Kozel v. The Personal– Relief from Forfeiture as a Barrier to Denying Coverage

Everyone should know that driving with an expired license is bad. A recent decision of the Ontario Court of Appeal has held that such behaviour is not necessarily sufficient for an insurer to refuse to defend and indemnify. Kozel v. The Personal (2014 ONCA 130) is a tale of an expired driver’s license, an unopened envelope, and the expansion of access to relief from forfeiture.

The top three reasons why insurance adjusters should care about this decision are:

1) It holds that driving with an expired license is imperfect compliance, not non-compliance with a condition precedent in an insurance contract;

2) It expands access to relief from forfeiture. The Court concludes that a finding of non-compliance should be made only in rare cases. In all other circumstances, the breach will be deemed imperfect compliance, with relief against forfeiture available;

3) Thus, it makes denying coverage more difficult, adding a layer of unpredictability.

Background Facts:

In February 2012, while driving in St. Petersburg Florida, Barbara Kozel age 77 years was involved in an accident which severely injured a motorcyclist. Her Ontario driver’s license had expired over four months before. She was sued in Florida. Her insurer, The Personal, put her on notice that she was in breach of statutory condition 4(1) and there may be a denial of coverage.

Prior to the accident, Barbara’s license was set to expire on October 7, 2011. In August 2011, she received an envelope from the Ministry of Transportation, but she did not open the envelope, and placing it in her china cabinet instead. A month later, she bought a new car and brought the envelope to the dealership (as she believed it might deal with her license plate stickers). She remembered opening the envelope. She did not read the contents. She did not know whether it contained documents relating to her license renewal. After the accident, Barbara returned to Canada and renewed her license.

Decision of The Applications Judge:

Facing a nasty American lawsuit and her insurer denying coverage, Barbara sought a declaration in Ontario that her insurer, The Personal, owed her a duty to indemnify and defend the claim. At first instance, the applications judge found that:

A due diligence defence was available. Barbara had exercised sufficient diligence, and was therefore not in breach of statutory condition 4(1). Though she did not demonstrate the “perfect diligence of the ideal citizen”, her actions were not those of “complete passivity”.Barbara was not entitled to relief from forfeiture under section 129 of theInsurance Act as this provision pertained to imperfect compliance relating to actions after a loss. She also could not obtain relief from forfeiture under section 98 of the Courts of Justice Act (‘CJA’), as clause 4(1) is a fundamental term or condition precedent of the policy.

The Personal appealed.

The Ontario Court of Appeal ultimately concluded that the defence of due diligence wasnot available to Barbara on the facts, but she was entitled to relief from forfeiture.

A) Due Diligence Defence Not Available on the Facts:

The Court of Appeal noted the obvious – Barbara did not open the envelope, instead leaving it in a china cabinet. She later produced her license at the dealership, but did not bother to check it (despite having a license for over 60 years, and previously renewing it on time).

B) Relief from Forfeiture:

A quick overview of relief from forfeiture is as follows:

It is a power that the Court has available to protect a person against the loss of an interest or right because of his/her failure to perform a condition in a contract, based upon section 98 of the CJA and section 129 of the Insurance Act.The Court of Appeal has held that if a breach constitutes imperfect compliance with a policy term, relief under section 129 remains available. If a breach constitutes non-compliance with a condition precedent to coverage, then it is not. (See Stuart v. Hutchins, 1998 ONCA).

The Court of Appeal decision in Kozel came down to one question: Was Barbara’s breach of statutory condition 4(1) imperfect compliance with a policy term, or was it non-compliance with a condition precedent?

Focusing on whether the breach of the term was serious or substantial, the court noted that where a term is incidental, it’s breach is deemed to be imperfect compliance. Where a provision is fundamental or integral, its breach is cast as non-compliance with a condition precedent. Barbara’s breach was found to be “not non-compliance”, meaning there were no grounds to believe that the term or its subsequent breach were fundamental. In short, because there was no specific language in the contract stressing that insurance coverage was conditional upon the individual being authorized to drive, it was found to be a ‘condition’, but not a ‘condition precedent’. Importantly, it was concluded that the Court should find that an insured’s breach constitutes non-compliance with a condition precedent only in rare cases where the breach is substantial and prejudices the insurer. It held that in all other circumstances, the breach will be deemed imperfect compliance, and relief against forfeiture will be available.

C) Test for Relief Against Forfeiture Met in this Case:

The test for whether to grant relief against forfeiture considers:

1) the conduct of the applicant;

2) the gravity of the breach; and

3) the disparity between the value of the property forfeited and the damage caused by the breach (See the Supreme Court of Canada’s decision in Saskatchewan River Bungalows, 1994).

The Court of Appeal held that Barbara had acted reasonably. While some might find the breach serious, the Court did not. It held that the breach had no impact on Barbara’s ability to drive safely or the contractual rights of the insurance company. Finally, the disparity in this case was noted as enormous. Barbara stood to lose $1,000,000 of insurance coverage where her breach of statutory condition 4(1) caused no prejudice to the insurance company. The Court ended by noting that to allow the appeal would result in the insurance company enjoying a large windfall at the expense of an individual who acted in good faith, and whose breach caused no prejudice to the insurer. The appeal was dismissed.

Final Thoughts

Moving forward, it seems inevitable that this decision will make denying coverage more challenging for insurers. It downplays the importance of not having a valid license, noting that this is not grave as it has no impact on an insured’s ability to drive safely. Finally, this may have an effect on the contents of insurance contracts. Statutory condition 4(1) was only labeled a condition in the insurance contract. The Court emphasized that the contract did not specifically identify the provision as a ‘condition precedent’, which may lead to a revision of how the relevant language in the standard automobile insurance contract (OAP 1) is drafted in the future.

If you have any questions about this blog or a similar file, please contact our Coverage practice group.