Section 258 (1) of the Insurance Act States:
Any person who has a claim against an insured for which indemnity is provided by a contract evidenced by a motor vehicle liability policy, even if such person is not a party to the contract, may, upon recovering a judgment therefor in any province or territory of Canada against the insured, have the insurance money payable under the contract applied in or towards satisfaction of the person’s judgment and of any other judgments or claims against the insured covered by the contract and may, on the person’s own behalf and on behalf of all persons having such judgments or claims, maintain an action against the insurer to have the insurance money so applied.
Section 258 (4) further confirms that the Insurer has absolute liability towards any person who is entitled to have insurance money under subsection (1) and claim is not prejudiced by, inter alia:
any act or default of the insured before or after that event in contravention of this Part or of the terms of the contract;
Essentially, an Insurer cannot penalize an innocent third party for any acts committed by the Insured that may give reasons to the Insurer to void coverage. Notwithstanding this, the Insurer may have an opportunity to recover paid claim monies from its own Insured, under certain circumstances, where the Insured has violated policy conditions (such as impaired driving).
Now, imagine a scenario where the Insurer becomes aware of certain misrepresentations made by the Insured, during the term of the policy, that were material enough to void coverage, ab initio. The questions arises: Can an automobile Insurer void coverage, ab initio, under an automobile policy, considering the fact that the law mandates liability insurance when a vehicle is being driven on road. It would make less sense to be able to void coverage ab initio, which would mean that the Insured, who was under the impression of being Insured, was told that coverage does not exist at the date of the accident, as Insurers decided to void coverage ab initio.
In an interesting decision by the Ontario Court of Appeal, above issues were discussed at length.
The facts of the case under Merino v. ING Insurance Company of Canada, 2019 were as under:
Ms. Karla Merino (Plaintiff/Appellant), a pedestrian, was catastrophically injured on September 12, 2002, when she was struck by a car driven by Timothy Klue. Mr. Klue and his wife, Sonia Abou-Khalil, were joint owners of the car who had applied for automobile insurance coverage, on or about May 29, 2002, over three months before the accident and the defendant/respondent insurer, ING Insurance Company of Canada, had issued a one-year policy. However, because of misrepresentations in the application regarding Ms. Abou-Khalil’s driving record, the respondent insurer cancelled the policy, ab initio, by sending a registered letter to the Insured, on or about July 2, 2002. Believing that the vehicle was uninsured, both Mr. Klue and his wife did not drive it until Mr. Klue drove on the date of the accident, after he had lost his job and consumed alcohol.
SUMMARY JUDGMENT MOTION
On April 16, 2012, after obtaining judgment against Mr. Klue, Ms. Abou-Khalil, and Allianz (the Insurers under “unidentified motorist coverage”, in the amount in excess of $2,000,000, the appellant(s) commenced the action under appeal against the ING on the basis that the insurance contract had not been properly terminated and thus coverage existed at the material time of the accident.
The motion judge dismissed the appellants’ action on summary judgment and found that the respondent insurer was entitled to rescind/cancel the insurance contract based on material misrepresentation, making it void ab initio and of no effect. Further, it was held that because the contract was rescinded before the date of the accident, the appellants could not recover under s. 258(1) because there was no contract of indemnity in place when the accident occurred.
The Plaintiff(s) appealed.
POSITION OF THE PARTIES
The policy was not validly terminated by the respondent insurers and thus, coverage existed at the material time of the accident.
The policy was rescinded much before the date of accident and thus no coverage is available.
The following issues, inter alia, were discussed by the court of appeal.
1) Are the appellants entitled to recover against the respondent if the contract was not validly rescinded?
2) Is an automobile insurer entitled to rescind an automobile insurance policy, ab initio, based on misrepresentations made by the Insured?
Are the appellants entitled to recover against the respondent if the contract was not validly rescinded?
The court found that if the coverage was properly terminated before the date of the accident, the injured third party will have no rights to recover under the policy as no coverage existed at the time of the accident. The court stated:
I agree with the motion judge that s. 258 can have no application where an automobile insurance policy is no longer in existence at the date of the accident because it was properly and effectively terminated by either party before that date.
Is an automobile insurer entitled to rescind an automobile insurance policy, ab initio, based on misrepresentations made by the Insured?
To terminate an automobile insurance, an insurer may, in accordance with the statutory regulations, either give 15 days’ notice by registered mail, or five days’ notice by personal delivery. In both cases, the insurer must refund the excess premium paid by the insured. The court stated:
The July 2, 2002 letter was sent by registered mail, but it did not give 15 days’ notice of termination. There was no return of premium because no premium had been paid. Because the contract was not terminated in accordance with the Regulation, if the respondent’s attempt to rescind was not effective, the contract remained in force.
Further, the court held that allowing the Insurer to void contract ab initio will be non-consistent with the compulsory automobile insurance act, that requires a vehicle must maintain automobile insurance in Ontario when driven. It is thus the requirement of enough notice period so that the Insured could shop for alternatives.
Feldman J.A, writing for the court and allowing the appeal, concluded:
I would set aside the judgment and reasons of the motion judge. An automobile insurer in Ontario cannot rescind an automobile insurance contract at common law ab initio, and the respondent’s letter purporting to do that was not effective. Because the letter did not give 15 days’ notice of termination, it also did not have the effect of terminating the contract under s.11 of the Regulation. The contract therefore remained in effect on the date of the accident.
Further, it was held that the Insurers are liable up to the policy limits.
Because the respondent did not establish on the record that Mr. Klue knowingly misrepresented facts in the application or acted as the agent of Ms. Abou-Khalil, the respondent has not established a defence under s. 258(11) of the Act. It is accordingly liable for the full amount of the policy limits.
Just playing the devil’s advocate here. Mr. Timothy Klue, the driver of the car who consumed alcohol on the day, understood the policy is not in force since he did not drive the vehicle after receiving the July letter. He had enough time to obtain another insurance policy before the accident, which he did not choose to obtain. Rather, he chose not to drive the vehicle at all, except on the day of the accident. For argument sake, he had much more than 15 days to obtain insurance since termination of the policy and before the date of accident. While I agree that the Insurers did not comply with the statutory regulations in terminating the policy (15 days notice and no return in premium, which is not applicable as no premium was ever paid), what confuses me is that Mr. Klue, had enough time to obtain an insurance policy, and he was very well aware that he was driving uninsured.