Car Insurance Policy Not Terminated Properly - Merino v. ING Insurance Company of Canada, 2019 ONCA 326 (CanLII)

August 26, 2019, Kitchener, Ontario

Posted by: Robert Deutschmann, Personal Injury Lawyer

Car Insurance Policy Not Terminated Properly - Merino v. ING Insurance Company of Canada, 2019 ONCA 326 (CanLII)

Date of Decision: April 25,  2019
Heard Before: Feldman, Pepall and Pardu JJ.A.

POLICY TERMINATION: was policy terminated properly; adequate notice for termination of insurance policy; the Insurance Act; misrepresentation; insurer did not follow statutory requirements for cancelling auto insurance policy; cancellation is not valid;

Karla Merino, a university student, was a pedestrian who was catastrophically injured when struck by a car driven by Timothy Klue. Mr. Klue and his wife, Sonia Abou-Khalil, were joint owners of the car. They had applied for automobile insurance coverage over three months before the accident and ING Insurance issued a one-year policy. However, because of misrepresentations in the application regarding Ms. Abou-Khalil’s driving record, ING Insurance rescinded the policy shortly after issuing it, a couple of months before the accident. Mr. Klue did not drive the car from then until the day of the accident.

By Statement of Claim issued on August 19, 2004, the appellants sued Mr. Klue and Ms. Abou-Khalil, and obtained judgment on July 28, 2011 for $2,000,000. Having been told by ING Insurance that Mr. Klue and Ms. Abou-Khalil were not insured by it because the policy had been rescinded, the appellants also sued Ms. Merino’s mother’s insurer, Allianz, in the same action pursuant to the uninsured automobile coverage it provided to the appellants. After non-pecuniary accident benefits of $181,107 paid by the Société de l’assurance automobile du Québec were deducted, Ms. Merino obtained a net award of $18,893 against Allianz. ING Insurance did not seek to be added to that action.

In the context of an arbitration hearing regarding a dispute among insurers over the obligation to pay accident benefits, ING Insurance insurer delivered a copy of its underwriting file to counsel for the appellants on September 1, 2005. However, ING Insurance insurer continued to contend that the policy had been rescinded before the accident.

On April 16, 2012, after obtaining judgment against Mr. Klue, Ms. Abou-Khalil, and Allianz, the appellants commenced the action under appeal against ING Insurance insurer under s. 258(1) of the Insurance Act, R.S.O. 1990, c. I.8 (the “Insurance Act” or the “Act”) on the basis that the insurance contract had not been properly terminated by ING Insurance, and Mr. Klue and Ms. Abou-Khalil were in fact insured by ING Insurance on the date of the accident.

On summary judgment, the motion judge was required to determine whether ING Insurance insurer was entitled to rescind the insurance contract with Mr. Klue and Ms. Abou-Khalil, and if so, whether the purported rescission had the effect of precluding the injured appellant, as an innocent third party, from making a claim against ING Insurance under s. 258(1) of the Insurance Act. That section provides:

Any person who has a claim against an insured for which indemnity is provided by a contract evidenced by a motor vehicle liability policy, even if such person is not a party to the contract, may, upon recovering a judgment therefor in any province or territory of Canada against the insured, have the insurance money payable under the contract applied in or towards satisfaction of the person’s judgment and of any other judgments or claims against the insured covered by the contract and may, on the person’s own behalf and on behalf of all persons having such judgments or claims, maintain an action against the insurer to have the insurance money so applied.

The motion judge dismissed the appellants’ action on summary judgment. He found that ING Insurance insurer was entitled to rescind the insurance contract based on material misrepresentation, making it void ab initio; that it had done so effectively; and that, as a result, s. 258(1) was not available to the appellants, as there was no contract with ING Insurance that provided indemnity to the at-fault driver or owner at the time of the accident.

The appellants appealed each of those findings.

For the following reasons the appeal was allowed.

The scheme of the automobile insurance provisions of the Act prescribes how an insurer may terminate its obligations under a contract it has issued, including for misrepresentation. An insurer may not effectively rescind a contract at common law, making it void ab initio; it must comply with the Act.

One of the sections in that scheme is s. 258 allows innocent third parties to sue and recover from the at-fault driver’s insurer, at least up to the statutory minimum liability coverage of $200,000 prescribed in s. 251, as long as the automobile insurance contract had not been validly terminated by the insurer before the accident.

The insurance policy issued by ING Insurance. An application for insurance for a one-year coverage term for both owners and drivers of a 1994 Jeep Cherokee was executed by Mr. Klue but not by Ms. Abou-Khalil, and was submitted to ING Insurance. The application contained accurate information about Mr. Klue and his past driving record, which was clean, but inaccurate information about Ms. Abou-Khalil’s record, which was not clean. Gulliver provided a 30-day binder to both as insureds, followed by a one-year automobile insurance contract.

ING Insurance’s subsequent underwriting investigation disclosed Ms. Abou-Khalil’s true driving record, which included an at-fault accident, convictions for speeding and careless driving, a license suspension for non-payment of fines, and the cancellation of a previous policy for non-payment of premiums. ING Insurance therefore decided to treat the insurance contract as void based on misrepresentation or failure to disclose required information.

On July 2 2002, ING Insurance sent a registered letter to the insureds, advising that because of the non-disclosure of Ms. Abou-Khalil’s previous driving record, the insurance coverage was “void from the inception date” and their right of indemnity was forfeited. Both Mr. Klue and Ms. Abou-Khalil read the letter. Believing that the vehicle was uninsured, they did not drive it until Mr. Klue drove on the date of the accident, after he had lost his job and consumed alcohol.

On March 19, 2003, counsel for the appellants wrote to Ms. Abou-Khalil giving notice of the accident and the claim and asking her to notify her insurer, ING Insurance, identifying a specific policy number. A field adjuster for ING Insurance responded on March 25, 2003, stating that neither Ms. Abou-Khalil nor Mr. Klue had an automobile policy with ING Insurance, and enclosed a copy of the letter that ING Insurance had sent to them purporting to rescind their insurance policy.

In the context of the 2005 accident benefits arbitration, which was a dispute among insurers, counsel for the appellants obtained ING Insurance’s complete underwriting file on the policy it had issued while ING continued to maintain that it had validly rescinded the policy. In April 2012, the appellants brought the within action under s. 258(1) of the Insurance Act against ING Insurance on the basis that the policy was not validly terminated before the accident. Both sides brought summary judgment motions.

The motion judge found that the Insurance Act provisions that govern how an automobile insurer may terminate an automobile policy and the effect of termination do not preclude an automobile insurer from rescinding a contract at common law and making the contract void ab initio. He concluded that ING Insurance was entitled to rescind its contract with the insureds, Mr. Klue and Ms. Abou-Khalil, based on material misrepresentation, and that ING Insurance’s July 2, 2002 letter to them had the effect of rescinding their insurance contract, making it void ab initio and of no effect.

On this summary judgment motion, in order to determine whether ING Insurance had the right to rescind, the motion judge had to decide whether there was a genuine issue requiring a trial regarding the events surrounding the application, including the materiality of the misrepresentation, how it happened that Mr. Klue signed the application and not Ms. Abou-Khalil, whether he signed on her behalf, and whether either of them knew that the application contained false information about her driving record.

The motion judge concluded that because the record before him was what it would be at a future trial, there was no purpose in deferring any issue to a trial. He noted that by 2006, Mr. Klue said he did not have a specific recall of what occurred during the meeting at the brokerage. By the time of the motions, 15 years had passed since the accident.

Having found that ING Insurance had validly rescinded the insurance contract, the motion judge went on to consider whether the appellants could still sue ING Insurance for indemnity under s 258(1) of the Act. In concluding that they could not, the motion judge found that this case was distinguishable from the case law that held that ss. 258(4) and (5) precluded a defence based on misrepresentation.

As a result of these findings, it was not necessary to address other issues, including whether the appellants had waived their rights under s. 258(1) by electing to seek coverage based on the vehicle being uninsured, the quantum of any damages claimed, and whether ING Insurance could rely on ss. 258(11) because it had not been properly pleaded.

Issues

1. Are the appellants entitled to recover against ING Insurance under s. 258(1) of the Insurance Act if the contract was not validly rescinded?
2. Is an automobile insurer entitled to rescind an automobile insurance contract at common law, making it void ab initio, based on misrepresentation in the application?
3. If the contract was not validly rescinded, is the appellants’ recovery limited to the statutory minimum of $200,000 under s. 251 of the Insurance Act, based on the defence of knowing misrepresentation, asserted under s. 258(11)?
4. Are the appellants barred from recovery under s. 258(1), based on the doctrine of waiver or abuse of process, because they initially pursued uninsured motorist claims against Allianz?

Conclusions

The Court set aside the judgment and reasons of the motion judge. An automobile insurer in Ontario cannot rescind an automobile insurance contract at common law ab initio, and ING Insurance’s letter purporting to do that was not effective. Because the letter did not give 15 days’ notice of termination, it also did not have the effect of terminating the contract under s.11 of the Regulation. The contract therefore remained in effect on the date of the accident.

The appellants were entitled to sue ING Insurance under s. 258 of the Act to directly recover the amount of the judgment awarded against the at-fault driver and owner of the 1994 Jeep up to the policy limits. Because ING Insurance did not establish on the record that Mr. Klue knowingly misrepresented facts in the application or acted as the agent of Ms. Abou-Khalil, ING Insurance has not established a defence under s. 258(11) of the Act. It is accordingly liable for the full amount of the policy limits.

There was no waiver or abuse of process. The appellants have undertaken to the court that they will account for any double recovery.

The Court allowed the appeal with costs fixed in the amount of $40,000 on the partial indemnity scale, inclusive of disbursements and HST.

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