Living Vicariously

Most Canadian provinces have legislation in place making the owner or lessor of a vehicle vicariously liable for a driver negligently operating the vehicle with the owner or lessor’s consent. As a result, in the absence of any independent fault on the part of a leasing or rental car company, that “innocent” company’s exposure is vicarious liability for damages arising from an accident caused by the driver’s negligence.

In order to restrict this liability, some provinces, namely British Columbia, Alberta and Ontario, have instituted a legislated $1 million monetary cap on the damages that an innocent lessor or rental car company may face.

In Alberta and Ontario, legislation also provides for “reverse” priorities in the leasing scenario, making the lessee, renter and/or driver’s policies sit in priority to that of the owner’s policy, further isolating the exposure on leasing and rental car companies and their insurers.

Not so in British Columbia. In B.C., even in a leasing or rental car scenario, the owner’s policy remains primary. Furthermore, absent very specific language, a leasing or rental car company’s excess policy may also be found to insure the driver or lessee, effectively eliminating the cap insofar as the insurer of the leasing or rental car company is concerned.

In British Columbia, the $1 million monetary cap is established by Section 82.1 of the Insurance (Vehicle) Act (IVA), which has the effect of limiting a lessor’s vicarious liability to $1 million. Most automobile leasing agreements in B.C.

require the lessee to obtain third-party liability coverage naming the lessor as an insured and requiring limits of at least $1 million. Indeed, the IVA requires that a lessee name a lessor as an insured, although limits are not addressed.

The intended result of the standard leasing agreement is to address the liability exposure created by Section 82.1, so that in the event that a lessor is sued for damages arising out of a motor vehicle accident involving its lessee, the lessor can rely upon the lessee’s Insurance Corporation of B.C. (ICBC) policy for coverage. This intended result does not apply to short-term rentals of less than 30 days where there is usually no obligation on the renter to obtain insurance naming the owner (for example, where a tourist rents a car for the weekend).

NEW GUIDANCE

In the 2014 decision, Stroszyn v. Mitsui Sumitomo Insurance Company Limited, British Columbia’s Court of Appeal addressed the interplay of the above-noted provisions. The facts of Stroszyn require only a cursory review.

The defendant, Mary Chen, leased a vehicle from Honda Canada Finance Ltd. Chen obtained the mandatory ICBC policy, which insured herself, Jason Chen and Honda Canada. The policy had a third-party liability limit of $1 million.

Honda Canada also had an excess automobile policy with Mitsui Sumitomo Insurance Company with a policy limit of $9 million. The excess policy provided that it would indemnify the “insured”, which was defined as Honda Canada.

On its face, the excess policy did not provide coverage for the lessee or driver of the motor vehicle (Mary and Jason Chen).

Jason Chen was involved in a motor vehicle accident with Edward Stroszyn. An action was commenced by Stroszyn for damages and the claim was settled for $1.6 million. ICBC paid out its $1 million policy to Stroszyn, leaving $600,000 owing on the judgment.

Stroszyn applied to the court for a determination on two points: (1) whether the payment of $1 million under the ICBC policy, which named both the lessor and lessee as insureds, extinguished Honda Canada’s liability pursuant to the vicarious liability cap; and (2) whether Jason Chen was an insured under the excess policy so as to make Mitsui Sumitomo Insurance liable for the remaining $600,000 of the settlement.

Stroszyn argued the $1 million payment under the ICBC policy did not discharge Honda Canada’s obligations. He submitted that given the $1 million payment was made on behalf of all of the insureds, the court should conclude that only $333,333 was made on behalf of Honda Canada. The Court of Appeal rejected this argument and found that payment under the ICBC policy satisfied Honda Canada’s obligations as a vicariously liable lessor to the $1 million cap.

Justice Peter M. Willcock stated:

 I see no basis in law for considering only a portion of the ICBC payment to have been made on behalf of Honda. In my view, each of the insureds in this case can regard the whole of the payment made by ICBC to have been made on his, her or its behalf and to have reduced its liability to the petitioner to the full extent of the payment. In the absence of a statutory provision limiting the lessor’s liability, all three would remain jointly and severally liable for the balance of the petitioner’s damages. However, the I(V)A having limited the lessor’s liability to $1 million, it is my view that the payment of $1 million to the petitioner on behalf of all insureds, including the lessor, completely discharges the lessor’s liability and leaves the other defendants jointly and severally liable for the balance of the damages.

Justice Willcock pointed out that this conclusion only addressed a situation where the vicariously liable party is a co-insured under the ICBC policy. Specifically, he continued:

In the circumstances of this case, because the lessor is an insured under the ICBC policy, we need not determine whether the lessor’s liability is reduced by payments expressly made by or on behalf of lessees or drivers alone. The liability of the lessor is certainly reduced by payments made on its behalf by its insurer and I cannot see in the legislation an evident intention to treat payments made under the primary insurance policy as payments made on behalf of the tortfeasor alone and not payments equally made by the parties vicariously liable for his negligence and insured under the payer’s policy, as they would be at common law.

 

This is an important limitation of the judgment. In circumstances where a driver or lessee makes a payment that is expressly made by the driver or lessee alone, this may or may not limit the liability of the lessor under the $1 million vicarious liability cap. This issue remains undecided.

The Court of Appeal then considered whether Jason Chen was insured under the Mitsui Sumitomo Insurance excess policy. While it was clear on the face of the Mitsui Sumitomo Insurance policy that the company had only intended on insuring Honda Canada, the policy was an “optional insurance contract” under the IVA, and, therefore, was governed by the requirements of the IVA. Pursuant to Section 61 of the IVA, optional insurance contracts may:

…prohibit a specified person or class of persons from using or operating the vehicle, exclude coverage for a specified risk or provide different limits of coverage for different persons or risks or classes of persons or risks.

However, pursuant to Section 61(2), such limitations of coverage are not binding on an insured unless the policy has “printed on it in a prominent place in conspicuous lettering the words”:

“This policy contains prohibitions relating to persons or classes of persons, exclusions of risks or limits of coverage that are not in the insurance it extends.”

NO REQUISITE WORDING

The Mitsui Sumitomo Insurance policy did not include the requisite wording. The lower court judge found that this omission was immaterial because the statutory language was meant to alert insureds to exclusions or limits of coverage of which they might not be aware (not those who were never insured under the policy). The Mitsui Sumitomo Insurance policy would not have been provided to Jason Chen, and, therefore, the failure to include the specific warning was of no real consequence.

The Court of Appeal disagreed:

 …the failure to meet the statu tory requirement precludes the insurer from reducing or altering the underlying coverage by writing limiting terms into the excess policy. The statute provides a means by which an insured may easily determine whether the coverage afforded under the lessor’s excess coverage differs from the underlying coverage. The wording required by the I(V)A is a measure of protection for all insureds. The exclusion of lessees and their agents from coverage is only effective if the mandated words appear on the policy; the exclusion is ineffective if the mandated words do not appear. That is so, whether or not the wording is brought to the attention of the insured. (our emphasis)

 In the result, Mitsui Sumitomo Insurance was required to pay the remaining $600,000 of the settlement, not because the initial $1 million payment failed to discharge Honda Canada, but rather because Jason Chen was an insured under the Mitsui Sumitomo Insurance policy.

The implication of this decision for those underwriting excess liability insurance for leasing companies in British Columbia is clear.

If underwriters wish to limit coverage to the leasing company alone, it is necessary to include the language from Section 61(2) in a “prominent place” and in “conspicuous lettering” in the policy. 

Alexander Holburn Beaudin + Lang LLP is a member of The ARC Group of Canada, a network of independent insurance law firms across Canada.