Canada: Insurance Case Law Roundup - March 19, 2010

The last few weeks of 2009 saw the release of four interesting decisions, from various levels of Canadian courts, on important insurance law matters. While the decisions were not overtly related to each other, each was noteworthy in its own right, and is summarized below.

1. Regulatory Jurisdiction
Royal Bank of Canada v. Mujagic
[2009] O.J. No. 4891 (Ont. S.C.J.)

In this case, the plaintiff Royal Bank (RBC) sought to enforce its mortgage rights against the defendants by way of summary judgment. While the defendants did not dispute that the mortgage was valid and in default, they argued, among other things, that the plaintiff and third party, RBC Insurance, negligently misrepresented the nature and quality of insurance promoted at the plaintiff's branch. Further, the defendants alleged that RBC and RBC Insurance violated legal requirements regarding the provision of insurance products, as the plaintiffs had not obtained the applicable licence.

The defendants were insured under a group disability policy provided by a third party, Canada Life. The beneficiary of the policy was the plaintiff, RBC. An employee of RBC took the application from Mr. Mujagic for coverage and coverage was instantaneously provided on the transmission of the application to either RBC Insurance or Canada Life. A brochure representing the policy of insurance, printed with the logo and name of RBC on the front and back covers was also provided to the defendants. RBC Insurance, meanwhile, administered a database of insured persons under the group policy and had responsibility for answering questions and providing information to those insured.

At issue was whether Ontario's insurance scheme applied to banks in the promotion and provision of insurance products. While the Supreme Court of Canada has found that a province's insurance regime applies to federally chartered banks (see Canadian Western Bank v. Alberta, [2007] 2 S.C.R. 3), Ontario has yet to enact enabling legislation specifically applying the provincial insurance scheme to such banks. Despite this fact, the Ontario Superior Court of Justice found "any person who does certain business activities" to be "bound by the provisions of the scheme." Accordingly, if RBC's or RBC Insurance's activities met the definition of "agent" under the Insurance Act (Ontario) or "insurance broker" under the Registered Insurance Brokers Act, respectively, the parties would be governed by the respective statute.

Section 1 of the Insurance Act defines "agent" to include a person that "[s]olicits insurance on behalf of an insurer or transmits, for a person other than .itself, an application for, or a policy of insurance to or from such insurer, or offers or assumes to act in the negotiation of such insurance or in negotiating its continuance or renewal with such insurer". Ultimately, the Court found that there was evidence suggesting that RBC solicited a policy of insurance and transmitted it to an insurer within the meaning of section 1 of the Insurance Act.

Meanwhile, the Registered Insurance Brokers Act defines "insurance broker" to include those that act or aid "in any manner in soliciting, negotiating or procuring the making of any contract of insurance" or that examine, appraise, review or evaluate "any insurance policy, plan or program" or make recommendations or provide advice with regard to the above. On this point, the Court found that there was evidence that RBC Insurance "offered or assumed to act in the negotiation" in insurance within the meaning of the Registered Insurance Brokers Act.

As such, the Court found that factual issues were raised with respect to a potential breach of the Ontario insurance scheme, which raised triable issues. The Court thus dismissed the motion for summary judgment.

2. Policy Interpretation - Fire Insurance
Hum v. Grain Insurance & Guarantee Co.
2009 ABQB 714 (Alta. Q.B.)

In this case from the Alberta Court of Queen's Bench, the applicants sought coverage as mortgagees under a standard mortgage clause in a fire insurance policy (the Policy). The Policy was issued to an insured who was not a party to the proceedings (presumably the mortgagor). The insured property was damaged in a November 2007 fire, which was deliberately set by the insured's tenant.

The Standard Mortgage Clause of the Policy stated that insurance would be in force as to the interest of the mortgagee "notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured.". The Standard Mortgage Clause specifically stated that it would supersede any conflicting provisions but only as to the interest of the mortgagee. The Policy, however, also contained an endorsement excluding loss resulting from vandalism or criminal acts caused by tenants.

The insurer denied coverage to the applicants on the basis of the tenant's exclusion endorsement. While the applicants argued that the wording of the Standard Mortgage Clause was clear and included protection in the immediate case, the insurer attempted to distinguish between policy exclusions and breaches of terms. According to the insurer, policy exclusions or conditions apply to insureds and mortgagees, while breaches of a term of a policy on the part of an insured or an insured's tenant may still allow a mortgagee to recover pursuant to the Standard Mortgage Clause.

While the Court found no case law considering the interaction between a Standard Mortgage Clause and a tenant's exclusion clause specifically, it examined several cases that considered the relationship between a Standard Mortgage Clause and other types of exclusion clauses. Specifically, the Court relied on Royal Bank of Canada v. State Farm Fire and Casualty Co., [2005] 1 S.C.R. 779 for the proposition that a Standard Mortgage Clause supersedes "any Exclusions in a policy which are in conflict with the Standard Mortgage Clause". According to the Court of Queen's Bench, the Supreme Court's findings suggest that in such cases, "the Standard Mortgage Clause permits recovery by a mortgagee in circumstances where the Exclusion may operate so as to otherwise preclude recovery by an insured."

Ultimately, the Court found that the Standard Mortgage Clause was clear in protecting the mortgagees against any act attributable to the mortgagor, owner or occupant of the property, while superseding any conflicting provisions as to the interests of the mortgagee. Citing the Supreme Court in Royal Bank, the Court found that the mortgagee's coverage was thus unaffected by exceptions to the mortgagor's coverage that conflicted with the Standard Mortgage Clause. As such, the applicants prevailed.

3. Policy Interpretation - Accident & Sickness Insurance
Co-operators Life Insurance Co. v. Gibbens
2009 SCC 59


The respondent insured, who was a beneficiary under a group insurance policy issued by the appellant, contracted herpes as a result of having unprotected sex. Following becoming infected, he suffered inflammation of the spinal cord (transverse myelitis) resulting in total paralysis from his mid-abdomen down, which was a rare complication of the disease. He subsequently claimed compensation under the group insurance policy, which provided coverage for losses "as a result of a Critical Disease or resulting directly and independently of all other causes from bodily Injuries occasioned solely through external, violent and accidental means." (emphasis added) The definition of "Critical Disease" did not include transverse myelitis and the insurance policy lacked a definition of "accident" or "accidental means". The central issue, therefore, was whether the respondent's loss could be considered a result of accidental means (nothing turning on the definitions of "external" and "violent", as those terms have long been subsumed by the definition of "accident").

Lower Courts

At trial, the Supreme Court of British Columbia relied on Martin v. American International Assurance Life Co., [2003] 1 S.C.R. 158, for the proposition that in determining whether the loss occurred by accidental means, a Court must consider whether the consequences were unexpected. Since the respondent's paralysis was an unexpected consequence of his actions, the BCSC found the paralysis to be caused by "accidental means" within the meaning of the insurance policy. On appeal, the British Columbia Court of Appeal rejected the notion that an "accident" could be determined by simply applying an "expectation test". Rather, an "ordinary person's understanding" of the words "accident" and "accidental" must be considered. Such an understanding requires an unexpected mishap or external factor. Applying this concept, the Court of Appeal found that the transverse myelitis did not arise naturally, but due to an external factor, being the introduction of the virus into the insured's body. As such, the loss was found to have occurred due to an "accident".

Supreme Court Decision

In considering the definition of "accident", the Supreme Court found that such words should be given their ordinary meaning. Applying this principle, it found that an accident "involves the idea of something fortuitous and unexpected, as opposed to something proceeding from natural causes" (quoting Welford's "The Law Relating to Accident Insurance"). The Supreme Court rejected the expectation test and, rather, found that the means by which a loss occurs forms a necessary part of determining whether the loss was caused by an accident. "[A] claimant who can establish that death was unexpected does not thereby, without more, establish a valid accident. Otherwise, every bad happening, natural or unnatural, whether caused by disease in the ordinary course of events or otherwise, would be classified as an accident."

Thus, the Supreme Court suggested that the entire chain of events be considered and not just the means or the end. The Supreme Court cited Sinclair v. Maritime Passengers' Assurance Co. (1961), 121 E.R. 521, to illustrate how a characterization of the facts giving rise to the loss may impact a court's findings. In Sinclair, Cockburn C.J. offered an example of a loss caused by exposure to the elements in the common course of navigating a ship (which would not be considered an accident), as opposed to a loss caused by exposure following a shipwreck (which could be held to be the result of an accident).

In the immediate case, in describing the scope of the respondent's coverage, the Supreme Court considered what an average person would understand by the terms of the policy. While such a person would understand that he or she was not buying comprehensive health insurance, "unlisted diseases or other bodily infirmities might still be covered if attributable to some antecedent event or events that could, together with the unexpected result, be characterized as accidental." Ultimately, however, the Supreme Court found that while the consequence of contracting herpes was unexpected, the insured's loss was caused by the natural transmission of disease. Specifically, "the transmission followed the normal method by which sexually transmitted diseases replicate" and could not be considered an "accident". To conclude otherwise would have added sexually transmitted diseases to the definition of "Critical Disease" and converted the insurance policy to one of comprehensive insurance for infectious diseases, contrary to the intent of the parties and their reasonable expectations. Thus, the insurer's appeal was allowed and the action dismissed.

4. Extended Warranties
Brick Protection Corp. v. Alberta (Provincial Treasurer)
[2009] A.J. No. 1450 (Alta. Q.B.)

The plaintiff, Brick Protection, offered a number of protection plans to customers purchasing merchandise at Brick Warehouse stores. The plans generally provided that Brick Protection would replace or repair any defective items for a specific period of time and supplemented the manufacturers' warranty applicable to each particular item. Typically, such additional protection cost between 10%-15% of the retail price of the item. The defendants issued notices of assessment for "insurance corporation tax" against Brick Protection in 1994, covering the taxation years 1987 to 1993 and including tax, interest and penalties. As the plaintiff's position was that as it did not carry on in Alberta the business of insurance, it had not filed the relevant returns during the applicable taxation years. While the term "business of insurance" is not defined in the Insurance Act Alberta (the "Act"), its meaning may be derived from the definition of "insurance" under the Act. At issue, therefore, was whether the protection plans offered by Brick Protection fell within the definition of "insurance" under the Act.

In its submissions, Brick Protection distinguished between the two types of insurance (value insurance - which pays a fixed sum on the occurrence of a contingency - and indemnity for the value of a loss) and warranties. According to Brick Protection, its plans offered warranties, as they guarded against product defects or failure, rather than providing reimbursement based on an unrelated occurrence or accident. The defendants, meanwhile, argued that the plans were essentially insurance products, as the warranty contracts were sold for a price and Brick Protection agreed to provide a benefit to the purchaser and pay for repairs or replacement as obligated under the contract. The defendants further argued that the plaintiff's business model, which did not include the manufacture or sale of merchandise, was that of an insurance company.

While the Court found that the warranty plans offered by Brick Protection appeared to contain "the elements of an indemnity insurance contract", it ultimately found that the plans were not contracts of insurance. The Court came to this conclusion for several reasons. First, the Court distinguished between an "indemnity", where coverage is based on an assessment of a loss or damage, with the obligation under the plaintiff's plans, which the Court characterized as "simply a covenant to fix or replace a defective product." The Court cited numerous American cases recognizing such a distinction. Second, the Court cited R. v. Anderson and Teskey, [1940] 3 W.W.R. 505 (Alta. C.A.) for the proposition that "the definition of insurance must have some relation to the subjects of insurance dealt with by the Act." The definition of insurance and the classes of insurance regulated by the Act do not include warranties and consumer goods (except vehicle warranty insurance), leading the Court to find that there was no legislative intent to include warranties, other than those for vehicles, under the legislative scheme. Finally, the Court found that, although not determinative, it was "noteworthy" that the "only companies that can offer insurance are insurance companies." On this point, the Court cited the lack of action by the Alberta government to require licensing of Brick Protection as an insurance company.

As such, the Court found that Brick Protection's plans were "classic manufacturer's, or distributor's product, warranties". While very similar to insurance contracts, such plans have historically fallen outside the realm of insurance law. The Court drew a distinction between warranties, which cover "the risk that the covered product will fail due to some inherent fault or weakness in the course of normal use," and insurance, which covers "the risk of unforeseen events or perils to the product unrelated to an inherent weakness in the product itself." Thus, the plaintiff prevailed and was successful in appealing its notices of assessment.

The decision in Brick case can be distinguished with that of Association pour la protection des automobilistes inc. c. Toyota Canada inc., 2008 QCCA 761. While the Quebec Court of Appeal in Toyota also rejected the notion that the extended warranty offered could be classified as "insurance", in reaching its decision, the Court of Appeal focused somewhat on the characteristics of the party offering the warranty. According to the Court of Appeal, a contract is a warranty if it (i) warrants against manufacturing defects only; (ii) is simply an accessory to the contract of sale; and (iii) is offered by someone with an economic interest in the contract of sale such as the seller or manufacturer. Considering the facts of the case, the Court of Appeal found that the extended plan was a warranty, as it (i) was offered by a subsidiary of the manufacturer in the context of a purchase of a new vehicle from an authorized dealer; (ii) was titled "Mechanical Protection Continuation Agreement for New Toyota Vehicle" and described as an extension of the manufacturer's warranty; (iii) essentially provided for only the repair of the vehicle if there was a defect; (iv) was subsidiary to the basic warranty; (v) was offered by a party that was not an insurer but rather a merchant under the Consumer Protection Act (Quebec); and (vi) provided that it was not intended to be insurance and that, if it was held to be insurance, the respondent was replaced by an insurer.

Thus, the Court of Appeal in Toyota relied, to some degree, on the characteristics of the party offering the extended warranty. On the other hand, the Court in Brick focused exclusively on the nature of the warranty offered by the protection plan. The decision emanating from Alberta, therefore, appears to go further in providing flexibility to those offering extended warranties, as such warranties could presumably be offered by parties unrelated to the manufacturer of the merchandise to which the warranty applies.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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