On July 21, the Alberta Court of Appeal released its decision in Brick Protection Corporation v. Alberta (Provincial Treasurer), in which it upheld a lower court's decision that a company selling extended warranties on appliances and furniture was not carrying on the business of insurance in Alberta at the relevant time. Although the Alberta insurance regulatory regime now captures certain extended warranty products, the Court's analysis has broad implications in other provinces in which extended warranties are not currently regulated as insurance products.
The respondent in the case, the Brick Protection Corporation, offered customers extended warranties on the furniture and appliances sold at its sister retailer, Brick Warehouse. Brick Protection was assessed by the appellant for taxes for the years 1987 to 1993 on the basis that Brick Protection was an insurance company. At issue on appeal, therefore, was whether the business of offering extended warranties made Brick Protection an insurance company for tax purposes.
In the majority opinion written by Mr. Justice Côté, the Court of Appeal began by reviewing the legislative scheme under which insurance companies are taxed in Alberta. Specifically, the relevant Alberta corporate tax statute includes a provision taxing persons or companies carrying on the business of insurance "within the meaning of the Insurance Act". The tax statute, however, does not define "insurance" nor does it refer to a specific definition within the insurance legislation. Rather, the tax statute refers to the insurance statute as a whole. Turning its attention to the Insurance Act, the Court of Appeal described the aim of the legislation as the regulation of the "traditional insurance industry" and the protection of the public from unscrupulous companies and unfair types of policies and claims processes. While the tax statute's reference to the Insurance Act could be assumed to refer to the definition of "insurance" in the Insurance Act, the Court of Appeal found the definition to be vague and ambiguous. The definition of "insurance", which is substantially the same in most other provinces, read as follows at the time:
the undertaking by one person to indemnify another person against loss or liability for loss in respect of certain risk or peril to which the object of the insurance might be exposed, or to pay a sum of money or other thing of value on the happening of a certain event.
According to the Court of Appeal, taking the definition of "insurance" literally would include "a host of things which no one in Canada would ever consider when using the word 'insurance'" and lead to absurd results. Thus, the Court of Appeal found that, in order to determine whether a certain business was "insurance", it would be necessary to
give some weight to actual practices and commercial reality. The Legislature must be presumed to legislate with reference to what actually occurs in the real world, not to theoretical nonexistent possibilities. That is doubly so when the new taxing legislation expressly refers to an existing well-known industry plus its regulation.
Insurance vs. extended warranties
Considering actual practices, the Court of Appeal noted that Brick Protection's business was not licensed under the Insurance Act, and consequently was not subject to the regulatory or consumer protection obligations of an insurance company. Notably, the Superintendent of Insurance was aware that Brick Protection was not licensed under the insurance regulatory scheme and had not required Brick Protection to become so licensed. According to the Court of Appeal, Brick Protection was also not part of "the known and very well-established insurance industry." In concurring reasons, Mr. Justice Graesser considered the Superintendent's position in not regulating Brick Protection to be "virtually conclusive" in determining whether extended warranties were properly considered insurance.
The Court of Appeal also considered the features typical of insurance coverage, namely the concepts of outside risks, indemnity, and risk assessment, and identified their absence in the case of extended warranties.
Insurance typically involves protecting against external risks created by neither the insurer nor the insured. It does not cover the risks associated with bad workmanship or design, and the insurer assumes only widely spread risks. In this case, however, the extended warranty only covered product failure resulting from defects in materials or workmanship. Meanwhile, coverage was limited only to products sold by Brick Warehouse. As colloquially described by the Court of Appeal, all the respondent's eggs remained "in the same basket" as loss was "neither spread nor pooled." The Court of Appeal also noted that if Brick Warehouse reverted to issuing the warranties itself rather than offering them through Brick Protection, any possible claim that the retailer could be taxed as an insurance company would be negated. In relation to extended warranties in such a case, the Court of Appeal noted, "no one would have thought to suggest that they were insurance. It would just be a clause in the sale contract."
The Court of Appeal also noted that insurance companies typically pay money by way of indemnity, unlike in the case of warranties, which generally only provide for the repair or replacement of the covered goods. The extended warranties in this case did not provide coverage for loss or damage to items or persons beyond the very item sold, and Brick Protection was also permitted to cancel the warranty and refund the price of the warranty if repair or replacement of the item proved impossible. The last condition was described by the Court of Appeal as "the antithesis of insurance."
Assessment of risk
Further, insurance typically involves paying a premium based on the risk incurred, and insurers generally require an application containing information about the person seeking insurance in order to ascertain the risk. In this case, however, only a flat fee was charged, calculated as a percentage of the purchase price of the item sold. There was no process to determine how the purchaser intended to use the item or whether the purchaser had any history of previous losses. The extended warranty could also be transferred without the permission of Brick Protection if the original purchaser transferred the item.
Accordingly, the Court of Appeal ultimately rejected the notion that the respondent was in the business of insurance and upheld the decision of the Court of Queen's Bench. The definition of "insurance" in the Insurance Act was found to be ambiguous and broad, and the objective of the Insurance Act was considered to be the regulation of the traditional insurance industry, whose business and products differed from those of the respondent.
Subsequent developments and broader implications
The legislative scheme existing in Alberta during the time period at issue has since been amended and the Alberta Superintendent of Insurance has expressed the view that extended warranties do now constitute insurance under Alberta law. For example, the Classes of Insurance Regulation under the Insurance Act now include an "equipment warranty insurance" class, which is defined as "the sub-class of boiler and machinery insurance that comprises insurance against loss of or damage to a motor vehicle or to recreational, marine, farm implement or construction equipment, arising from its mechanical failure, but does not include automobile insurance or insurance incidental to automobile insurance" and the Insurance Act requires automobile, marine, recreational equipment, farm implement and construction equipment dealerships to hold a special limited class of insurance license in order to sell such equipment warranty insurance. In addition, the Miscellaneous Provisions Regulation under the Insurance Act now includes a definition of "household appliance insurance" ("a contract of insurance that indemnifies a person who has an interest in a household appliance against the appliance's malfunction, failure or breakdown") but exempts such insurance from application of the Insurance Act where the premium is less than $200.
Insurance statutes and regulatory practice relating to extended warranties vary across Canada, with some provinces (such as British Columbia) expressly regulating extended warranties as insurance, while in other provinces (such as Ontario), the legislation does not expressly consider such warranties and the administrative practice, for the moment, is not to regulate extended warranties. In that context, the Brick Protection case provides valuable insight into how courts may consider extended warranties in other provinces in the absence of express regulation.