The recent Ontario Court of Appeal decision, Kozel v. The Personal Insurance Company, addressed the availability of relief against forfeiture in the insurance context under section 98 of the Courts of Justice Act (the “CJA”). The Court found that the narrow forfeiture provision  in section 129 of the Insurance Act did not preclude the court from using its wide discretion  to grant relief from forfeiture under the CJA. Where it would be “unjust or unreasonable” to find an insurance policy condition binding on an insured and where the breach would not be substantial and prejudice the insurer, a court should allow relief from forfeiture.

The plaintiff was a 77-year-old Ontario resident who had failed to renew her driver’s license. She was involved in a motor vehicle accident in Florida about four months after her license had expired. She was charged for driving with an expired license, but the charges were withdrawn due to Florida legislation allowing for a grace period of six months before charges are laid for such an offence. A motorcyclist who was injured in the accident commenced a tort action in Florida. As the plaintiff’s insurer had previously advised that she may be denied coverage, the plaintiff brought an application for a declaration that the insurer was required to indemnify her under her policy.

The application judge ordered that the insurer had both a duty to defend and indemnify the plaintiff. The insurer appealed.

The Court of Appeal dismissed the insurer’s appeal. Although the Court agreed with the insurer that the plaintiff was in breach of statutory condition 4(1), which provides that an insured shall not drive an automobile unless authorized to do so by law, the Court held that the plaintiff was entitled to relief from forfeiture under section 98 of the CJA. This section states that a court “may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.”

Relief from forfeiture refers to the power of the court to protect a person against a loss because the person has failed to perform a condition in an agreement or contract. Section 129 of the Insurance Act provides relief from forfeiture in limited circumstances, specifically those related to proof of loss. It did not apply in the plaintiff’s situation. Nevertheless, the Court held that the narrow forfeiture provision in section 129 of the Insurance Act did not preclude the Court from relying on its broad discretion to grant relief from forfeiture under the CJA.

In the insurance context, the purpose of relief from forfeiture is to prevent hardship to an insured where there has been a breach of a policy condition and where this would not result in prejudice to the insurer. Relief under section 98 of the CJAwould be available only if the insured was imperfectly compliant with a policy term, rather than non-compliant with a condition precedent to coverage. Non-compliance with a condition precedent to coverage refers to circumstances where “the breach of the term is serious or substantial” and prejudices the insurer. In this case, the Court found that, in driving with an expired licence, the plaintiff’s breach of the policy condition was relatively minor.

Then the Court considered three factors: 1) conduct of the insured; 2) gravity of the breach; and, 3) disparity between the value of the forfeiture and the damage caused. In this case, the plaintiff’s conduct was reasonable in that she had renewed her licence three days after returning to Ontario. The breach was not grave in that it had no impact on her ability to drive or on the contractual rights of the insurance company. In addition, as the plaintiff stood to lose one million dollars in insurance coverage, while the breach caused no prejudice to the insurance company, the disparity between the damage caused and the value of the forfeiture was enormous.