The Ontario Court of Appeal recently released its decision1 which among other things focused on the exercise of the discretionary relief from forfeiture power available to Ontario courts under both the Courts of Justice Act ("CJA") and the Ontario Insurance Act ("IA"). The decision not only reviews how previous Canadian cases dealt with requests for relief from forfeiture, it points to a growing trend of avoiding labels and analyzing the underlying principles.
The facts in the case involved a 77 year old lady insured under an Ontario automobile insurance policy who seriously injured a motorcyclist in Florida. At the time of the accident, she was driving without a driver's license having failed to renew her license despite receiving a renewal notice from the Ministry. She subsequently renewed it. In Canada including Ontario, automobile policies are the only policies that need be approved by the insurance regulators and thus the policy forms are standardized across Canada. Auto policies contain Statutory Condition (imposed by law) that include:
4(1) The insured shall not drive or operate or permit any other person to drive or operate the automobile unless the insured or other person is authorized by law to drive or operate it.
The insured sought a declaration that the insurer was required to indemnify and defend her. The issues addressed were whether the cure of the technical breach was sufficient (trial judge held yes; Court of Appeal said no) and if not, whether she could get relief from forfeiture (trial judge held no; Court of Appeal said yes). It is this latter issue that should be of interest to insurers and insureds alike.
Under Ontario law (similar but not necessarily the same in the other provinces), the relief from forfeiture provisions are as follows:
CJA 98 A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.
IA 129 Where there has been imperfect compliance with a statutory condition as to the proof of loss to be given by the insured or other matter or thing required to be done or omitted by the insured with respect to the loss and a consequent forfeiture or avoidance of the insurance in whole or in part and the court considers it inequitable that the insurance should be forfeited or avoided on that ground, the court may relieve against the forfeiture or avoidance on such terms as it considers just.2
Ontario Courts had previously held that neither IA 129 nor CJA 98 allow a court to grant relief of a breach of a condition precedent.3 The Court of Appeal noted that ICA 129 is significantly narrower than CJA 98 and only allows relief to be given for imperfect compliance re proofs of loss.
Courts have held that in order to exercise the discretion conferred, a threshold question and then three factors need to be considered:4
The threshold question is a determination of whether the breach constitutes imperfect compliance in which case relief may be available or non-compliance with a condition precedent in which case relief is not available. The focus for forfeiture cases is whether the breach is incidental or whether it is serious, fundamental or integral. Failure to give timely notice of a claim5 in a "occurrence policy" is non-compliance while failure to give timely notice in a "claims made policy";6 failure to cooperate as required by the policy7 and failure to institute timely action8 were held to be fundamental breaches or breaches of a condition precedent.
Once the court characterizes the breach as being incidental or constituting imperfect compliance, it then goes through a three step analysis as to whether it should exercise its discretion and grant relief. It looks at:
- The conduct of the applicant seeking relief from forfeiture. The Court held that this required an examination of the reasonableness of the breaching party's conduct as it relates to all facets of the contractual relationship. Despite rejecting the breaching party's due diligence defence, the Court nonetheless held that because the insured acted promptly to renew her license when she found out and because she had always paid her premiums promptly, this requirement was satisfied.
- The gravity of the breach. The Court found that her ability to drive safely was not affected by this administrative matter.
- The disparity between the value of the property forfeited and the damage caused by the breach. The Court had no difficulty in holding that losing $1 million in coverage far outweighed the prejudice to the insurance company of the breach of the condition.
What should insurers take from this case:
- Labels may still mean something. Identifying true condition precedents and calling them such will strengthen an insurer's position and prevent a relief from forfeiture application from getting past the threshold question. As only automobile policies are imposed by regulators in Canada, this provides some scope for insurers to fix up their policy wording.
- Do not label ordinary conditions or terms in general as conditions precedent. Using too wide a brush may undermine your ability to shelter true conditions precedent from applications for relief from forfeiture.
- Step back and analyse the seriousness of the breach; the conduct of the insured (past as well as that connected to the breach); the empathy that the insured will garner and most importantly the consequences to each side of the other side's position prevailing.
- If you as insurer still want to deny coverage and contest a relief from forfeiture application, have cogent evidence and arguments on the threshold question as well as on each of the three factors that the applicant will need to address.
1 Kozel v. The Personal Insurance Company (2014) 119 O.R. (3d) 55; 2014 ONCA 130 – unanimous decision of Rosenberg, MacPherson and LaForme JJ.A.
2 Found in Part III which covers insurance contracts in general. However, the part including IA 129 does not apply to accident and sickness; life or marine insurance. For a&s contracts see IA 328.
3 See Stuart.
4 Saskatchewan River Bungalows  2 S.C.R. 490;  S.C.J. No. 59 (Supreme Court of Canada)
5 Falk Bros. Industries Ltd. v. Elance Steel Fabricating Co.,  2 S.C.R. 778;  S.C.J. No. 97 (Supreme Court of Canada)
6 Stuart v. Hutchins (1998), 40 O.R. (3d) 321 (Ontario Court of Appeal)
7 Canadian Newspapers C. v. Kansa General Insurance Co. (1996), O.R. (3d) 257 (Ontario Court of Appeal)
8 See Falk Bros.
The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.
© McMillan LLP 2014