Dealers and repair shops often have a practice of loaning clients a car for a day or two while the customer’s car is in the shop.  What dealers may not be mindful of is what happens if the car gets into an accident.  Most dealers would presume that their customer’s insurance would provide coverage.  In the recent decision by the Ontario Superior Court of Justice in Coachman Insurance Co. v. Lombard General Insurance Co. of Canada (2011), 105 O.R. (3d) 475, the Court found otherwise.

In this case, there was the typical story where an individual purchased a motor vehicle from a motor vehicle dealer (the “dealer”). The vehicle required warranty repair work and the dealer provided the purchaser with a loaner vehicle while repairs were being carried out. In the course of driving the loaner vehicle, the purchaser was involved in a motor vehicle accident and an action was commenced naming the purchaser and the dealer. The issue before the Court was whether the purchaser’s own insurer under his motor vehicle policy would be required to respond first to the claim or whether the motor vehicle insurer of the dealer was required to respond.

The applicable section of the Insurance Act (Section 277 (1.1) provides that where a vehicle is leased (which includes a lease or rental) and coverage is otherwise available to the lessee, the lessee’s policy of insurance is primary. In this case, there was no written agreement between the purchaser and the dealer with respect to the loaner vehicle and the only restriction on the use of the vehicle was a vague instruction that the purchaser could use it “around town”. There was no specific date for return of the vehicle other than at the time the work on the purchased vehicle was completed. The dealer did not consider the loaner vehicle to be a rental and the Court found that the mere fact that both parties could derive some benefit for convenience as a result of the loan of the vehicle does not result in a rental situation. The Court held that the loaner vehicle was not a rental vehicle under the terms of Section 277 of the Insurance Act and therefore the dealer’s policy was the first required to respond with the purchaser’s policy being excess to the dealer’s policy.

This decision is important for motor vehicle dealers who often loan vehicles to customers whose vehicles are in the dealership for repair. In order to avoid the dealer’s policy becoming primary to respond to any accident claims of a driver to whom a vehicle is loaned, it is recommended that a formal form of loaner or short term rental agreement be entered into.