The Test to Determine Whether an Insured "Permitted" the Unauthorized use of a Motor Vehicle

A recent decision looked at the test to determine whether an insured permitted someone else to drive his vehicle when she was not authorized to do so.

In O’Connell v.Personal Insurance Co., (2014 ONSC 1469 (S.C.J.), the insured let his girlfriend borrow his motor vehicle. The insured’s girlfriend was involved in an accident. It turned out that the insured’s girlfriend only had a G1 license and therefore she was not authorized to drive alone or on a 400 series highway, where the accident occurred. The insured stated that he had assumed his girlfriend had a full license. At trial, the insured’s girlfriend testified that she had not told the plaintiff that she did not had have a full license because she was embarrassed. The insurer denied a defence and indemnity on the bases that the insured had breached statutory condition 4(1) of the Ontario Regulation 777/93 and section 1.4.5 of the OAP, by allowing someone else to drive his vehicle when they are not authorized to do so.

The court held that the insured had not “permitted” his girlfriend to drive when she was not authorized to do so. In reaching this conclusion, the court held that the test to determine whether an insured permitted the use of their vehicle by an unauthorized driver is whether the insured took all reasonable and prudent precautions to see that the statutory condition was not contravened. The court held that the insured knew his girlfriend had a driver`s license and it looked the same has his full G license, he had heard her anecdotes involving driving in the past and she had never told him that she only had a G1 license. Given this, the court held that the insured acted as reasonably and prudently as an average individual in similar circumstances, the statutory condition was not breached and the insurer was bound to defend and indemnify the insured.

Excess Insurance

Excess insurers may be interested in the recently reported decision of ACE INA Insurance v. Associated Electric & Gas Insurance Services Ltd., [2012] O.J. No. 6500 (S.C.J.).

ACE insured Toronto Hydro, which was sued over an explosion that occurred in the underground parking of a high-rise apartment building.  AEGIS was the excess insurer.  Although there was no explicit duty to defend under the AEGIS policy, ACE brought an application that AEGIS had a duty to pay defence costs pursuant to the doctrine of equitable contribution.

The AEGIS policy was an "indemnity policy" rather than a "liability policy".  Under its policy, AEGIS limited its indemnity obligation where there is other insurance, and limited its duty to indemnify to defence costs incurred by the insured, not those incurred by a third-party such as ACE.  Defence counsel had been appointed by ACE rather than the insured.  AEGIS's obligation was only to indemnify defence costs at the end of the litigation, where the costs were not covered by other insurance.    

Justice C.J. Brown rejected the argument that AEGIS had an equitable duty to contribute to defence costs despite the clear wording of the policy.  There is no equitable obligation to defend where an excess policy precludes a duty to defend.  In addition, a relevant factor was that any defence costs paid by AEGIS would reduce the policy limits available to the insured so there was potential prejudice to Toronto Hydro. 

Court of Appeal Comments on s. 132 of the Insurance Act

The Court of Appeal recently commented on s. 132 of the Insurance Act. Section 132 provides that a person who obtains a judgment against an insured person which has not been satisfied may recover that amount from the insured’s insurer.

In Walker v. Sovereign General Insurance Co., [2011] O.J. No. 4106 (C.A.), the Walkers obtained a judgment against Sun Shelters Industries Inc. for damages sustained in a parking lot slip and fall. Sun Shelters went bankrupt and could not pay the judgment, so the Walkers brought an action under s. 132 against Sun Shelters’ insurance company, Sovereign. Sovereign’s position was that it did not receive proper notice as required under the CGL policy and as a result was not required to defend the action or indemnify Sun Shelters or the Walkers.

The Court of Appeal held that notice of a claim can be given either by the insured or by a person on behalf of the insured. In this case, notice was given to Sovereign by a co-defendant. The Court noted that if notice is given by someone other than the insured, the person should have sufficient proximity to give adequate details of the claim:

36 Given its purpose and importance, if the notice is to be given for an insured instead of by the insured itself, the person giving it should have sufficient proximity to the claim to have knowledge of the information required by s. 3(a). Emshih was just such a person. It owned the property where the accident occurred; it was a defendant in the original action; and it cross-claimed against Sovereign's insured. In giving notice to Sovereign, Emshih was giving notice for Sun Shelters as contemplated by s. 3(a) of the policy.

Sovereign had actual notice of the claim and made a conscious decision not to defend. If the insurer had no knowledge of the claim, no opportunity to investigate or negotiate a settlement, it may be that the decision would be different.

- Tara