Insurance contracts are contracts requiring the utmost of good faith. At common law, automobile insurers can typically rescind (i.e., treat as void ab initio or 'from the beginning') an auto insurance policy based on a misrepresentation or material non-disclosure of the insured who is applying for insurance. Comparatively, an automobile insurer cannot rescind a contract if it discovers a misrepresentation or non-disclosure on an insurance application after a collision has already occurred.
However, in Merino v. ING Insurance Company of Canada,1 the Ontario Court of Appeal ruled that an insurer, despite having elected to rescind an auto insurance policy prior to any accidents occurring, could still be sued by a third-party claimant for compensation for injuries sustained in a subsequent motor vehicle accident caused by its insured.
Timothy Klue ("Klue") and his wife, Sonia Abou-Khalil ("Abou-Khalil") were joint owners of a vehicle. On May 29, 2002, they had applied for insurance coverage on their vehicle, and ING Insurance Company of Canada ("ING") had issued a one-year policy.
However, ING's underwriting investigation revealed misrepresentations in the application regarding Abou-Khalil's driving record. As a result, on July 2, 2002, ING sent a registered letter to Klue and Abou-Khalil advising that, because of the non-disclosure of Abou-Khalil's previous driving record, the insurance coverage was "void from the inception date" and their right of indemnity was forfeited. Both Klue and Abou-Khalil read the letter, and because they believed their vehicle was uninsured, they did not drive it.
Unfortunately, Klue drove the vehicle on September 12, 2002 after having lost his job and consuming alcohol, and in doing so, Klue struck a pedestrian, Karlay Merino ("Merino"), who suffered catastrophic injuries.
Merino and others filed a Statement of Claim against Klue and Abou-Khalil on August 19, 2004, and they obtained Judgment for $2,000,000 on July 28, 2011. Having been told by ING that Klue and Abou-Khlali were uninsured because their insurance policy had been rescinded, the Plaintiffs also sued Ms. Merino's mother's insurer, Allianz, in the same action pursuant to the uninsured automobile coverage it provided. After non-pecuniary accident benefits of $181,107 paid by the Société de l'assurance du Québec were deducted, the Plaintiffs obtained a net award of $18,893 against Allianz. ING did not seek to be added to that action.2
On April 16, 2012, the Plaintiffs commenced an action against ING under s. 258(1) of the Insurance Act.3 Section 258(1) of the Insurance Act provides as follows:
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.
As such, the Plaintiffs sued on the basis that ING's insurance contract with Klue and Abou-Khalil had not been properly terminated by ING and that Klue and Abou-Khalil were insured by ING on the date of the accident with Merino.
On an application for summary judgment, the motions judge had to decide whether ING was entitled to rescind the insurance contract with Klue and Abou-Khalil and, if so, whether the rescission had the effect of precluding the injured Plaintiff, as an innocent third party, from making a claim against ING under s. 258 of the Insurance Act.
The motions judge dismissed the Plaintiffs' action on summary judgment. He held that ING was entitled to rescind the policy based on material misrepresentation, making it void ab initio, and that ING had done so effectively. The Plaintiffs could not recover under s. 258(1) because the contract had been rescinded prior to the accident, and thus, there was no contract of indemnity in place at the relevant time. The Plaintiffs appealed.
It is worth reviewing the key issues on the appeal and the Court's findings.
- Are the appellants entitled to recover against the respondent under s. 258(1) of the Insurance Act if the contract was not validly rescinded?
The Court held that s. 258(1) gives an injured third party the right to collect on his/her judgment against the at-fault driver from that driver's insurer where the insurer issued an automobile insurance policy that provided for indemnity, regardless of any misrepresentation that the insured may have made in the application for insurance.4
The Court held that, where an automobile insurance policy is properly terminated before the accident, s. 258 does not apply. However, in this case, the Court found that ING did not terminate the contract in accordance with the provisions of the Insurance Act and the relevant Regulations.
- Is an automobile insurer entitled to rescind an automobile insurance contract at common law, making it void ab initio, based on misrepresentation in the application?
Pursuant to s. 11 of the Statutory Conditions – Automobile Insurance5 (the "Regulation"), an insurer has to give 15 days' notice by registered mail or 5 days' notice by personal delivery of its intent to terminate an automobile insurance policy. The insurer must also return the excess premium paid by the insured.
The Court held that, in this case, ING did not terminate in accordance with s. 11, because the termination letter that it sent by registered mail did not give 15 days' notice of termination and there was no return of premium because no premium had been paid. Non-compliance with the Regulation meant that the contract remained in force, and s. 258(1) of the Insurance Act remained applicable.6
Moreover, s. 233 of the Insurance Act also remained applicable. Section 233 states:
- an applicant for a contract,
- gives false particulars of the described automobile to be insured to the prejudice of the insurer, or
- knowingly misrepresents or fails to disclose in the application any fact required to be stated therein;
- the insured contravenes a term of the contract or commits a fraud; or
- the insured wilfully 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.
- an applicant for a contract,
- Subsection (1) does not invalidate such statutory accident benefits as are set out in the Statutory Accident Benefits Schedule.
- 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.
The Court held that s. 233 did not allow a misrepresentation to 'void' an insurance contract. Instead, it only affected the obligations flowing between the insured and the insurer—its operation did not terminate the insurer's obligations altogether.
Prior to the uniform automobile insurance legislation of 1932, which introduced the concept of compulsory minimum third-party liability automobile insurance, the effect of misrepresentation was to void the insurance contract. However, that is no longer the law, and under s. 233, a misrepresentation does not render the contract void. Consequently, the Court held that allowing an insurer to rescind at common law for misrepresentation (as the motions judge had done) would undermine ss. 233 and 258 of the Insurance Act.
As such, the Court held 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 those of injured third parties, are governed by those statutory provisions".8
- If the contract was not validly rescinded, is the appellants' recovery limited to the statutory minimum of $200,000 under s. 251 of the Insurance Act, based on the defence of knowing misrepresentation, asserted under s. 258(11)?
Every motor vehicle liability policy is required to insure for liability to a minimum amount of $200,000 for any one accident. In this case, while Klue had signed the application for insurance, Abou-Khalil had not, and Klue had not signed as her agent. Since Abou-Khalil had not signed the application, ING could not rely on the defence of knowing misrepresentation contained in ss. 233(1)(a)(ii) and (3). Therefore, the Plaintiffs' entitlement was not limited to the $200,000 minimum liability limit. They were entitled to the policy limit of $1,000,000.9
- Are the appellants barred from recovery under s. 258(1), based on the doctrine of waiver or abuse of process, because they initially pursuant uninsured motorist claims against Allianz?
The Court refused to give effect to the grounds of appeal relating to waiver or abuse of process.
The Merino decision is important because the Court found that an automobile insurer in Ontario could not rescind an automobile insurance contract at common law ab initio. Because ING did not give 15 days' notice of termination, their termination letter did not terminate the contract under s. 11 of the Regulation. The contract remained in force, and the Plaintiffs were ultimately able to sue ING under s. 258 of the Insurance Act to recover the amount of their Judgment. Further, without being able to establish that Klue had knowingly misrepresented facts in the application or that he had acted as agent of Abou-Khalil, ING did not have a defence under 258(11) of the Insurance Act. As a result, the insurer was found liable for the policy limits.
As a result of this decision, automobile insurers in Ontario
must comply with giving advance notice as prescribed by the
Regulation and can no longer rescind without prior notice based on
an alleged misrepresentation by those applying. Although this
decision is not binding on Alberta courts, it is certainly
persuasive. We can expect to see great interest in pursuing
an appeal to the Supreme Court of Canada for further
1 2019 ONCA 326 [Merino].
2 Ibid at para 2.
3 R.S.O. 1990, c. I.8 [IA].
4 Merino, supra note 1at para 28.
5 O. Reg. 777/93.
6 Merino, supra note 1 at paras 33-34.
7 R.S.O. 1990, c C.25.
8 Merino, supra note 1 at para 52.
9 Ibid at para 66.
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