Rescinding a policy to make it void ab initio (i.e., void from its inception date) is a remedy available to insurers at common law where an insurance policy was induced by fraud and/or material misrepresentation in the application or underwriting process. Upon learning of a material misrepresentation in an application for insurance, the insurer typically has three courses of action open to it (see Ellis v. London-Canada Insurance Company,  O.R. 141):
1.Treat the policy as void ab initio and refund the premium collected (i.e. rescind the policy),
2.Treat the policy as valid and subsisting and keep the premium; and
3.Treat the policy as valid but cancel unilaterally in accordance with the policy terms.
In Merino v. ING Insurance Company of Canada, 2019 ONCA 3226 [“Merino”], however, the Court of Appeal held that rescinding a policy ab initio, i.e., the first option, is not a remedy that is available to insurers for automobile policies in Ontario.
In Merino, the plaintiff was catastrophically injured when she was struck by a vehicle insured by ING. Three months before the accident, ING’s insureds, who were husband and wife, applied for insurance for the vehicle and ING issued a one-year policy (the “Policy”). However, a couple of months before the accident, ING wrote to the insureds advising that it was rescinding the Policy ab initio because of misrepresentations in the insurance application regarding the insured wife’s driving record. Since ING took the position that the Policy was rescinded, as opposed to cancelled, it did not follow the procedure set out in Section 11 of the Statutory Conditions for the termination of automobile policies by an insurer.
The Motion Judge’s Decision
After obtaining judgment against the insureds at trial, the plaintiff brought an action against ING under section 258(1) of the Insurance Act, which permits a plaintiff who has obtained judgment against a negligent driver to sue the driver’s automobile insurer directly to satisfy the judgment. The plaintiff argued that the Policy was not properly terminated by ING and, as a result, the insureds had coverage under the Policy at the time of the accident.
On a motion for summary judgment brought by the plaintiff, however, the action was dismissed. The motion judge held that ING was entitled to rescind the Policy based on the material misrepresentation, rendering it void ab initio.
The Court of Appeal’s Decision
The Court of Appeal disagreed with the motion judge and allowed the appeal. The Court held that an automobile insurer in Ontario is not entitled to unilaterally rescind an automobile policy at common law ab initio, since doing so would be inconsistent with Ontario’s statutory scheme for automobile insurance.
The court identified a number of ways in which rescission was at odds with Ontario’s statutory scheme. For one, since the Compulsory Automobile Insurance Act makes automobile insurance mandatory for the operation of motor vehicles in Ontario, if an insurer was to be permitted to rescind an automobile policy ab initio, a person who believed they were operating a vehicle with insurance could have that policy rescinded with retroactive effect and put that person in automatic contravention of the Act. This would be a result clearly inconsistent with the legislature’s intent.
In addition, the Court noted that the Insurance Act and the regulations provide precise rules that must be followed if an insurer chooses to terminate or not renew a policy, including complying with mandatory notice periods. The purpose of this requirement is to ensure that individuals always know whether they are insured and, if they are notified of a termination or non-renewal, provide them with time and opportunity to obtain alternate coverage or to avoid driving a vehicle until they are able to secure alternate coverage. According to the Court, this objective would be undermined if an insurer could circumvent the notice requirements by rescinding a policy ab initio.
Further, the Court noted that rescission is inconsistent with sections 233 and 258 of the Insurance Act. Section 233, which deals with the rights of an automobile insurer where there has been a misrepresentation or breach of a condition by an insured, provides that where an applicant knowingly misrepresents a material fact in an insurance application, the policy remains in effect. However, the applicant’s rights are limited to his or her right to receive certain statutory accident benefits (there is no obligation to compensate the insured for other losses or to indemnify the insured for his or her liability to third parties). Section 258 (often referred to as the “absolute liability provision”) provides that where an automobile policy is in effect, the insurer remains absolutely liable to an injured plaintiff for the minimum limit for coverage in Ontario (i.e., $200,000) regardless of any act by the insured that may have resulted in forfeiture of coverage. According to the Court, allowing an insurer to rescind at common law would undermine the policy the legislature has enacted through sections 233 and 258 to provide certain statutory accident benefits to every person who obtains automobile insurance, even by misrepresentation, and to protect innocent third parties.
As a result, the Court of Appeal held that ING’s purported rescission of the Policy in its notice letter to the insureds was not effective to void coverage. In addition, since the notice letter did not comply with section 11 of the Statutory Conditions for termination of an automobile policy by an insurer, the Policy was never properly cancelled by ING. The Court therefore held that the Policy remained in force on the date of the accident and the plaintiff was entitled to recover from ING directly to satisfy the judgment.
The Court of Appeal’s decision in Merino makes clear that an insurer is not entitled to unilaterally rescind an automobile policy ab initio in Ontario. According to the Court, for automobile policies, Ontario’s statutory scheme for automobile insurance overrides any common law right of an insurer to rescind. It is noteworthy that in Merino the Court did not refer to its earlier decision in Shepley v. Guarantee Co. of North America  O.J. No 4176 (C.A.), where the Court appeared to accept the proposition that rescinding an auto policy ab initio was possible, but that it had been waived by the insurer in the circumstances.
We understand that the decision in Merino is under appeal. In the meantime, if an insurer wishes to end coverage under an automobile policy, whether for material misrepresentation in the insurance application or otherwise, it must strictly comply with the procedure set out in section 11 of the Statutory Conditions for the unilateral termination of an automobile policy by an insurer. Where it fails to do so, the policy will remain in force. If it is properly cancelled, the insurer still has the right to rely upon sections 233 and 258 of the Insurance Act to restrict its third party payouts to the minimum statutory limits.
Alex Reyes is the author of this blog and member of the firm’s Coverage practice group. If you have a question about this decision or a similar file, please contact Alex.