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
Facts
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.
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