The Ontario Court of Appeal recently released its decision in Kozel v The Personal Insurance Company,(1) which, among other things, focused on exercising the discretionary relief from forfeiture power available to Ontario courts under both the Courts of Justice Act and the Ontario Insurance Act. The decision not only reviews how previous Canadian cases dealt with requests for relief from forfeiture, but also highlights a growing trend of avoiding labels and analysing the underlying principles.
The case involved a 77-year-old woman insured under an Ontario automobile insurance policy who seriously injured a motorcyclist in Florida. At the time of the accident, she was driving without a driver's licence, having failed to renew it despite receiving a renewal notice from the ministry. She subsequently renewed the licence. In Canada, including Ontario, automobile policies are the only policies that are approved by the insurance regulators and the policy forms are standardised across the country. The policies contain statutory conditions (imposed by law) including: "4(1) The insured shall not drive or operate or permit any other person to drive or operate the automobile unless the insured or other person is authorized by law to drive or operate it."
The insured sought a declaration that the insurer was required to indemnify and defend her. The issues addressed were whether the cure of the technical breach was sufficient (the trial judge held yes, but the Ontario Court of Appeal said no) and if not, whether she could get relief from forfeiture (the trial judge held no, but the appeal court said yes). It is this latter issue that is of interest to insurers and insureds alike.
Under Ontario law (which is similar to but not necessarily the same as that in the other provinces), the relief from forfeiture provisions are as follows:
- Section 98 of the Courts of Justice Act: "A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just."
- Section 129 of the Insurance Act:
"Where there has been imperfect compliance with a statutory condition as to the proof of loss to be given by the insured or other matter or thing required to be done or omitted by the insured with respect to the loss and a consequent forfeiture or avoidance of the insurance in whole or in part and the court considers it inequitable that the insurance should be forfeited or avoided on that ground, the court may relieve against the forfeiture or avoidance on such terms as it considers just."(2)
The Ontario courts had previously held that neither Section 129 of the Insurance Act nor Section 98 of the Courts of Justice Act allows a court to grant relief of a breach of a condition precedent.(3) The appeal court noted that Section 129 of the Insurance Act is significantly narrower than Section 98 of the Courts of Justice Act and allows relief to be given only for imperfect compliance in relation to proof of loss.
In order to exercise the discretion conferred, the court must consider a threshold question and then three factors.(4)
The threshold question is a determination of whether the breach constitutes imperfect compliance, in which case relief may be available, or non-compliance with a condition precedent, in which case relief is not available. The focus for forfeiture cases is whether the breach was incidental or whether it was serious, fundamental or integral. Failure to give timely notice of a claim(5) in an occurrence policy has been held to be non-compliance, while failure to give timely notice in a claims-made policy,(6) failure to cooperate as required by the policy(7) and failure to institute timely action(8) have been found to be fundamental breaches or breaches of a condition precedent.
Once a court has characterised the breach as being incidental or constituting imperfect compliance, it goes through a three-step analysis as to whether it should exercise its discretion and grant relief. It considers the following:
- The conduct of the applicant seeking relief from forfeiture – in the case at hand, the court held that this required an examination of the reasonableness of the breaching party's conduct as it related to all facets of the contractual relationship. Despite rejecting the breaching party's due diligence defence, the court nonetheless held that because she acted promptly to renew her licence when she found out, and because she had always paid her premiums promptly, this requirement was satisfied.
- The gravity of the breach – in the case at hand, the court found that her ability to drive safely was not affected by this administrative matter.
- The disparity between the value of the property forfeited and the damage caused by the breach – in the case at hand, the court had no difficulty in holding that losing $1 million in coverage far outweighed the prejudice to the insurer of breach of the condition.
Insurers should take the following points from this case:
- Labels may still mean something. Identifying true conditions precedent and calling them such will strengthen an insurer's position and prevent a relief from forfeiture application from getting past the threshold question. As only automobile policies are imposed by regulators in Canada, this provides some scope for insurers to fix their policy wording.
- Do not label ordinary conditions or terms in general as conditions precedent. Using too wide a brush may undermine your ability to shelter true conditions precedent from such applications.
- Step back and analyse:
- the seriousness of the breach;
- the conduct of the insured (past as well as that connected to the breach);
- the empathy that the insured will garner; and
- most importantly, the consequences to each side of the other side's position prevailing.
- If as the insurer you still want to deny coverage and contest a relief from forfeiture application, have cogent evidence and arguments on the threshold question, as well as on each of the three factors that the applicant will need to address.
For further information on this topic please contact Frank Palmay at McMillan LLP by telephone (+1 416 865 7000), fax (+1 416 865 7048) or email (firstname.lastname@example.org). The McMillan LLP website can be accessed at www.mcmillan.ca.
(2) Found in Part III which covers insurance contracts in general. However, the part including Section 129 of the Insurance Act does not apply to accident and sickness, life or marine insurance. For accident and sickness contracts, see Section 328 of the act.