It neither requires nor contemplates any action by the insurer to terminate the contract. Rather, it describes the consequences, as between the insured and the insurer when the insured has knowingly misrepresented or omitted a fact in the application. Those consequences are three-fold: 1) a claim by the insured (for own property damage or own loss due to injury) is invalid; 2) the right of the insured to recover indemnity (from a claim by a third party who suffered damage where the insured was at fault) is forfeited; but 3) the insured remains entitled to certain statutory accident benefits under the Statutory Accident Benefits Schedule: see O. Reg. 403/96, s.30.
28The Court of Appeal, at paras. 49 and 50, addresses the proposition that Mr. Euler has put forward:
The respondent relies on a statement made in Hansra v. York Fire and Casualty Insurance Co. (1982) 1982 CanLII 2005 (ON SC), 38 O.R. (2d) 281 (Ont. Co. Ct.), that an insurer has three options when it learns of a misrepresentation in an insurance application: it may a) refund the premium and treat the policy as void ab initio; b) retain the premium and treat the policy as valid and subsisting; or c) treat the policy as valid but cancel unilaterally in accordance with the statutory conditions….
However, the statement in Hansra that an insurer may treat an automobile policy as rescinded was made per incuriam and does not represent the law in Ontario. The case of General Security Insurance Co. v. Howard Sand and Gravel Co., 1954 CanLII 18 (SCC), [1954] S.C. R. 785 was cited as authority for the proposition, but Howard Sand does not so state. There is no analysis in Hansra of the issue, or of the conflict between the policy of the automobile insurance scheme contained in the two Acts - the Insurance Act and the Compulsory Automobile Insurance Act - and the ability of an automobile insure to rescind ab initio.
29At para. 52, Justice Feldman, speaking for the court in Merino, makes it clear that the proposition advanced by Mr. Euler cannot stand:
I conclude that an automobile insurer in Ontario does not have the option of unilaterally rescinding a contract of insurance at common law ab initio, but is bound by the statutory scheme contained in the two Acts [The Insurance Act and the Compulsory Automobile Insurance Act] and the Regulation. The rights and obligations of insurers and insureds, as well as injured third parties, are governed by those statutory provisions.
30As explained in Merino, allowing an insurer to rescind at common law for misrepresentation would undermine the policy of the legislation to provide certain statutory accident benefits to every person who obtained a policy of insurance, including by misrepresentation, and to provide protection to innocent third parties. See Halsbury’s Laws of Canada, HMV-246, Cumulative Supplement March 15, 2000.
31Therefore, pursuant to the Insurance Act, a misrepresentation or, as is the case here, a failure to notify of a material change in risk, does not render the policy voidable nor is the policy automatically terminated from the date of breach. The consequence of the breach is governed by s. 233 (1) of the Act: “ a claim by the insured is invalid and the right of the insured to recover indemnity is forfeited.” The consequence of the breach of the policy affects the right to claim under the policy, not the policy itself. Further, if the policy is not void ab initio, there is no obligation on the insurer to return the premium going back to the date of the breach.
Conclusion
32For the reasons given, the application by Mr. Euler for a declaration that Economical is obligated to defend and indemnify under the policy is dismissed.
Costs
33The parties have agreed that the successful party on this application should be awarded costs in the sum of $1,500. Accordingly, Economical shall have its costs of this application, fixed in the sum of $1,500.
“original signed by”
The Honourable Justice D. C. Shaw
Released: April 22, 2021
COURT FILE NO.: CV-20-0373-00
DATE: 2021-04-22
ONTARIO
SUPERIOR COURT OF JUSTICE
B E T W E E N:
Jeremy Euler
Applicant
- and -
Economical Insurance
Respondent
REASONS ON APPLICATION
Shaw J.
Released: April 22, 2021
/lvp