Does an Improper Cancellation of an Insurance Policy Stay in Force Perpetually: CAO Says Not on the Facts of this Case

By Meredith Harper Oct 11, 2018

In a 2 – 1 decision, the Court of Appeal released Ontario (Finance) v. Elite Insurance Company, 2018 ONCA 809. This was a priority dispute between the Motor Vehicle Accident Claims Fund (MVACF) and Elite. The issue in dispute was whether Elite’s automobile insurance policy was in force at the time of the claimant’s accident and whether Elite was in priority to pay accident benefits.

Facts

The claimant originally obtained automobile insurance with Elite for a 6 month term – from September 20, 2009 to March 20, 2010. The policy was an “Autograph” policy. It required the claimant to install a device in his car that recorded data and driving behaviour, in ex change for which the premiums charged were discounted below that which would have been offered on any regular policy.

The claimant never installed the device in his car. He did not register the Autograph policy online. Despite this, Elite renewed the claimant’s policy for another 6 month term. Elite notified the claimant that he needed to install a device in his car and register the policy online -  otherwise the policy would be cancelled. Despite Elite’s warning, the claimant never installed the device in his car. He did not register the Autograph policy online.   Meanwhile, he continued to enjoy the discounted premiums.

On March 19, 2010, Elite telephoned the claimant about his failure to install the device or register the policy. Elite offered to connect the claimant with a broker to see if he could obtain a different type of policy of insurance without requiring the data device. The claimant declined.

Elite’s notice of non-renewal of the policy was sent to the claimant on August 12, 2010. The letter stated that, effective September 20, 2010 at 12:01 a.m., corresponding to the end of the 2nd 6 month term of coverage, Elite would no longer be able to provide the claimant with a policy of auto insurance. Declination Rule 56 (which was drafted by Elite and approved by FSCO) allowed the insurer to refuse to renew a contract where the insured had not registered to receive the Autograph device within the two previous terms (12 months). It was undisputed that the claimant received Elite’s notice of non-renewal via registered mail.

On September 21, 2010, the claimant telephoned Elite. He was told that he failed to register online for the device and his policy is not in force as of September 20, 2010. The claimant was  transferred to his broker to obtain alternative insurance. The claimant never pursued any further coverage with Elite.

On September 23, 2010, the claimant obtained a new auto insurance policy with Axa Insurance. The Axa policy was cancelled a year later.

In July 2011, Elite discontinued the Autograph policy program, with the Superintendent's approval.

The claimant was involved in an accident on December 29, 2011, more than 15 months after his last interactions with Elite.

The claimant applied to the MVACF for accident benefits. The MVACF paid the claimant benefits. It then put Elite and Axa on notice of a priority dispute pursuant to section 268 of the Insurance Act.

Decision of Arbitrator Densem

A preliminary issue hearing was originally heard before Arbitrator Scott Densem. The two issues before him are whether the non-renewal notice sent by Elite was valid and, if not, whether the Elite policy was still in force at the time of the accident.

Arbitrator Densem found that Elite’s non-renewal notice was premature: While Declination Rule 56 is a valid ground for non-renewal, it can only apply where the insured has not registered within two previous terms (12 months). He found that Elite sent the notice at a time where the 12 months of  the claimant’s policy had not been completed. Where Elite sent the non renewal notice on August 12, 2010 and completion of two terms would have been on September 20, 2010. The Arbitrator concluded that the non-renewal notice was not valid.

Arbitrator Densem also found that the Elite policy was not in force at the time of the accident. He found that a renewal of a policy was not a new contract and that case law established that principles of contract law apply to auto insurance contracts. He found that the claimant and Elite intended to end their contractual relationship and that the claimant’s action in obtaining alternate coverage from Axa amounted to a repudiation of the contract. Finally, Arbitrator Densem found that section 236(5) of the Insurance Act did not establish that auto insurance policies continue indefinitely. In the alternative, the Autograph Policy program was terminated across Ontario in 2011, so the Elite autograph policy ceased to exist before the accident.

MVACF’s Appeal to the Superior Court

The MVACF appealed to the Superior Court. On appeal it was agreed that the standard of review of the arbitrator's decision was reasonableness. Justice Cavanagh granted the MVACF’s appeal and found that Elite’s policy was in force at the time of the accident.

Justice Cavanagh asserted that “the arbitrator failed to properly engage in an interpretive process in respect of s. 236(5) of the Insurance Act and that he made findings that were "not only in error, but outside of a range of possible, acceptable, outcomes" because his "conclusion fails to give effect to the clear words of section 236(5)”.

Justice Cavanagh relied heavily on Echelon General Insurance Company v Her Majesty the Queen, 2016 ONSC 5019, and found that a literal interpretation of s. 236(5) was necessary and that, where the insurer fails to strictly comply with sections 236 (1), (2), or (3) in terminating a policy, the policy remained in-force.

Standard of Review at the Court of Appeal

The MVACF argued that on this appeal, the court's task is to determine whether Justice Cavanagh applied the right standard, and that, once satisfied that he applied a "reasonableness" standard, and not a disguised "correctness" standard, the court ought not to interfere with his decision. The Ontario Court of Appeal disagreed and found that it was required to examine the reasonableness of Arbitrator Densem’s original decision rather than the reasonableness of the first level of appeal’s decision.

Elite’s Non-Renewal Notice Was Premature

The Ontario Court of Appeal ultimately found that the arbitrator's conclusion that the notice of non-renewal was premature was a reasonable interpretation of the requirements of section 236 of the Insurance Act in the context of Ontario's mandatory automotive insurance scheme.

Elite’s Policy Was Not In Force At The Time Of The Accident

Writing for the majority, Justice Katherine van Rensburg, concurred by Justice David Paciocco, The Ontario Court of Appeal found that Arbitrator Densem’s decision that the Elite policy was not in force at the time of the accident was reasonable. Justice van Rensburg J.A., stated that she did not agree with all aspects of the arbitrator's analysis but that his decision was reasonable where it took the relevant statutory provisions into account along with the factual circumstances of the case.

The Court of Appeal found that s. 236(5) did not create any new contract through some form of renewal. The Court disagreed with the arbitrator's conclusion that s. 236(5) would extend coverage under the policy for no longer than an additional one six-month term.  Van Rensburg J.A., stated that such a finding contradicted the plain wording of the section, which contemplates that coverage continues until proper notice of non-renewal is given.

The Court of Appeal also agreed with Justice Cavanagh’s conclusions that the only reasonable interpretation of s. 236(5) is that statue overrides the common law with respect to lapsed policies.

Despite finding that these two aspects of Arbitrator Densem’s analysis were unreasonable, the Ontario Court of Appeal stated that his ultimate conclusion was reasonable.

The Court of Appeal focused on the proper scope for the application of s. 236(5), and whether, despite this provision, the parties could bring an end to an automobile insurance policy through their conduct.

The Court of Appeal found that it was not unreasonable to give s. 236(5) a contextual reading, and to conclude that s. 236(5) is not exhaustive as to what happens to a policy in any situation where there has been a defective notice of non-renewal.

The Court of Appeal considered Statutory Conditions - Automobile Insurance, 0. Reg. 777/93, s. 11(2), which provides that a policy may be terminated by the insured "at any time on request", and there are no specific requirements for the content or form of the request.

The following facts were considered by the Court in finding that the Elite policy was not in force at the time of the accident: The evidence was clear that the claimant knew what the insurer was requiring him to do in order to continue coverage under the Autograph policy. After he received notice (albeit prematurely), he acted to protect his interests. By September 23,2010, he had obtained a replacement policy from AXA. As the arbitrator noted, the parties shared a mutual intention that the Elite policy would not continue to cover the claimant. Even if this intention was precipitated by the assumption that Elite's notice of non-renewal was valid and that the Autograph policy had therefore ended, the parties acted so as to terminate their relationship and conducted themselves in reliance on the termination. The claimant obtained replacement coverage, and was no longer charged a premium for the Elite policy.

At paragraph 64 of her decision for the majority, van Rensburg J.A., stated that requiring strict compliance with section 236 of the Insurance Act, without consideration of the factual context, would lead to absurd results. The Court of Appeal found that the parties did not intend on indefinite coverage of the Elite policy, especially where the claimant obtained auto insurance elsewhere.

The Court of Appeal acknowledged that Echelon General Insurance Company v Her Majesty the Queen, 2016 ONSC 5019, was essentially overturned by a subsequent decision of Arbitrator Novick, and upheld on appeal in the Superior Court (2018 ONSC 5029). It was found that Arbitrator Novick correctly examined communications exchanged, and behavior of the insurer and the claimant, in finding that the policy in that case was no longer in force.

Dissent

In her dissent, Pardu J.A., found that the law required a literal interpretation of s. 236(5), and  where the insurer fails to strictly comply with sections 236 (1), (2), or (3) in terminating a policy, the policy remained in-force. She commented that the purposes of the compulsory automobile insurance regime established by the Insurance Act is to protect third parties. Pardu J.A.’s concerns were that requiring anything less than strict compliance and a literal interpretation of section 236 would jeopardize insurance coverage for potential innocent third parties who are involved in accidents with uninsured motorists. It was Elite’s argument during the appeal hearing that, such circumstances are exactly why the MVACF exists to pay benefits.

Pardu J.A. also commented that interpreting s. 236(5) as requiring that a contract of insurance remain in force until there is compliance with the notice requirements is consistent with the objective of providing some certainty as to when a policy is in force. She concluded that to allow subjective assumptions by either party to lead to a conclusion that there was no contract of insurance, in the face of statutory requirements for non-renewal or termination of such contracts, was unreasonable.

Three Important Take-Aways:

  1. Even on an appeal from a Judge’s decision the appropriate standard of review is whether or not the original Arbitrator’s decision is reasonable.
  2. The insurance industry now has two decisions where Courts and Arbitrators rely on the factual context of communication and behaviour of the insurer and the claimant, to determine whether a policy remains in-force despite an insurer’s invalid termination of the policy: Ontario (Finance) v. Elite Insurance Company, 2018 ONCA 809, & Echelon General Insurance Company v. Ontario (Minister of Finance), 2018 ONSC 5029.
  3. If insurers do not cancel a policy properly, they run a risk of a finding that the policy remains in force in perpetuity without the benefit of collecting premiums or having an contact with the insured, absent evidence to suggest the parties intended otherwise, where the language of s236(5) seems to oust the common law understanding that a policy does not extend beyond its term.

Meredith Harper is the Chair of the Appellate Group at ZTGH and one of the lawyer's on this file. If you have a question about this decision or a similar file, please contact Meredith.

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