Mind the Gaps

Ayoung passenger suffered devastating injuries in 1997 when she was ejected from a leased car that had been negligently driven. The driver’s insurer paid its $1 million limits, and the leasing company’s insurer settled on the eve of trial in 2004 for just under $10 million, exclusive of costs.

This case and others like it prompted car leasing and rental companies to lobby the Ontario government to change its vicarious liability rules. The leasing industry argued a lease was simply one of a number of methods to finance the acquisition of a vehicle, and thus leasing companies should not be exposed to unlimited liability simply because a vehicle continued to be owned by the leasing company under this form of financing.

The Ontario government responded with Bill 18 in 2006, but the solution may now be proving to be unduly complex, according to Stephen R. Moore, a partner with the Toronto firm of Blaney McMurtry LLP.

Moore spoke on this topic in November 2007 at an Ontario Bar Association CLE conference entitled “Third Annual Hot Topics in Motor Vehicle Insurance.” He made his argument again in February 2008 at Osgoode Hall’s Professional Development Conference entitled “Managing and Litigating Motor Vehicle Accident Claims.”

Moore believes government drafting errors and delay further complicated the introduction of Bill 18, which amends the Compulsory Automobile Insurance Act, Highway Traffic Act and Insurance Act. Most notably, until the new OEF 110 — which reduces coverage for lessees or drivers of leased vehicles — can be endorsed on the Standard Excess Automobile Policy (SPF 7), which provides excess liability coverage for drivers on a standard policy, the new legislative scheme benefits the car leasing and rental companies, but not their insurers. In the absence of amendment, Moore argues, insurers will probably continue to insure operators and possibly lessees to the full policy limits.

THE NEW REGIME

The changes contained in Bill 18 took effect on Mar. 1, 2006. The basic scheme is fairly easy to understand:

• A “lessee” is now defined as “a person who leases or rents a motor vehicle or street car for any period of time.”

• For the first time, lessees are liable in the same manner as the owner of a vehicle for any loss or damage caused by the negligent operation of the vehicle. Also, the owner, operator and lessee are jointly and severally liable to the plaintiff (although it is unclear what their liability is to each other). These provisions apply to bodily injury and death claims (referred to in this article as B. I.), and to property damage claims (referred to in this article as P. D.) that might be caused by the operator of a rented or leased vehicle.

• The provisions that limit liability of lessors apply only to B. I. and do not apply to taxis, livery vehicles and limousines. (Lessors are still fully liable for P. D.) The liability of lessors is essentially limited to Cdn$1 million, less any insurance the lessee or operator has available. If such other policies exist, the lessee’s policy responds first, the operator’s policy responds second and the lessor’s policy responds third. The Cdn$1 million maximum liability of the lessor can be modified by regulation (there are currently no such regulations) or an act requiring the vehicle to carry higher limits (the Public Vehicles Act, for example). These amendments do not apply if the lessor was negligent.

• Amendments to the Compulsory Insurance Act require persons renting or leasing vehicles for periods in excess of 30 days to be able to demonstrate the vehicles are insured under auto insurance policies.

Moore says the entire package of new and revised policies and endorsements should have been approved before the legislation took effect. But due to a lack of coordination between the government and the Financial Services Commission of Ontario (FSCO), Moore contends, FSCO introduced them on two separate dates after Mar. 1, 2006. The result was slightly different rules for three different time periods. These three time periods include:

• Mar. 1, 2006 to the vehicle’s auto insurance renewal date in 2007;

• from the vehicle’s auto insurance renewal date in 2007 to the renewal date in 2008; and

• from the vehicle’s auto insurance renewal date in calendar 2008 onwards.

In some cases, different vehicles in the same collision may be governed by different rules. It is possible that the renewal dates for the primary and excess coverage on the same vehicle will be different.

INSURANCE ISSUES

The re-ordering of priority of policies is only supposed to apply to B. I. claims; however, the wording of the revised OAP 1 appears to mandate a re-ordering for all claims, including PD claims. There is also a priority re-ordering for all claims in the new OPCF 5C, which provides coverage to the lessor for short-term vehicle leases. Courts will need to interpret these ambiguities.

The OEF 110 endorsement, which takes effect on or after Jan. 1, 2008, is available for endorsement on the SPF 7. The OEF 110 endorsement provides that the maximum amount of insurance available under the excess policy is capped at Cdn$1 million — or any other larger figure that the insurer might specify — less any insurance available to the lessee/renter or the driver. Once that figure is reached, any remaining limits under the SPF 7 are only available to the named insured (leasing or rental company). In the context of short-term rentals, this endorsement appears to have fixed the problem that the SPF 7 insures drivers and lessees. If the car rental company is insured pursuant to an OAP 1, with limits of Cdn$1 million endorsed with an OPCF 5C, as well as a SPF 7 endorsed with an OEF 110, then the maximum for which these insurers will be obliged to indemnify

the renters or drivers is Cdn$1 million. But, as already noted above, until the OEF 110 is used, the new scheme benefits the car leasing and car rental companies at the exclusion of their insurers, who will probably continue to insure operators and possibly lessees to the full policy limits.

FSCO issued two bulletins when it announced the changes that took effect beginning on Jan. 1, 2007 and Jan. 1, 2008, respectively. In Moore’s opinion, the bulletins confuse the situation further because they direct or encourage changes to be read into policies in force on or after March 1, 2006 and they will require judicial interpretation.

For those who rent cars and do not own their own automobiles, it appears their coverage is capped at Cdn$1 million. Moore stresses the need for insurance companies to issue a driver’s policy to those people who wish additional coverage, as it appears that such coverage is not available now.

NON-OWNED INSURANCE

The SPF 6 is the standard non-owned auto policy. Under the revisions, if an automobile is rented in the name of a company (i. e. an employer), the policy will provide the primary coverage — primary to the policy of the owner of vehicle — which is a significant change from the past. For rating purposes, prudent insurers are now asking commercial insureds to provide full particulars of how often employees, partners, etc. are renting vehicles, as well as how often they drive their own vehicles on company business. Two new endorsements to this policy are available for new business and renewals on or after Jan. 1, 2008:

• OEF 98A permits insureds to have

excluded drivers under this policy, and

• OEF 98B (Reduction of Coverage for Lessees or Drivers of Leased Vehicles) provides that this coverage is excess to any coverage the renter or driver has available to respond to the claim; it essentially makes the SPF 6 excess coverage only where a partner, officer or employee rents a vehicle for company business.

Moore anticipates most brokers would recommend placing the OEF 98B endorsement on an y SPF 6 coverage they write. There may be situations in which both the employer’s OAP 1 and SPF 6, endorsed with an OEF 98B, may be obliged to respond to the same loss.

THE SEARCH FOR PARTIES AND DEEPER POCKETS

A police report provides the names of the owner and driver of a vehicle, but usually does not indicate if the car was leased or rented. An MVA plate search should be done, Moore argues. Sometimes the owner of the plate and the owner of the vehicle to which the plate is attached are different entities; usually this means the vehicle is leased or rented. Moore says counsel will want to get production of the rental agreement and police notes to get any additional information on possible parties.

If someone is injured through the negligence of the driver of a leased or rented vehicle, in order to have access to more than Cdn$1 million, counsel will start looking for other parties, Moore observes. If it is determined the driver of the leased or rented vehicle was in the course of his or her employment, the employer will be added as a defendant on the basis of vicarious liability. However, even if the vehicle was not being used for company purposes at the time of the accident, the driver should be asked (usually at discovery) if the vehicle was rented for business purposes, Moore says. On the basis of the OCF 98B, if the answer is yes, there may be access to the insurance.

MINDING THE GAPS

Moore says FSCO has failed to understand real distinctions between the interests of leasing and car rental companies. For example, he argues, if FSCO felt car rental companies should provide renters and drivers with a minimum coverage of Cdn$1 million, this should have been mandated in the OPCF 5C. Such an approach would have allowed FSCO to issue an endorsement amending the SPF 7 policy so that, for leasing and car rental companies, no coverage would have been available for the driver or owner. This would have preserved the ability of excess insurers to subrogate against the lessees and drivers in appropriate circumstances, Moore says. The current OEF 110 may be appropriate for car rental companies, but not for car leasing companies.

Moore believes that if the courts accede to FSCO’s request or demand that expanded coverages be read into policies effective Mar. 1, 2006, then people who own and rent cars will have coverage for their vicarious liability as renters under their own insurance policies from that date.

Generally, until a car rental or leasing company’s excess policy is endorsed with the OEF 110 (not possible before Jan. 1, 2008), the excess policy probably provides coverage to the driver to the full limits of the excess policy, Moore observes. For this reason, Moore suggests insurers recommend to their car rental and leasing clients that they consent to having this endorsement added to their excess policies immediately.