In the recent decision of M.B. Kouri Insurance Brokers Ltd. v. R.L. Gougeon Ltd., the Ontario Court of Appeal ruled a broker could issue a binding renewal of an insurance policy despite a broker's agreement stating it did not have this authority.[i] Unusually, the insurer argued the renewal was binding because it wanted to recover premiums collected by the broker for the unauthorized renewal. The Court's reasoning, however, may open the door to other circumstances in which a court might require an insurer to cover risk that it did not willingly assume.
Kouri was an insurance broker whose clientele consisted solely of about 175 campground operators. Kouri obtained insurance for its clients from Ecclesiastical Insurance through Gougeon, a wholesale broker with a book of business for Ecclesiastical. The sub-broker agreement between Gougeon and Kouri provided that Kouri had no authority to bind Ecclesiastical to an insurance contract.
All the insurance policies for the campground owners had a common expiry date of May 30, 2004. In early 2004, Kouri asked Gougeon about a possible renewal of the Ecclesiastical policies. Having received no response, on May 10 Kouri unilaterally issued new certificates of insurance to its clients for a further year-long term of coverage from Ecclesiastical. A few days later, Ecclesiastical advised Gougeon that it was extending the term of the existing policies for 30 days while it decided whether it would renew the program. In the meantime, Kouri invoiced its clients for premiums at an increased rate for renewed annual coverage. Kouri did not advise Ecclesiastical or Gougeon that it had sent its clients new certificates for another year's coverage or that it had collected premiums for the first month of such coverage.
In early July 2004, Kouri advised Gougeon that it had obtained coverage from another insurer effective July 1. After deducting a commission, Kouri used the money it had received as premiums for Ecclesiastical's coverage in June to pay the premiums charged by the new insurer. Some time later, Gougeon and Ecclesiastical learned about the certificates that Kouri had issued for the renewal of the Ecclesiastical policies and the premiums Kouri had collected for it. They demanded Kouri remit premium payments to Ecclesiastical for its June coverage. Kouri refused and sued Ecclesiastical and Gougeon for a declaration that it owed Ecclesiastical nothing and, in fact, was entitled to damages for Ecclesiastical's failure to decide on potential renewal of its policies in a timely way. Ecclesiastical counter-sued for the payment of premiums collected by Kouri for its coverage in June 2004.
The trial judge found that Ecclesiastical was not entitled to premiums for coverage in June because it did not tell Kouri that there would be a cost for the 30-day extension. Even if it had, the trial judge found that Ecclesiastical had been negligent in not determining the issue of renewal in a timely way, and that Kouri had as a result suffered damages equivalent to the premiums paid on account of the purported renewal. Ecclesiastical and Gougeon appealed.
The Ontario Court of Appeal's Decision
The Ontario Court of Appeal allowed the appeal and ordered Kouri to pay Ecclesiastical the amounts received from its clients as premiums for the renewal of coverage. The Court relied on section 402 of the Insurance Act, which provides that an agent or broker who receives money as a premium for an insurance contract is deemed to hold such premium in trust for the insurer.[ii] In the Court's view, Kouri's unilateral act of sending out certificates of insurance created valid contracts. The issue was not whether Kouri could bind the insurer; on the face of the sub-broker agreement, Kouri had no such authority. However, an insured who received a certificate had no knowledge of the terms of the sub-broker agreement and no reason to question its validity. As a result, in the Court's view Kouri's "ostensible authority was sufficient to create binding contracts of insurance on behalf of Ecclesiastical."
The Court also found that Ecclesiastical's failure to advise Kouri in a timely way about a possible renewal was "arguably irresponsible" but not illegal or wrongful conduct. All parties were corporate entities entitled to pursue their own commercial interests.
Implications of the Court of Appeal's Decision
Canadian insurers generally assume they cannot be bound by unilateral acts of brokers absent a special agreement to the contrary. In some cases an insurer has been ordered to honour a claim made by an insured to whom a policy was not issued due to an agent or broker failing to forward the insurance application to the insurer. In such cases, however, the insured had paid the required premium and the insurer would have issued a policy had it received the application.
The outcome in Kouri v. Gougeon was obviously influenced by Ecclesiastical's position that the renewals issued by Kouri were binding despite Kouri's lack of authority to act as it did. However, the Court's reasoning with respect to Kouri's ostensible authority could apply in situations where an insurer was contesting coverage. On the Court's analysis, the central issue was not Kouri's actual authority but the insureds' perception of it. As a result, if the issue were not the insurer's right to collect premiums but rather its obligation to cover a large claim, the Court might well conclude that an insured was entitled to coverage even though a renewal had been issued by a broker without the insurer's consent. In such a case the insurer might have a claim for indemnity against the broker, but its right of recovery could be limited by the broker's inability to pay a large judgment.
To protect themselves from such a situation, insurers should ensure that policies clearly set out the limit of a broker's authority to issue renewals. Insurers should also remind brokers of the limits of their authority under their agreements in situations where the coverage will expire shortly and no decision on a renewal has been made. Unfortunately, neither of these measures provides complete protection because insureds may not be able to distinguish between certificates actually issued by the insurer and those devised by a broker who has acted with authority in past dealings.