RECENT DEVELOPMENTS IN CANADIAN LAW: INSURANCE LAW · RECENT DEVELOPMENTS IN CANADIAN LAW:...

RECENT DEVELOPMENTS INCANADIAN LAW: INSURANCE

LAW

Marvin G. Baer

This article describes the growing disquietexpressed by some Canadian judges in thereduction of all insurance doctrine toquestions of the interpretation of the pol-icy. The article attempts to identify thetraditional concerns that underlie insur-ance doctrine and to explore how suc-cessfully Canadian courts have been indeveloping doctrine which meets theseconcerns.

The primary concerns identified are theneed to control the risk and to preventadverse risk selection; the need to mini-mize the moral hazard; the need to co-ordinate insurance payments with othertypes of recovery; the need for a systemwhich fairly classifies the risk; and theneed to prevent unconscionable over-reaching by one party over the other.

The insurance doctrines that are ex-amined are the concepts of indemnity, in-surable interest, subrogation and contri-bution; the insurer's obligation to defendand the direct recourse provisions; therequirement to disclose material facts; thedetermination of coverage including prin-ciples of interpretation and tort liability;and the claims process.

This survey of recent Canadian judg-ments suggests that in spite of judicialmisgivings, most Canadian courts con-tinue to regard the parties' autonomy andthe policy of insurance as the touchstonesof insurance doctrine. However, somecourts have attempted to restate a moreprincipled foundation for insurance doc-trine or to create new doctrine in orderto overcome perceived unfairness or in-adequacies in existing law.

Cet article dicrit l'inquijtude croissanteexprim~e par certains juges canadiensconcernant le fait que toutes les r~glesd'assurance se riduisent d des questionsd'interpritation de la police. L'article tented'identifier les preoccupations tradition-nelles qui sous-tendent les r~gles d'assu-rance et d'analyser dans quelle mesureles tribunaux canadiens ont russi dt gla-borer des regles qui ripondent d ces pri-occupations.

Les principales preoccupations identi-figes sont la nicessiti de contr6ler le risqueet d'9viter une mauvaise silection durisque; la necessiti de minimiser les 6l6-ments subjectifs du risque; la necessitj decoordonner le paiement des indemnitisavec les autres types d'indemnisation; landcessiti d'itablir un systme qui classfiebien le risque; la necessitj d'emp4cher uncomportement abusif d'une partie enversune autre.

Les r~gles d'assurance examinees tou-chent les concepts d'indemniti, d'intiritassurable, de subrogation et de contribu-tion; l'obligation qu'a l'assureur de de-fendre l'assuri ou l'assurge et les clausesrelatives au droit d'action directe; l'obli-gation de declarer les faits pertinents aurisque; la difinition de la garantie, ycompris les principes d'interpritation etla responsabilitg d~lictuelle; le processusde riclamation.

Cet examen de dicisions rcentes destribunaux canadiens laisse entendre quemalgri les apprihensions des juges, laplupart des tribunaux canadiens conti-nuent de considirer l'autonomie des par-ties et la police d'assurance comme lespierres de touche des rigles d'assurance.Cependant, certains tribunaux ont essaygde reformuler des regles d'assurance ayantde meilleurs fondements juridiques et decrier une nouvelle doctrine afin de contrerle sentiment d'injustice ou de combler leslacunes du droit existant.

Recent Developments in Canadian Law: Insurance Law

I. INTRODUCTION

Six years have passed since I wrote the last article on RecentDevelopments in Insurance Law for this journal.' During this periodthere has been increasing evidence of a crisis of confidence by thejudiciary in insurance matters. 2 After a prolonged drift in which basicinsurance law doctrine declined from principles of equity to questionsof interpretation,3 there are signs that the judiciary find the resultingtheories threadbare. In several areas this has lead the courts to try torestate a more principled foundation for insurance doctrine;4 in othersit has led the courts to hector the legislature, superintendents or industryto make changes; 5 while in still others it has led, the courts to importnew doctrines to overcome perceived unfairness or inadequacies inexisting law.6

However, it would be misleading to picture all of the decisionsover the six years as a steady flow of reform minded judgments. Thereare some sloughs of stale doctrine. They have occurred at all levels,including the Supreme Court of Canada. 7

As with any body of mature doctrine, there is a tendency formany insurance rules and principles to become separated from theirfunctional underpinnings. Concepts take on a life of their own, inwhich internal consistency, historical fidelity, linguistic purity, and

M. Baer, Recent Developments in Canadian Law: Insurance Law (1985) 17OTAWA L. REv. 631.

2 During the past six years some 1200 superior court decisions on InsuranceLaw have been reported in Canada. This article does not, of course, try to coverthem all.

3 See M. Baer, Rethinking Basic Concepts of Insurance Law in SPECIALLECTURES OF THE LAW SOCIETY OF UPPER CANADA, 1987: INSURANCE LAW (Don Mills:De Boo, 1987) 199 [hereinafter Baer].

4 See, e.g., Constitution Insurance Co. of Canada v. Kosmopoulos, [1987] 1S.C.R. 2, 34 D.L.R. (2d) 208, [hereinafter Kosmopoulos cited to S.C.R. discussedinfra under the heading Insurable Interest.

5 Perhaps the worst examples are the numerous Ontario cases concerned withthe Underinsured Motorist Endorsement, S.E.E 42, formerly used with the standardautomobile insurance policy.

6 See, e.g., the increasing references to reasonable expectations and punitivedamages discussed infra.

7 After a pause of several years, the Supreme Court of Canada has returnedto its former practice of hearing a significant number of appeals in insurance matterseach year. So far, there is no discernable pattern as to when leave to appeal isgranted. The cases do not necessarily involve matters on which there are significantconflicts in the decisions of provincial appellate courts. Nor do the cases alwaysindicate a desire to restate or reform the law. See, e.g., Scott v. Wawanesa MutualInsurance Co., [1989] 1 S.C.R. 1445, 59 D.L.R. (4th) 660, [hereinafter Scott citedto S.C.R.] (where, however, there was a significant conflict in provincial appellatecourt decisions); Falk Brothers Industries v. Elance Steel Fabricating Co., [1989] 2S.C.R. 778, 39 C.C.L.I. 161.

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circular or tautological explanations are more important than is anyanalysis of the underlying social problem. These tendencies are exag-gerated in insurance law because many disputes centre on what are infact legal proxies for the real concerns of the parties. 8 In thesecircumstances it may be useful to organize a discussion of RecentDevelopments in Insurance Law along functional lines. This is what Ihave tried to do in the following discussion, while preserving enoughtraditional categories and language so that readers do not lose theirway.

The recent emphasis on the parties' autonomy and the policy ofinsurance as the touchstone of insurance doctrine minimizes the formerattitude that much of insurance law was of a mandatory nature. Theformer attitude grew out of a conclusion that many of the concerns ofinsurers were in the public interest. Of course few judges have put thematter in such stark terms, but there was a underlying assumption thatinsurers were, at least in part, merely stake holders for the generalpublic. The implication of this view as, and is, that insurers shouldnot have a completely unfettered right to decide the conditions underwhich risks should be distributed. The recognition of this implication,however, did not prevent the courts from deferring to the greatertechnical expertise of the industry. It meant that basic insurance doc-trine did not develop as a set of neutral or objective criteria forinterpreting the parties' intentions nor as a thinly disguised basis forgiving effect to the insurers' self-centered aspirations. Instead, insu-rance doctrine developed in response to several central concerns inwhich insurers and the general insuring public were seen as having acommon interest. These concerns included the following: the need tocontrol the risk and to prevent adverse risk selection; the need tominimize the moral hazard; the need to co-ordinate insurance paymentswith other types of recovery; and the need to have a system whichfairly classifies risk. In addition, some doctrine grew out of a reco-gnition that insurers and the general insuring public had adverseinterests, and legal control was necessary to prevent unconscionableoverreaching by one party over the other. Many of the doctrines thatcover the claims procedures are examples of this type of concern.

This list of concerns permeates many aspects of insurance doctrineand there is considerable overlap amongst them. No particular legalprinciple is based on only one isolated concern. However, it is impor-tant to keep these concerns in mind and to try to articulate which onesform the foundation of any particular doctrine. The modern alternative

8 There is a growing recognition that defences which have no actual relation-ship to the loss are "technical" defences (that is, defences without merit of theirown, but which are grudgingly tolerated by courts who either think their hands aretied or accept them as proxy for a more meritorious defence). See, e.g., the judgmentof Carruthers J. in Genser v. Waterloo Mutual Insurance Co. (1983), 6 C.C.L.I. 157at 158 (Ont. H.C.).

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of regarding the policy as the optimum solution derived from freelycompetitive market forces ignores legal history, and assumes a worldthat does not actually exist. It has led to the bankruptcy of someinsurance law doctrine and a loss of faith by the judiciary.

II.

A. Indemnity

No principle is more central to insurance doctrine than the prin-ciple of indemnity. It encompasses several of the above concerns suchas the need to control the risk, the need to minimize the moral hazardand the need to allocate the risk fairly. This principle manifestssignificant public policy worries, although the language used to des-cribe these worries has changed over time, as has the order of theirimportance in the public mind. 9

In spite of its central importance, the principle of indemnity isnot often the immediate concern in litigation. However, it has generatedseveral subsidiary and related doctrines, which have been subjected tofundamental re-examination by the Canadian courts in recent years.These include the requirement of insurable interest and the principlesof subrogation and contribution.

B. Insurable Interest

Whatever its origin and purpose, the requirement of insurableinterest was until recently an extreme example of a simple factualinquiry turned into elaborate (perhaps rococo) technical legal rules.These rules may have given the illusion of certainty;10 but they havetaken on a life of their own, invalidating insurance contracts at thebehest of public spirited insurers to no clearly discernable socialadvantage.

The doctrine was ripe for reform, so it was not surprising to seelower courts adopting arbitrary distinctions to limit the impact of whathad clearly become a technical defence. Such judicial strategies should

9 The public policy concerns center around the mischief of gaming anddeliberate acts of destruction. The changed public attitude towards the former can beillustrated by comparing the preamble of the Life Assurance Act, 1774, (U.K.) 14Geo. 3, c.48 with current advertisements for government lotteries.

10 See C. Brown & J. Menezes, INSURANCE LAW IN CANADA (Toronto:Carswell, 1982) at 84. The fear of uncertainty first expressed by Lord Eldon inLucena v. Craufurd (1806), 2 Bos & PUL. 269 at 320, 127 E.R. 630 at 650 (H.L.)[hereinafter Lucena cited to E.R.] has not been borne out by experience. Indeed sinceKosmopoulos, the issue of insurable interest has dramatically declined - after aninitial period when news of the decision had not yet reached the provinces.

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no longer be necessary following the Supreme Court of Canada'sdecision in Kosmopoulos".

Kosmopoulos, the plaintiff, was the sole shareholder and directorof a corporation that carried on business under the name of SpringLeather Goods. He carried on business without much regard for thefact that his business was incorporated. Virtually all the documentsrequired in the business continued to refer to the sole proprietorshipand made no reference to the company. The lease for the businesscontinued in Kosmopoulos' name when the landlord's approval toassign the lease was not obtained. A policy of fire insurance wasissued showing the insured as "Kosmopoulos O/A Spring LeatherGoods" even though the insurance agency which arranged the insurancewas well aware of the fact that the business was being carried on bythe corporation. Following a loss by fire, the insured claimed indemnityunder the policy and in the alternative against the agency for failureto arrange coverage. The insurers originally defended on the groundsof fraud, misdescription of the risk, material change in the risk andthat the insured had no insurable interest. All defences were abandonedbefore or during the trial with the exception of the defence that theinsured had no insurable interest.' 2

This history suggests that the insurers may have had some legi-timate and substantive reasons for not paying this claim. However,they abandoned them in favour of a technical defence. This technicaldefence failed at trial and in the Ontario Court of Appeal, and finallyin the Supreme Court of Canada.

The decision of the Supreme Court of Canada has been consideredin detail elsewhere,13 and there is no need to repeat that discussionhere. In short, the majority judgment is an ideal model for the decisionsof the ultimate court. There is a return to first principles, an attemptto articulate the function or purposes of the doctrine (relying on bothprevious authority and modern academic scholarship), an attempt tounderstand how the legal rules work in the community and what mightbe the impact of any change.

In all of this the Court had the advantage of a clearly identifiedchoice between two tests for insurable interest, each with long standingjudicial support. The Court also had the advantage of a considerablescholarly rehearsal of the justification or purpose of the requirement.So their task was made easier than it might have been. Nevertheless,the decision is remarkable in its approach. However, this approach isnot necessarily part of a new trend since in some subsequent insurancecases the Supreme Court of Canada has lapsed into a kind of mecha-nical and thoughtless approach, with little apparent sensitivity to the

" Supra, note 4.12 Ibid. at 6fW.13 See, e.g., Baer, supra, note 3 at 201-09.

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impact of their decisions in the community.14 Thus the impact of theKosmopoulos decision may be more limited than first appears. Fur-thermore the decision has had little immediate effect on doctrineswhich are associated with insurable interest, such as subrogation andcontribution.

There are two areas in which the requirement of insurable interestcontinues to puzzle the courts. In both cases insurable interest is anunnecessary, even parasitical notion that confuses the main issue. Thefirst involves a series of cases involving the loss of goods which havebeen illegally imported into Canada. 15 In these circumstances insurersoccasionally deny liability, relying on the public policy prohibitionagainst profiting from crime or wrongdoing. Often this defence is asubstitute for one which is more difficult (or more time consuming) toestablish, one associated with the suspicious circumstances of the lossor the apparently exaggerated nature of the claim.

Generally, the defence based on public policy has -been unsuc-cessful. But often the analysis is clouded by reference to whether theimporter has an insurable interest in the illegally imported goods. Aslong as insurable interest was defined in terms of strict legal rights,these references made some sense -although it is doubtful that theywould establish a distinct justification for denying the claim. However,now that the factual expectancy test has been adopted, it should beeasier for the courts to recognize that the public policy concerns arequite distinct and unrelated to the requirement of an insurable interest.Put another way, even thieves probably have some incentive to preservestolen property which they intend to use and enjoy.16 However, thievesmay not, at least as a general matter, have the same incentive as other,more honest, citizens. They may, for example, be more willing toregard insurance as -a convenient way to turn assets into ready cash.This suggests that insurers may treat the manner in which an asset hasbeen acquired or held as material. Hence, insurers may desire adequatedisclosure of the nature of the insured's interest. This is a differentissue, however, from whether the insured has a sufficient interest toinsure at all, assuming that adequate disclosure has been made.

The second area in which the requirement of insurable interestcontinues to preoccupy the courts is in automobile insurance. 17 Herethe primary issue is one of adequate disclosure. The issue arises in the

14 See in particular Scott, supra, note 7.15 See, e.g., Ardekany v. Dominion of Canada General Insurance Co. (1986),

32 D.L.R. (4th) 23, 22 C.C.L.I. 221 (C.A.) [hereinafter Ardekany] (and cases citedtherein); Hamzeh v. Safeco Insurance Co. of America (1988), 85 A.R. 344, 32C.C.L.I. 83 (Q.B.); Shakur v. Pilot Insurance Co. (1989), 33 C.C.L.I. 272 (Ont.H.C.) appeal allowed (1990), 74 O.R. (2d) 673 (C.A.); Awad v. Guardian InsuranceCo. of Canada (1989), 38 C.C.L.I. 66 (N.B.Q.B.).

16 Compare Thompson v. Madill (1986), 13 C.C.L.I. 242 (B.C.S.C.).17 See, e.g., Bank of Nova Scotia v. Scottish & York Insurance Co. (1987),

83 A.R. 296, [1988] I.L.R. 1-2313, 32 C.C.L.I. 134 (Q.B.); Morrow v. Royalhsurance Co. of Canada (1990), 42 C.C.L.I. 135 (Alta Q.B.).

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family context, where the insurer has not been supplied with completeor accurate information concerning the ownership of the insured au-tomobile. This information is important because it is an indication ofthe automobile's primary user. Once again the discussion of insurableinterest as a mandatory requirement tends to simply confuse the issue.

C. Subrogation

There is increasing evidence that the approach adopted in Kos-mopoulos of returning to first principles, articulating purpose andopenly considering the social impact of any particular rule, may beexceptional. At least the decision has had a limited impact in the tworelated areas of subrogation and contribution. Like the requirement ofan insurable interest, these doctrines are designed to implement thefundamental principle of indemnity. However, the doctrines also try tocope with the added complication of overlapping recoveries. Thedoctrines are usually treated as distinct, although they have much incommon. Their separate treatment, often divorced from other aspectsof indemnity, may explain why they have acquired several technicalfeatures.

Both doctrines are sometimes said to be of equitable origin,although they have existed in the common law of insurance at leastsince the eighteenth century.' 8 The significance of this speculationabout the doctrines' origins is thought to relate to the nature andmagnitude of judicial control. Emphasizing their equitable origins isthought by some English judges to justify a greater supervisory roleby the courts. This debate has largely been ignored by Canadiancourts, who continue to approach these issues as ones of interpretationand construction of the policy. The question of who has ultimatecontrol may, however, have limited impact in the vast majority ofcases where the policy is silent, ambiguous, or does not reflect theexpectations of all of the interested parties. In such cases, the resultsbased on judicial supervision (under the rubric of "equity") may tendto coalesce with those based on the parties' intentions (under the rubricof "reasonable expectations"). However, tension between the twoapproaches may be more significant if the parties' intentions arediscovered from a narrow, mechanical reading of the policy.

During the period before 1985, Canadian courts appeared to besignificantly restricting the use of subrogation by property and casualtyinsurers.19 There was the odd ruling or dictum that was hard to explain,

18 For a discussion of the doctrines' origin, see S.R. Derham, SUBROGATIONIN INSURANCE LAW (Sydney, N.S.W.: The Law Book Co., 1985).

'9 See Baer, supra, note I at 651 and M. Baer, Annual Survey of CanadianLaw: Insurance Law (1980) 12 OTTAWA L. REv. 610 at 657 [hereinafter 1980Survey]. See also R. Hasson, Subrogation in Insurance Law - A Critical Evaluation(1985) 5 OXFORD J. OF LEGAL STUDIES 416; C.R. Huband, The Gradual (andIllogical) Demise of Subrogation Rights (1979) 9 MAN. L. J. 147.

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but for the most part the courts did this in a variety of ways whichwere compatible with traditional doctrine. The result was probablyconsistent with the intentions of those involved in joint enterprises torationalize their insurance coverage. However, there was little opendiscussion of the tripartite nature of the issue and no attempt toconstruct guidelines or a list of relevant factors to determine the parties'intentions.

Since 1985 there have been a series of cases in the consumercontext which seems to reverse the earlier trend and apply the doctrineof subrogation with renewed vigour.20 These cases have allowed su-brogated actions by the insurers of homeowners against relatives,friends and Good Samaritans. They have been criticized as beingcontrary to the parties' reasonable expectations, promoting the needfor wasteful duplication in insurance coverage and having a chillingeffect on caretaking arrangements. 2' On more technical grounds, theyalso seem to be inconsistent with the apparent conclusion of Mr JusticeDeGrandpr6 that, in accordance with basic principles, no subrogationis possible against an insured whose interest extends to all propertyfor which it may be liable. 22

The fact that these cases have retreated from the broad conclusionof Mr Justice DeGrandpr6 could have been anticipated. The learnedjudge's conclusion went beyond what was necessary for the case, andseemed to confuse what could be insured with what was in factinsured.2 3 There is a similar confusion in some of the recent decisionscoming to the opposite result. For instance in Morawietz,24 in allowinga subrogated action against the negligent son of the insured homeow-ners, the Ontario Court of Appeal stated "[i]n our opinion the defendant[the son] did not have an insurable interest in, and was not the insuredin the part of the policy covering the property damaged by hisnegligence".25 This statement is bound to cause puzzlement, if notconfusion, since potential liability had been recognized as an insurable

20 Morawietz v. Morawietz (1986), 18 C.C.L.I. 108, [1986] I.L.R. 1-2082(Ont. C.A.) [hereinafter Morawietz]; Wade v. Canadian Northern Shield InsuranceCo. (1986), 18 C.C.L.I. 173, [1986] I.L.R. 1-2131, 5 B.C.L.R. (2d) 62 (S.C.)[hereinafter Wade cited to C.C.L.I.]. See also Heckbert v. Wye Electric Ltd (1984),9 C.C.L.I. 72 (N.B.Q.B.) where the learned Judge was surprised that the insurerwould bring a subrogated claim against the insured's own brother. He stated: "[i]fthe protection afforded by the insurance is at the cost of destroying family relationship,then something very valuable and very important has been lost. However, that playsno part in the decision I have just reached" (supra, at 75). Instead, he dismissed theclaim on the grounds that the defendant was not negligent.

21 J.R. Rendall, Annot.: Wade v. Canadian Northern Shield Insurance Co.(1986) 18 C.C.L.I. 174.

22 Commonwealth Construction Co. v. Imperial Oil Ltd, [1978] 1 S.C.R. 317,I A.R. 161.

23 See 1980 Survey, supra, note 19 at 652.24 Supra, note 20.25 Ibid. at 109, Curiam J.

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interest even under the restrictive "legal right" test of Lord Eldon. 26

It clearly meets the "factual expectancy" test now accepted by theSupreme Court of Canada. 27 Hence there is no doubt that the son hadan insurable interest in his potential liability for the destruction of hisparents' property. In fact, the Ontario Court of Appeal recognized thatthis was so. Instead, the point the Court was making in the sentencequoted above was that the son had no insurable interest in that part ofthe policy covering his parents' property. This is a confusing way ofreferring to insurable interest, which is a mandatory requirement ofthe common law, quite independent of any policy wording. The issuewas not whether the son could insure- his potential liability, but whetherhe did so. The quotation seems to suggest he could not do so in thisparticular way - that is as property insurance. This is reminiscent ofthe view of the Ontario Court of Appeal in Cummer-Yonge Invt Ltd v.Agnew-Surpass Shoe Stores Ltd,28 that the ordinary concept of propertyinsurance does not embrace a liability loss. This view has been rejectedby the Supreme Court of Canada even as a question of interpretation. 29

These references to the nature and extent of the defendants'insurable interest are not necessarily entirely irrelevant if it is assumedthat the parties wanted or expected comprehensive coverage. This iswhat Mr Justice DeGrandpr6 may have had in mind. Moreover, theseissues may yet turn out to be relevant under an alternative claim innegligence for failure.to provide full coverage or to warn of gaps incoverage.

Stripped of these puzzling references to insurable interest, thesubrogation cases turn on whether the insurer has lost its subrogationrights in one of three ways: (1) by renouncing the right in the policy;(2).by also insuring the liability of the defendant; or (3) by the insured'sgranting of immunity to the defendant. From the point of view of theparties trying to avoid the need, for duplicate coverage, it probablymatters little which strategy is adopted. However, the recent casesillustrate-that it may be easier to convince the courts that one ratherthan another of these strategies should be implied. For instance, thecourts may be more willing to imply terms into an informal family orneighbourly arrangement than to go beyond the express terms of thepolicy. However, this does not provide a satisfactory explanation ofthe results of the recent cases and it seems anomalous that the courtsare more willing to allow subrogation in the consumer context.

Some of the apparent anomaly may disappear, or at least be putin a different perspective, if the issue is considered in a broader contextby identifying the true parties in interest. Much moral indignation may

26 Lucena, supra, note 10.27 See supra, note 4.28 [1972] 2 O.R. 341 at 345, 25 D.L.R. (3d) 501 at 505 (C.A.).29 [1976] 2 S.C.R. 221 at 228-31 (Laskin C.J.C.) and 248-50 (Pigeon J.), 55

D.L.R. (3d) 676 at 682-83 and 690-91.

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be misplaced by confusing cause and effect. The recent subrogatedactions in the consumer context are the result of liability insurance,not the cause. The court has been asked to decide which insurer shouldcover the loss, not whether the homeowner's dependents or neighboursshould pay for it personally. Seen in this context the decisions are nomore convincing, but the results may be less offensive. The decisionsare no more convincing because they treat the insurer's rights asentirely derivative. In the case of the plaintiff, this pretence is temperedby the necessity of determining the scope of the plaintiffs insurancecoverage. Nevertheless, the defendant's liability is determined as if heor she were not insured. Critics are also caught up in the resultingflight of fancy.30 No one really anticipates that their insurer will recoupthe insurance proceeds from their dependents, friends and neighbours.Yet this is what the comparison seems to suppose. Such a suppositionis seen to be perversely at odds with public expectation. Moreover,there is a perceived danger that the same rule would be applied if thelike case did actually arise, as where the defendant's insurance coveragewas ineffective or uncollectible.

All of these concerns may be quite genuine, but they do not helpto identify what would be relevant if the court was not forced to dealin similes. If the issue was seen as one involving the co-ordination ofoverlapping insurance coverage, other factors could be considered. Inaddition to the basic need to prevent excess recovery, these factorsinclude maximizing loss prevention, promoting economic efficiency byinternalizing costs, (that is, attributing the total true costs to aneconomic activity), spreading risk, reducing the cost of insurance, andencouraging deliberate choice amongst coverage options by insureds.3 1

Many of these factors are quite complex and they are not all compa-tible. Moreover, courts are not alone responsible for co-ordinatingcoverage and, in fact, may not be in the best position to perform thetask. They should look assiduously for directions from the industryand the legislature.

The application of these considerations to the facts of Morawiet 32

may not have been easy. Much depends on the nature of the son'sown insurance. If it were a motor vehicle liability policy, the co-ordination proposed by the Ontario Court of Appeal, while not inevi-table, has some rational basis. The risk associated with welding fenderflairs on an automobile can appropriately be attributed to the activityassociated with automobile ownership. Where this leaves the losscaused by the father's contributory negligence is unclear (and was leftunclear by the Ontario Court of Appeal). To be consistent, suchnegligence should also be assigned to motorist activity - that is, to

30 See Rendall, supra, note 21.31 For a fuller discussion see K. Abraham, DISTRIBUTING RISK (New Haven:

Yale University Press, 1986).32 Supra, note 20.

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the father's automobile insurer, if he has one. This could be done inMorawietz because the subrogated action was brought in the mother'sname. However, there could be no such co-ordination if the subrogationaction had been brought in the father's name. Then his contributorynegligence would have been a partial defence and, since the fathercould not sue himself, there would be no way for his homeowner'sinsurer to claim from his motor vehicle liability insurer.33

If, however, the son was insured under a similar comprehensiveliability rider to that of his parents, the co-ordination suggested by theCourt may not be rational. At least it will be based on the undertakingof the son's insurer to satisfy any judgment obtained against the son.If it were not for this undertaking, the son's insurer could rely on theautomobile exclusion.

In situations that do not involve the automobile exclusion, thereis less obvious justification to shift the loss from one insurer to another.Such actions are not unknown in the automobile insurance field, butthe fact that they have largely been replaced by the industry's "Inter-company Settlement Chart" suggests that they are an inefficient andexpensive way to allocate risk. They probably should not be encou-raged by the courts, but not for the reason that the courts are unableto discover who are the real parties in interest, or on the basis thatthe liability insurer should inevitably enjoy the social approbation givento its insured. 34 Rather, they should be discouraged because this iswhat the real parties in interest would do if they could bargain in anormal context of an ongoing business relationship. It is significant inMorawietz that the son was insured by an insurance company that wasknown to be in receivership.

D. Contribution

It is perhaps not surprising that Canadian courts have had difficultyco-ordinating insurance coverage in the context of subrogated claims.The derivative nature of the claims make it difficult for them toconsider the relevant issues openly. However, Canadian courts havehad only marginally greater success in co-ordinating coverage in anyrational way when the issue is directly before them in an action forcontribution. In such cases the ,courts attempt to give effect to theintention of the insurers involved. Such deference is probably wise,but the courts run into difficulties by attaching too much significanceto the wording of the policies. The policies do not, in fact, evidence

33 Fortunately for the father, the automobile exclusion only applied to thecomprehensive liability rider of his homeowners' insurance.

34 The point can perhaps be more forcefully made by asking whether wewould treat the parents as unnatural ingrates if they sued their son in order to recoverfrom his liability insurer.

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a deliberately reached agreement between the insurers; indeed, theexistence of a compatible intention is unlikely, and if found would belargely fortuitous.

An extreme example of this policy-centered approach is theOntario Court of Appeal decision in St Paul Fire & Marine InsuranceCo. v. Guardian Insurance Co. of Canada.35 The case involved adispute between two liability insurers that provided coverage to lawyerson a "claims made" basis. One liability insurer replaced the other, butthere was a six-month period in which their coverage overlapped. Theissue of contribution would have been difficult enough if the claimhad been made entirely in the six-month period of overlap, but it wasmade more difficult by the fact that the writ was issued before, butbrought to the defendant's notice during, this six-month period. Thusthere was the added complication of identifying when the claim wasmade. The majority of the Ontario Court of Appeal quite sensiblydecided that the claim was made when it came to the defendant'snotice. 36 This seemed to suggest that there was overlapping coverageand the next step was to apply the "other insurance" provisions of thetwo policies. At this point the reasoning of Mr Justice Thorson (forthe majority) becomes a bit hard to follow, but he seems to concludethat in interpreting the other insurance clause of the replaced policy,the Court had to determine when the loss was suffered. He concludesthat the loss was suffered when the writs were issued and, at that date,there was no "other insurance against a loss covered by this policy".37

Why the process of interpretation starts with the replaced policy is notmade clear, nor is it clear why the replacing policy is effective asexcess insurance, but not as other insurance.

A more straightforward approach to the other insurance clausesin the two policies might have resulted in the opposite conclusion, thatis that the replaced policy was excess insurance. However, even thisinterpretation seems arbitrary, giving too much emphasis to cleverdrafting which may not truly represent the expectations of both insu-rers. A more broadly based search for the parties' expectation isillustrated by Mr Justice Gray's decision in Tinmouth v. La GroupeDesjardins, Assurances Generales38 where he found that the partiesintended the replacing policy to be first loss insurance.

35 (1983), 43 O.R. (2d) 326, 2 C.C.L.I. 275 [hereinafter St Paul cited toO.R.].

36 See also Wright Engineers Ltd v. U.S. Fire Insurance Co. (1987), 19C.C.L.I. 74 (B.C.C.A.).

37 St Paul, supra, note 35 at 343.38 (1986), 57 O.R. (2d) 187, 19 C.C.L.I. 268 (H.C.), appeal dismissed (1988),

30 C.C.L.I. xxxiii, 32 O.A.C. 80. See also Dominion of Canada General InsuranceCo. v. Wawanesa Mutual Insurance Co. (1986), 16 C.C.L.I. 69, 64 B.C.L.R. 122,[1986] I.L.R. 7643 (S.C.) where the Court found the two "other insurance" clausescancelled each other.

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E. Insurer's Obligation to Defend

There is a further area where Canadian courts have had difficultyin deciding how to co-ordinate overlapping coverage. This area in-volves the obligation to defend found in liability insurance contracts.This obligation has generally been recognized as separate and broaderthan the obligation to indemnify.39 Since it is separate, it is notnecessarily subject to the same limits, exclusions and co-insuranceclauses as the obligation to indemnify. Canadian courts have not yethad to determine what are the appropriate limits on this obligation; inparticular whether the insurer's obligation is affected by the order inwhich claims are made or settled. For instance, the courts have notbeen asked whether the insurer can avoid defence costs in situationsof multiple claims by settling some large claims first and therebyexhausting the limits of indemnity under the policy.

The scope of the obligation to defend has been considered byvarious Canadian courts. The principle that is usually adopted is thatthe insurer must defend any action which alleges liability for whichindemnity is provided, whether the allegation is justified or not. Thiscorresponds with the express wording of many liability policies. Somecourts have been troubled by the fact that this approach seems to makethe parties' rights under the insurance contract depend upon the unpre-dictable allegations of third parties.40 Nevertheless, the courts havebeen reluctant to relieve the insurer of its obligation to defend unlessthe alleged conduct is clearly outside the policy coverage. 41

The problem of overlapping obligations to defend has, however,caused the courts more difficulty.42 This has been particularly so whenthe underlying obligations to indemnify are intended to be mutuallyexclusive, or stacked in a particular way. At least four approacheshave been adopted, although there may be other less obvious solutions.The first approach is to deny that either insurer can claim from the

39 Great West Steel Industries Ltd v. Simcoe & Erie General Insurance Co.(1979), 27 O.R. (2d) 379, 106 D.L.R. (3d) 347, [1980] I.L.R. 1-1167 (C.A.); OpronMaritimes Construction Ltd v. Canadian Indemnity Co. (1986), 73 N.B.R. (2d) 389,19 C.C.L.I. 168, 21 C.L.R. 113, (C.A.), leave to appeal to S.C.C. denied (1986),76 N.B.R. (2d) 360n, 76 N.R. 399, 21 C.C.L.I. xxxv.

40 See comments by McEachern C.J. in Cansulex Ltd v. Reed Stenhouse Ltd(1985), 18 C.C.L.I. 24 at 48, [1986] I.L.R. 8051 at 8061, 70 B.C.L.R. 273 at 294(S.C.) [hereinafter Cansulex].

41 See, e.g., St Andrew's Service Co. v. McCubbin (1988), 31 C.C.L.I. 161,22 B.C.L.R. (2d) 38 (S.C.); Nichols v. American Home Assurance Co., [1990] 1S.C.R. 801, 68 D.L.R. (4th) 321; Thames Steel Construction Ltd v. NorthernAssurance Co. (1989), 67 O.R. (2d) 158, 34 C.C.L.I. 320 (C.A.).

42 See M. Baer Annot.: Broadhurst and Ball v. American Home AssuranceCo. (1989) 33 C.C.L.I. 16.

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other in the absence of express statutory authority.43 This approachseems unjustifiable except as an interim measure. The second approachputs the obligation to defend on that insurer which has the greaterobligation to indemnify.44 This might be the first loss insurer wherethe excess claim (if any) will be modest, or might be the excessinsurer if the claim is large and the limits of the first loss insuranceare low. The third approach attempts to divide the cost of defenceaccording to how the loss is ultimately distributed. This requires adetermination after trial. In the meantime, either insurer may be forcedby the insured to defend the action. 45 The fourth approach is simplyto divide the costs of defence equally.46 So far no Canadian court hasattempted to apply the co-insurance clauses in the policy directly (orby analogy) to the defence obligation. That is, no court has recognizedthat there could be a permanent overlap of the obligation to defendeven though, ultimately, it is determined that there is no overlappingobligation to indemnify.

Assuming the insured can require either insurer to defend, he orshe may have little interest in how the insurers ultimately divide thecosts, other than a general interest that the division serve some rationalpurpose. These are the same interests that the courts should have indetermining how the insurers would rationally divide the costs if theyhad expressly addressed the issue. This requires more than the kind ofnarrow textual analysis that is found in the recent contribution cases.

F. Direct Recourse Provisions

There are two provisions in the uniform insurance acts whichenable injured parties to bring a direct action to recover the proceedsof liability insurance contracts. 47 In spite of their apparent similaritythey have come to serve two different purposes. The automobile direct

43 General Accident Assurance Co. of Canada v. Ontario Provincial Police

Force (1988), 64 O.R. (2d) 321, 30 C.C.L.I. 178 (H.C.); Broadhurst and Ball v.American Home Assurance Co. (1989), 33 C.C.L.I. 16 (Ont. H.C.).

44 Economical Mutual Insurance Co. v. Insurance Corporation of BritishColumbia (1986), 72 A.R. 374, 18 C.C.L.I. 134, 44 ALTA L.R. (2d) 242 (Q.B.).See also Caldon v. Kansa General Insurance Co. (1988), 31 C.C.L.I. 69 (Ont.H.C.).

45 Royal Insurance Co. of Canada v. Saskatchewan Gov't Insurance (1988),90 A.R. 270, 33 C.C.L.I. 244 (Q.B.). This may not be easy to do if the insurersrefuse to defend and the insured settles out of court. See Cansulex, supra, note 40.

46 Foundation Co. of Canada v. Canadian Indemnity Co. (1979), 33 N.S.R.(2d) 317, 98 D.L.R. (3d) 70 (S.C.); Lester Archibald Drilling and Blasting Ltd v.Commercial Union Assurance Co. (1987), 80 N.S.R. (2d) 186, 25 C.C.L.I. 145(T.D.).

47 In Ontario, Insurance Act, R.S.O. 1980, c. 218, ss. 109 & 226 [hereinafterreferred to as Insurance Act or Act]. Part IV of the Act, dealing with fire insurance,will hereinafter be referred to as the Fire Part; Part VI, dealing with automobileinsurance, will be referred to as the Automobile Part.

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recourse provision is in fact part of a legislative scheme designed toensure that accident victims receive a minimum compensation. Thedirect recourse provision helps to do this by insulating the victim fromthe insured tortfeasor's wrongdoing.48 But since the victim wouldotherwise have access to uninsured motorist coverage (or in someprovinces a public unsatisfied judgment fund) the provision, in factserves to co-ordinate insurance coverage. Given the difficulty that thecourts have had in co-ordinating coverage in a principled way whenthe issue is clearly before them, it is not surprising that they have haddifficulty interpreting and applying this direct recourse provision. Forone thing, they do not often recognize that the provision's primaryfunction is now to co-ordinate coverage. Instead they see the disputein terms of balancing the interests of the innocent victim and the motorvehicle liability insurer. This has not always led to a generous inter-pretation of the victim's rights. The case law is prolific and manynuances have been built around two types of problems: the failure ofthe insured to pay his or her renewal premium on timea9 and someother default of the insured.50 The case law dealing with the first typeof problem is still somewhat unsettled, but there is a tendency to allowthe insurer to deny coverage even though it has issued indicia ofinsurance and its practices seem to hamper the public enforcement ofthe compulsory insurance laws. The case law dealing with the secondtype of problem seemed more settled, although it was built on afoundation that was not entirely convincing. Following a familiarpattern, the extent of the victim's protection from the acts or defaultsof the insured was said to be determined by the further legal distinctionbetween the definition of the risk and (promissory) warranty. As inother contexts, basing one legal distinction on another passed for legalanalysis without any further justification for the particular scope of theinsured's protection. In any event, this familiar line of enquiry maybe ripe for re-examination given the various changes that have beenmade in the scheme for compensating automobile accident victims.Moreover, the Ontario Court of Appeal may recently have signalledits intention to engage in such a re-examination in affirming the trialdecision in Walker Estate v. Allstate Insurance Co. of Canada.5'However, a less generous, although probably more accurate assessmentof its decision is that the Court was unaware of prior doctrine orunaware of the possible confusion that some of its cryptic commentsmight cause.

In contrast to this brief endorsement, the Ontario Court of Appealhas recently considered the general direct recourse provision in consi-

48 In Ontario, Insurance Act, R.S.O. c.218, s. 226 (4).49 See M.G. Baer & J.A. Rendall, CASES ON THE CANADIAN LAW OF

INSURANCE, 4th ed. (Toronto: Carswell, 1988) at 507ff.50 Ibid. at 797ff.51 (1989), 67 O.R. (2d) 733, 37 C.C.L.I. 267 (C.A.).

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derable depth. 52 This provision does not attempt to insulate the injuredparty from the insured's acts or defaults. Instead the provision operatesas an assignment of the insured's rights to indemnity under the liabilityinsurance contract and the injured party is subject to the same equitiesas the insurer would have against the insured. There are also othersignificant differences between the two direct recourse provisions. Oneis obvious on the face of the general section which requires that theinjured party first attempt execution against the insured and only if itis returned unsatisfied can the injured party claim against the liabilityinsurer. The other significant difference is not so obvious and involvesthe greater likelihood under the general section that the injured partyis claiming for his or her own benefit.

In the Ontario case of Perry v. General Security Insurance Co.of Canada53 the plaintiffs initially obtained a default judgment againstan insured lawyer for the loss they suffered as a result of the lawyer'sfailure to properly investigate the title to land. In the subsequent directaction, the insurer successfully defended on the grounds that the lawyerdid not incur liability "for injury or damage to the person or property"of the plaintiffs within the meaning of section 109 of the InsuranceAct; that the lawyer had forfeited his right to be indemnified by hisbreach of the conditions of the policy; and that the plaintiffs were notentitled to claim relief from forfeiture under section 106 of the Insu-rance Act.

In affirming these defences, the majority of the Court noted that"the result [was] an unhappy one" 54 and that it seemed to run counterto one of the purposes for the insistence by the Law Society of UpperCanada that its members assume this insurance as a condition of beinglicensed. 5 The Court went on to hope that a prompt solution wouldbe provided by legislation or otherwise. Given these observations, onewould expect very compelling reasons for the Court to act contrary toits understanding of the main reasons for this type of insurance.Unfortunately the reasons are at best plausible or at least familiar inother contexts.

In relation to the first issue, whether the plaintiffs' suffereddamage to property, the majority found that it would be a distortionof the language and the legislative and judicial history of section 109of the Insurance Act, and of the definition of the word "property"found in the Act to allow the plaintiffs to claim under the section.This is a surprisingly bombastic conclusion given the analysis thatprecedes it. The judicial and legislative history referred to is the fact

52 Perry v. General Security Insurance Co. of Canada (1984), 47 O.R. (2d)

472, 11 D.L.R. (4th) 516, 7 C.C.L.I. 231 (C.A.) [hereinafter Perry (Ont. C.A.)cited to C.C.L.I.].

53 (1983), 42 O.R. (2d) 514, 149 D.L.R. (3d) 272, 1 C.C.L.I. 227, [1983]I.L.R. 6411 (H.C.).

54 Perry (Ont. C.A.), supra, note 52 at 247.55 Ibid.

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that automobile claims were removed from section 109 and treatedseparately in section 226 and certain procedural protections and rightsgiven to the insurer. The procedural protection and rights are notspecifically identified by the Court but they are those that relate to theinsurer's inability to rely on certain defences against the innocentclaimant. They do not relate in any obvious way to whether the claiminvolves damages to intangible or tangible property.

The discussion of the meaning of "property" consists largely ofa misconceived treatment of section 1(54) of the Act as an exclusiveor comprehensive definition of property and a reliance on a statementmade by Mr Justice Laskin in an entirely different context.5 6 There isof course a distinction between property damage and pure economicloss in tort law. There is also an industry practice of distinguishinginsurance coverage along the same lines. Perhaps when section 109was first passed liability insurance was not common for pure economicloss. However, the use of "property" as a generic term to include bothtangible and intangible property is not unusual.57 Moreover, the Courtwas not asked to find insurance coverage contrary to the expectationsof the insurer. The question was a more narrow one: whether, giventhat there was insurance coverage, the plaintiffs should have the rightto bring a direct action to recover it, or should they be confined tothe normal, usually more clumsy, execution processes.53 Essentiallythe question becomes whether there is something in the nature of thetwo types of coverage that would justify treating them differently forthis narrow purpose.59

Unfortunately, in spite of their reference to legislative and judicialhistory, the majority of the Court has given no reason or authority tojustify such differing treatments. On the contrary, the discussion of theother issues raised by the insurer indicates that it would suffer noprejudice by allowing a direct action for damage to both tangible andintangible property.60

56 The reference is to Laskin J.'s judgment in Jordan House Ltd v. Menow,

[1974] S.C.R. 239, 38 D.L.R. (3d) 105 considering a section of the Liquor LicenceAct, R.S.O. 1960, c. 218.

57 It is so used elsewhere in the Act and Regulations.58 Including claiming by way of express assignment. See Frederickson v.

Insurance Corporation of British Columbia (1986), 28 D.L.R. (4th) 414, 17 C.C.L.I.194 (C.A.), leave to appeal to S.C.C. granted [1986] 6 W.W.R. ixv.

59 The distinction becomes even more artificial when the two types of coverageare combined in a general liability policy.

60 See Perry (Ont. C.A.), supra, note 52; Starr Schein Enterprises Inc. v.Gestas Corp. (1987), 38 D.L.R. (4th) 593, 25 C.C.L.I. 240, [1987] I.L.R. 8480(C.A.) which also was a case involving solicitor's negligence. However, in Kallos v.Saskatchewan Gov't Ins. (1983), 4 D.L.R. (4th) 34, 3 C.C.L.I. 65, [1984] I.L.R.6709 (Q.B.) the Saskatchewan Queen's Bench held that the victim of a solicitor'snegligence did have a right of direct recourse against the solicitor's liability insurerunder s. 26 of the Saskatchewan Insurance Act, R.S.S. 1978, c. S-26. See alsoRichards v. Continental Casualty Co. (1987), 25 C.C.L.I. 237, 53 ALTA L.R. (2d)76 (C.A.), leave to appeal to S.C.C. denied (1987), 55 ALTA L.R. (2d) 1.

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The question of whether the plaintiffs should have been grantedrelief from forfeiture is more difficult. At least, the question is moredifficult where the insurer has suffered no actual prejudice by theinsured's failure to give notice to and co-operate with the insurer. Theissue requires more careful consideration of the meaning of the phrase"subject to the same equities" found in section 109 of the Act. TheCourt observed that "this was a flagrant case of the flouting of theconditions of the policy by the solicitor". 61 This conduct alone wouldhave disentitled the insured from relief. But this may be a personaldisqualification or a mere personal defence which in other contexts(such as assignment or negotiation) would not be included in the term"subject to the same equities". In the absence of prejudice to theinsurer, the disqualification is based on a deep-seated aversion in thelaw to rewarding wrongdoing. Here it is expressed as the need for"clean hands", while in the context of arson or fraud it is expressedmore strongly. Nevertheless, as in these other contexts, public policyshould not be applied more broadly than is necessary.62

In Perry the Ontario Court of Appeal interpreted section 106 tomean that the plaintiffs could be in no better position than the insured.However, the Court also found that the insurer was in fact prejudicedby the insured's failure to give notice and co-operate in the defenceof the plaintiffs' claim.

m.

A. The Obligation to Disclose Material Facts

The common law obligation to act with the utmost good faith innegotiating insurance contracts has been modified by various statutoryprovisions. These provisions have left a checkered pattern which inmany ways tends to reinforce the technical nature of the requirement.The courts have done little to reduce the anomalies created by thispiecemeal pattern. They have not emphasized the common theme ofthis legislation but, instead, have tended to exaggerate the differencesby attaching an inordinate importance to the choice and arrangementof terms.

Some of the resulting anomalies can be illustrated by comparingthe insured's disclosure obligations before and after the risk attachesin fire and automobile insurance. 63 A careful and exhaustive description

61 Perry (Ont. C.A.), supra, note 52 at 245.62 See, e.g., Blair J.A.'s judgment in Stats v. Mutual of Omaha Insurance Co.

(1976), 14 O.R. (2d) 233, 73 D.L.R. (3d) 324 (C.A.), affd [1978] 2 S.C.R. 1153,87 D.L.R. (3d) 169, 22 N.R. 91.

63 In Ontario, see Insurance Act, R.S.O. 1980, c. 218, s. 125 (2) (StatutoryConditions 1 & 4 in Part IV - Fire Part) & ss 206-07 (Statutory Condition I in PartVI - Automobile Part).

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of the insured's obligation in these situations probably requires a chart,but the case law indicates that (1) the words "knowingly" and "frau-dulently" do not mean the same thing, so that part of the insured'sobligation is more onerous in automobile insurance; 64 (2) omissionsand misrepresentations must be distinguished in the case of fire insu-rance but not automobile insurance; 65 and (3) the insured's obligationmay be greater after than before the risk attaches. 66

With these complexities, it is not surprising that trial judgesoccasionally lose their way. The most frequent and significant "error"is to overlook the Supreme Court of Canada's decision in Taylor v.London Assurance Corporation,67 and to assume that the adverb "frau-dulently" in Statutory Condition 1 of the Fire Part of the InsuranceAct, adds nothing to the common law. With this assumption, of course,the significance that the Supreme Court attached to the differencebetween omissions and misrepresentations is also overlooked. 68 Theseerrors are illustrated by the decision of the trial judge in Landmeyerv. Economical Mutual Insurance.69 In that case the applicant was askedwho lived in the premises and he answered that he lived in one halfand his father lived in the other half. He did not disclose that herented two or three rooms on a weekly basis to tenants, many ofwhom were "seriously addicted to alcohol".70 In finding that the insuredwas in breach of Statutory Condition 1 the trial judge clearly erred bystating "[t]he notion underlying statutory condition 1 is that the with-holding of information material to the risk, even though it may not

64 Compare Taylor, infra, note 67 with Sleigh v. Stevenson, [1943] 4 D.L.R.

433, [1943] O.W.N. 465 (C.A.). See also McLean v. Paul Revere Life InsuranceCo. (1990), 43 C.C.L.I. 273 (B.C.S.C.) where the Court seems to give a differentmeaning to fraud in the accident and sickness part of the Act.

65 This results from the different placement of the adverbs "knowingly" and

"fraudulently" in the Fire and Automobile Parts of the Act. In Ontario compareInsurance Act, R.S.O. 1980, c. 218, ss 125 (2) (Statutory Condition 1 (Fire Part))& 206 (Automobile Part). There are equivalent sections in the other common lawprovinces. See also the importance attached to this placement in the cases cited innote 64.

66 In Ontario compare Statutory Conditions I & 4 in the Fire Part (the adverbfraudulently does not appear in the latter) and ss 206 & 207 (Statutory Condition 1in the Automobile Part) (the adverb knowingly does not appear in the latter). Thesame distinctions exist in the equivalent provisions in the other provinces. In addition,until recently in Ontario an insurer could require additional information in theapplication (see Insurance Act, R.S.O. 1980, c. 218, s. 203(2) repealed by InsuranceAct, S.O. 1990, c. 2, s. 41) which did not form part of the application for thepurpose of s. 206. Equivalent sections still exist in other provinces.

67 [1935] S.C.R. 422, [1935] 3 D.L.R. 129, 2 I.L.R. 252 [hereinafter Taylorcited to S.C.R.].

68 See Bar Bx Department Store Ltd v. Madill (1986), 18 C.C.L.I. 274(B.C.S.C.) (an example of the confusion).

69 (1984), 66 N.S.R. (2d) 139, 10 C.C.L.I. 51 (S.C.T.D.) [hereinafter Land-meyer cited to C.C.L.I.].

70 Ibid., at 54.

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have been intentional, deceives the insurer and in that sense it isfraudulent". 71 The trial judge was also ambiguous about whether theapplicant's incomplete answer was an omission or a misrepresentation.The Nova Scotia Court of Appeal72 allowed the insured's appeal,relying on the Supreme Court of Canada's decision in Taylor.73 Thisrequired the Court to determine whether the applicant's partial disclo-sure was an omission or a misrepresentation. The appellate courtdecided it was an omission, apparently relying on the findings of thetrial judge. This reliance is curious since the trial judge does not seemto have applied his mind to the distinction. In any event, there is nodiscussion by the appellate court of the nature of the distinction orwhy a fraudulent intent is necessary to avoid the contract in one casebut not the other. Nor is there more than a passing reference to thefact that the insured's disclosure obligation would have been differentand more onerous if he had started to rent the rooms after the riskattached.7 4

Some of the distinctions in the Automobile Part are illustrated byRoy Pulp Contracting Ltd v. Saskatchewan Government Insurance,75where the insurer denied liability on the grounds that the insuredmisrepresented the vehicle's weight and number of axles. The trialjudge found that these facts were used to set the premium and that theinsured knew this. These findings made it unnecessary to explore thedifference between "fraudulently" and "knowingly" and the differencebetween falsely describing the vehicle and misrepresenting other facts.The first distinction would have been relevant if the insured had knownthe facts but not known their importance to the insurer in setting thepremiums. The second distinction would have been important if theinsured had known neither the facts nor their importance to the insurer.

The facts of this case can also be used to illustrate that thestatutory provision refers to knowingly misrepresenting or failing todisclose in the application "a fact required to be stated therein". Thisforecloses any discussion of materiality. Since the premiums werebased on the misstated facts, the insurer probably could have met thestandard definition of materiality in any event. However, the vehicle'sweight and number of axles may not in fact reflect loss experience.They may instead be used to set the premiums because of considera-tions associated with the pricing of government services or taxes (suchas ability to pay or distributive effect).

71 Ibid., at 60.72 Landmeyer v. Economical Mutual Insurance Co. (1985), 68 N.S.R. (2d)

241, 12 C.C.L.I. 220 (C.A.).73 Supra, note 67.74 See Watkins v. Portage La Prairie Mutual Insurance Co. (1984), 5 C.C.L.I.

108 (B.C.S.C.) (an example of how initial disclosure and a material change in therisk can become confused).

75 (1985), 15 C.C.L.I. 171, 46 SASK. R. 152 (C.A.).

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The distinct disclosure standard in life insurance is illustrated bythe Ontario Court of Appeal decision in Johnson v. Eaton-Bay LifeAssurance Co. 76 where the beneficiary's claim was dismissed eventhough the insured answered the question as she did in a bona fide -though mistaken - belief as to the nature of the information whichthe question was intended to elicit. The Court of Appeal was unableto agree with the trial judge that the questions were ambiguous and,since they were clear and unambiguous any confusion on the part ofthe insured was irrelevant and could not affect the rights of the insurer.

This series of cases applying the various statutory provisionscovering the insured's disclosure obligation breaks no new ground.There is still some confusion (due mostly to oversight) by some trialjudges about the effect of the various sections and still no attempt tosearch for a common underlying theme.

Nor has there been much concern about whether these distinctionsare still apt, given modem industry practice (whatever justificationthere may have been previously). For instance, in Bastien v. Smith &Ridout Ltd77 the insurer assumed the risk on the basis of an unsignedapplication form and information that had been given to a previousinsurer. Little attempt was made to obtain fresh information from theinsured, or to warn the insured of the importance that the insurerattached to this information. Nevertheless, the Court found a breachof both Statutory Conditions 1 and 4 of the Fire Part. In doing so, theCourt carefully distinguished the various elements of the statutorydisclosure requirements but made no attempt to justify these distinc-tions.

B. Materiality

In determining what facts are material, Canadian courts continueto rely on the uncorroborated (albeit uncontradicted) evidence of theinsurer's employees or on their own understanding of what must bematerial. Occasionally, they follow the lead of the Ontario DivisionalCourt in Doherty v. Home Insurance Co.78 and examine the evidencecritically and sceptically, but often they seem willing to accept commonprejudices or intuitions. 79 In spite of Doherty, there continues to be noattempt to distinguish those factors that actually affect the risk and

76 (1984), 5 C.C.L.I. 73, [1984] I.L.R. 1-1761, 3 O.A.C. 238 (C.A.).77 (1988), 33 C.C.L.I. 114 (Ont. H.C.) [hereinafter Bastien].78 (1986), 19 C.C.L.I. 314, [1986] I.L.R. 1-2120 (Ont. Div. Ct) [hereinafter

Doherty].79 See Worral v. BCAA Insurance Co. (1988), 35 C.C.L.I. 269 (B.C. Co.

Ct); Bastien, supra, note 77; LeBreton v. Simcoe & Erie General Insurance Co.(1989), 43 C.C.L.I. 84 (N.B.Q.B.).

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those that affect the premium for other reasons.80 Nor do Canadiancourts emphasize the difference between those factors that make therisk uninsurable and those that affect its classification. In the lattercase, avoidance of the contract leads to an obvious forfeiture whichmay be out of all proportion to the harm done by an inappropriatecross-subsidy.81

IV.

A. Coverage

Insurance law doctrine is under the greatest stress in relation toissues of coverage. Here traditional doctrine seems particularly thread-bare and some Canadian courts are struggling to discover new cohesiveprinciples. They have had mixed success and there may yet be aconservative retreat led by the Supreme Court of Canada. 82

The traditional approach regards issues of coverage as centeringon the policy's wording. Most lawyers and judges still use the terms"policy" and "contract" interchangeably even though they are carefullydistinguished in the legislation.8 3 In interpreting the policy, the courtsuse rules of construction, most of which are unhelpful. Contra profe-rentem is by far the most frequently invoked rule, but surprisinglythere is little Canadian case law concerning its appropriate application(for example, whether it should apply to manuscript policies, policywording suggested by brokers, or policies subject to administrative orgovernmental approval).

Canadian courts are of course affected here, as elsewhere, bynotions of adhesion. They are sensitive to the lack of bargaining powerand understanding by insureds. They may also be starting to recognize

80 See, e.g., Bastien, ibid. A less obvious example is Bell v. Tinmouth (1988),

32 B.C.L.R. 349, 34 C.C.L.I. 179 (C.A.), where the insured misrepresented thesecurity at an art gallery. This was held to be material even though a co-insurer paidfor its share of the loss. It is not easy to see how facts can be material to one insurerand not the other.

81 See Lejeune v. Cumis Insurance Society Inc., [1989] 2 S.C.R. 1048, 41C.C.L.I. 157 [hereinafter cited to S.C.R.] where the Court found that the lease ofone apartment in a building containing four apartments to an organization which usedit as a place for social gatherings meant the premises were no longer "occupied solelyas a private dwelling" (supra, at 1063) and hence were outside the risk. This findingmade it unnecessary, in the Courts' view, to determine whether the change in usewas material. The decision, based on provisions of the Civil Code, may lead to aneven more extreme form of forfeiture. Recovery is forfeited even though appropriatecoverage may have been obtainable without paying a higher premium. This unfortu-nate result comes from the conceit that the policy terms can be interpreted withoutregard to context.

82 See, e.g., Scott, supra, note 7.83 In Ontario, see Insurance Act R.S.O. 1980, c. 218, ss 1.14 and 1.51.

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that the policy does not play the central role in determining the parties'expectations that traditional doctrine assumes. Courts are beginning togo beyond the words of the policy in determining the bargain betweenthe parties. This may be an alarming prospect for some and its publicexposure may prompt a retreat to a more traditional stance.

Canadian courts are searching for new interpretive techniques inthree ways: (1) by the more aggressive use of traditional doctrine; (2)by toying with the American approach of giving effect to the parties'reasonable expectations; and (3) by turning to tort law as a moreflexible tool to meet the expectations of the insuring public.

B. Reasonable Expectation

The notion that the courts should give effect to the parties'reasonable expectations has been referred to by Canadian courts withincreasing frequency in the last few years. 84 The courts in Western andCentral Canada have more often cited the doctrine with approval, whilethe courts in Eastern Canada have been more reluctant to accept it.85

Even amongst those courts that refer to the doctrine with approval,there is no agreement as to its meaning. For some it is simply an aidto interpretation which, like contra proferentem, can be invoked onlyonce ambiguity has been found. To others, the doctrine allows thecourts to mandate coverage, apart from or in spite of the policy'swording. In either case the justification for the court's intervention isnot always made clear. The American doctrine has been justified ontwo distinct grounds. The first emphasizes some shortcoming in thenegotiation process. Either the insurer has misled the insured or hasfailed to make adequate and frank disclosure. The second ground basesthe court's intervention on the substance of the policy term or exclu-sion. The court, in effect, finds the term or exclusion ineffectivebecause it is unfair or arbitrary (that is, the exclusion seems haphazard,too broadly drawn or with no reasonable or apparent justification).

Canadian courts do, however, share some common attitudestowards the doctrine. They all tend to see it as new, and American,and seldom refer to the similar authority given to them in the FirePart. 86 In addition, they tend to be slightly inarticulate in explainingwhat makes the insured's expectations reasonable. Their difficulty may

84 See M.G. Baer, Annot.: Cooper Estate v. Transamerica Occidental LifeInsurance Co. (1989) 40 C.C.L.I. 58.

85 Blouin v. Maritime Life Assurance Co. (1988), 88 N.S.R. (2d) 23, 37C.C.L.I. 128, [1989] I.L.R. 1-2447 (S.C.T.D.); Walsh v. Canadian General InsuranceCo. (1989), 77 NaD & P.E.I.R. 118, 38 C.C.L.I. 189 (Nfld C.A.) [hereinafterWalsh cited to C.C.L.I.]; Scott, supra, note 7 at 1448 (dissenting judgment ofLaForest J.); Cleworth v. Zackariuk (1987), 28 C.C.L.I. 276 at 287, 11 B.C.L.R.(2d) 125 at 131 (C.A.) (concurring judgment of Esson J.A.).

86 In Ontario, see Insurance Act, R.S.O. 1980, c. 218, s. 128.

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be compounded by the fact that they seem to get very little help inunderstanding the underwriting needs of the industry. The best thatcounsel can do is to assert that the policy words are plain and thereis no legal authority to curb the insurer's autonomy. Such argumentsmay frequently prevail, but seldom without widespread misgivings.The paucity of their reasons makes these judgments inherently unstable,with relatively short half-lives, and little predictive value.

There is no obvious reason why the courts seem to have insuffi-cient evidence of the industry's underwriting needs, - that is, aninsufficient explanation of the purpose of a policy term or exclusion.There may be some difficulty in getting the evidence before the courtsince questions of interpretation are not seen as questions of fact. Incontrast, the analogous issue of materiality (which also raises thequestion of what is important for underwriting purposes) is recognizedas a question of fact and there is a broad scope for the insurer toexplain its needs.

Perhaps the most authoritative statement of the reasonable expec-tation doctrine is that given by the dissenting judges in Scott.87 Theirjudgment also illustrates the ambiguous way in which the doctrine isapplied. Unlike many Canadian judges, they do not identify thedoctrine as new and American. Instead, they firmly ground it in varioustraditional canons of interpretation. Having referred to Mr JusticeEstey's judgment in Consolidated-Bathurst Export Ltd v. Mutual Boilerand Machinery Insurance Co.,8s Mr Justice LaForest summarized:

In other words, in construing an insurance policy, the courts must beguided by the reasonable expectation and purpose of an ordinary personin entering such contract, and the language employed in the policy is tobe given its ordinary meaning, such as the average policy holder ofordinary intelligence, as well as the insurer, would attach to it.89

At the same time, the whole exercise of interpretation was premisedon the policy being ambiguous. However, the ambiguity seems to bevery much a product of the possible purposes of such a clause.Ambiguity is not first found by a simple logical exercise isolated fromthe parties' concerns and expectations. The basic approach is sharplyidentified in the following passage:

The answer to this question cannot be determined by a simple logicalexercise like that outlined by the Court of Appeal. It requires interpre-tation, a task, as will be seen, not so much dictated by adamantine logicas by reference to divergent public policies underlying the clause. 90

87 Supra, note 7.88 (1979), [1980] 1 S.C.R. 888, 112 D.L.R. (3d) 49.89 Scott, supra, note 7 at 1454.90 Ibid. at 1451.

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The case is more typical in the way that the insured's reasonableexpectations are identified, while no serious attempt is made to justifythe position of the insurers. The dissenting judgment does quote anargument from the insurer's factum that the insureds, having opted toexercise the right to create co-insureds, must take the burden of theirco-insureds' acts. Mr Justice LaForest regards this submission asperhaps technically correct, but not one which takes into account therealities of the situation. The majority, on the other hand, rely solelyon the clear wording of the policy. They do not attempt to identifythe concerns of the insurer other than to speculate tentatively: "[t]hedefinition of 'Insured' clearly includes the minor children living in thehome. It may well be that insurance companies do not wish to pay forthe delinquency of teenagers within the home". 9' They do not, however,completely foreclose an inquiry into what is reasonable:

However, when the wording of a contract is unambiguous, as in my viewit is in this case, courts should not give it a meaning different from thatwhich is expressed by its clear terms, unless the contract is unreasonableor has an effect contrary to the intentions of the parties. 92

The difficulty with the concluding proviso in this sentence is twofold: (1) no serious attempt is made to determine the parties' intentionsapart from the policy, so the reference is circular; and (2) no seriousattempt is made to answer the dissenting judges' view that the contractwould be unreasonable if the innocent insureds' rights were affectedby the wrongdoing of their co-insured.

The references to reasonableness by both the majority and dissentdid not prevent the Newfoundland Court of Appeal from declaring ina subsequent case "[lt]he idea that a policy should be interpretedaccording to the insured's reasonable perception of it is not a principleof Canadian law". 93 The statement is all the more remarkable becausethe insured expressly invoked section 11 of the Newfoundland FireInsurance Act 94 which allows the court to find any exclusion, stipula-tion, condition or warranty "unjust or unreasonable" and hence notbinding upon the insured. Of course, the court's view of the appropriatestandard under section 11 may be quite different from their understan-ding of the alien reasonable expectation doctrine. One cannot be surebecause the statutory test is not discussed in any detail. There is noreference to what the insured might have reasonably anticipated andno attempt to explain the interest of insurers. Instead, the court simplyconcluded, "[t]he court cannot reasonably expect an insurance company

9' Ibid. at 1467.92 Ibid.93 Walsh, supra, note 85 at 201.- The Fire Insurance Act, R.S.N. 1970, c.130, s. 11. In Ontario, see

Insurance Act, R.S.O. 1980, c. 218, s. 128.

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against its will to cover a married couple or any other group of peopleagainst loss or damage caused by the criminal act of any one of theirnumber". 95 This conclusion, that insurers cannot be made to providecoverage against their will, renders the statutory provision otiose.

C. Tort Liability

Two distinct developments have finally come together in recentyears and their combination may soon radically reform the way courtsinterpret insurance contracts. The first development has been the spreadof concurrent tort liability in many contract settings. As ProfessorAtiyah has observed:

[A]t a more technical and doctrinal level.. .modem judges are happierwith the fluidity of tort techniques than they are with the perceivedrigidities and inadequacies of contract law. Hence tort law is increasinglyused to resolve problems which could equally be resolved by contractlaw if judges were more willing than they seem to be to adapt contractlaw to modem ideas and values. 96

This development has accelerated since the Supreme Court of Canadadecision in Central Trust Co. v. Rafuse, 97 although there may be someretrenchment following the British Columbia Court of Appeal's deci-sion in London Drugs Ltd v. Kuehne & Nagel International Ltd.98

The second development has been the imposition of a high dutyof professional care on insurance brokers. 99 Brokers have been heldliable under various theories for not anticipating the reasonable insu-rance needs of their customers and neither satisfying those needs norwarning of any gaps in coverage. In describing the broker's duty therehas been some reference to the standards in the industry. However,most authorities describe the broker's duty in language which closelymimics the American doctrine of giving effect to the insured's reaso-nable expectations. These two developments have coalesced aroundthe question of the tort liability of direct underwriters. In the case ofindirect underwriting with the services of a broker, it is possible toassume that the insured relies heavily if not exclusively on the broker.This reliance may seem inconsistent with the insured's reliance on theinsurer, although why insureds should have such monotheistic faith in

95 Walsh, supra, note 85 at 208.96 P.S. Atiyah, ESSAYS ON CONTRACT (Oxford: Clarendon Press, 1986) at 9.97 [1986] 2 S.C.R. 147, 31 D.L.R. (4th) 481.98 (1990), 45 B.C.L.R. (2d) 1, 70 D.L.R. (4th) 51.99 See J. R. Caskey, Beyond Fine's Flowers: The Bloom of the Professional

Liability of Insurance Brokers in SPECIAL LECTURES OF THE LAW SOCIETY OF UPPERCANADA, 1987: INSURANCE LAW (Don Mills: DeBoo, 1987) 155; C. Brown, The Impli-cations of Professional Status: New Directions in the Liability of Insurance Agentsand Brokers (1989) 1 CAN. INs. L. REv. 31.

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brokers may not be clear. In any event, there may seem to be lesspressure in such cases to find the insurer liable either for its owncarelessness or for that of the broker. Moreover, this attitude may bereinforced by the view that in failing to meet the insured's expectationsthe broker is not acting for the insurer.

However, in the case of direct underwriting the insured relies onno one other than the insurer and its employees. There is no indepen-dent intermediary who is expected to meet a high standard of profes-sional care. Yet the insured's expectations are no more modest and hisor her own vigilance no greater.

In this context, courts are now being asked to decide that insurersshould know as much about their own business and be under as muchduty to service their customers as independent brokers. So far, theyhave been reluctant to do so, although the results of some of the casesmay be justified on their facts.100

V.

A. The Claims Process

Insurers have an obvious strategic advantage after loss in settlingany claim. This advantage comes from both the general circumstancesof the parties and some unique contractual protection, extracted orbargained for by insurers. The circumstances which favour the insurerinclude its familiarity with the claims process, economies of scale, andthe financial plight or physical distress of the insured. In addition,uncertainty in legal concepts gives the insurer greater discretion indeciding what claims to meet, placing the burden and risk of litigationon the insured. Apart from these circumstances, insurers often demandadditional contractual rights to control the claims process. Generally,these contractual rights have been treated sympathetically by the courts,even though they are often onerous or coupled with extreme penaltiesfor non-compliance by the insureds. In part, this sympathetic treatmentstems from a recognition (based on worldly experience rather thanstatistical or scientific data) that insurers are an attractive target for thedishonest and unscrupulous. However, there have been other visionsof the world and countervailing tendencies. For one thing, judicialfashion changes, as does the object of moral rectitude.

100 See Piggott Construction (1969) Ltd v. Saskatchewan Gov't Insurance Office(1985), [1986 2 W.W.R. 530, 16 C.C.L.I. 204 (C.A.); G.K.N. Keller Canada Ltdv. Harford Fire Insurance Co. (1983), 1 C.C.L.I. 34, 27 C.C.L.T. 61 (Ont. H.C.),appeal allowed in part (1984), 4 C.C.L.I. xxxvii (Ont. C.A.); Fletcher v. ManitobaPublic Insurance Corp. (1989), 68 O.R. (2d) 193, 36 C.C.L.I. 157 (C.A.), appealallowed (1990), 75 O.R. (2d) 373n (S.C.C.).

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However, it would be a mistake to assume that because modemjudges are less apt to make jaundiced or pessimistic statements aboutthe moral fibre of the insuring public, legal doctrine has significantlychanged. Instead, the courts have long had various doctrines to protectinsureds from onerous contract terms or extreme penalties. Many ofthese doctrines became part of the law as a result of the introductionof Statutory Conditions for fire insurance contracts in the late nineteenthcentury. Hence the protective devices are not all new, nor is therenecessarily a general trend towards their more vigorous use. Instead,there have been mixed developments, sometimes with little coherentprinciple or consistent philosophy.

Apart from the circumstances and any contract protection, insurersmay have a third type of strategic advantage which is not so muchbargained for as simply given to them by the courts in their interpre-tations of insurance doctrine.

Before examining these contract concessions, adverse judicialconsequences and countervailing protective doctrines in detail, it maywell be useful to identify the main concerns of insurers after loss. Atthat point, their concerns shift from adverse risk selection, increasedmoral hazard and controlling the risk to different and more limitedconcerns. These more limited concerns include determining the ma-gnitude of the loss and whether it results from an insured hazard,ensuring that appropriate steps are taken to minimize the loss, andpreserving the insurer's rights to salvage property and to seek recourseagainst third parties. These substantive interests are reflected in variousrules requiring timely notice and proof of loss, the co-operation of theinsured in preserving any assets and defending any claim, and sub-mission by the insured to various procedures for quantifying the loss(such as appraisal or actual replacement).

These various concerns, and the rules adopted to meet them, canbe divided between those that go to establish the insured's right torecover and those that attempt to limit further loss. The rules associatedwith the first type of concern are largely of an evidentiary character,designed for the early disclosure and preservation of evidence. Inrelation to this concern the insurer is in a slightly different positionfrom other contract makers, but not in as unique a position as legaldoctrine (at least at common law) seems to suppose. As to the secondconcern, there has been some judicial recognition that the concern issimilar to the desire to mitigate loss for breach of contract (a moreapt description would be an obligation of good faith adjustment similarto an obligation to salvage bargains and prevent economic waste inother contract settings).

B. Compensatory Damages, Punitive Damages and Costs

The strategic advantage of the insurer after loss is reinforced bythe unique insurance rule that insurers are not liable to pay compen-satory damages for breach of contract. If insurers are found liable

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under an insurance contract they are typically ordered to pay the lossup to the face value of the policy, but are not liable for consequentialdamages. This unique insurance rule has not often been explained bymodem Canadian courts. Attempts to do so seem obviously miscon-ceived. For instance, in Gannon & Associates Ltd v. Advocate GeneralInsurance Co. of Canada,1 1 the Manitoba Court stated that to awardconsequential damages would in effect amend the terms of the insu-rance contract. This overlooks the compensatory nature of any claimfor damages for breach of contract. The aim of such a claim is not toenforce the contract, but to compensate the plaintiff for its breach.General contract theory does not require that such compensatory re-medies be specifically set out in the contract. Nor does the remotenessrule limit damage claims to the amount due in the absence of breach.

I have described elsewhere two possible sources of the courts'reluctance to recognize consequential damage claims. 10 2 I believe themore likely source is a confusion with the prima facie rule of inter-pretation that indirect losses are not covered in an ordinary propertyinsurance contract. In effect, the courts have confused consequentiallosses from breach by the insurer with consequential losses that resultfrom an insured hazard.

The insurer's strategic advantage is also reinforced by the inclu-sion of pre-judgment interest in the policy limits. 1 03 In the case ofautomobile insurance, courts have reached this conclusion by givingan artificially restrictive meaning to "interest" in the pertinent sectionsof the provincial insurance acts. They have interpreted the term asreferring to post-judgment interest only, largely because that was theonly kind of interest awarded when the sections were first enacted.These cases may encourage insurers to delay payment as long as theycan and to profit from their delay.104

The absence of the more usual remedies such as consequentialdamages and pre-judgment interest has prompted modem Canadiancourts to search for an alternative remedy to control the claims process.In the past decade they have referred with increasing frequency to the

10 (1984), 32 MAN. R. (2d) 1, 12 C.C.L.I. 61 (Q.B.).102 M. Baer, Annot.: Labelle v. Guardian Ins. Co. of Canada (1989) 38

C.C.L.I. 274.103 See B. A. Foster, The Insurer's Liability for Pre-judgment Interest in Excess

of the Policy Limit - The Case of Migliore v. Gerard (1989) 1 CAN. INS. L. REV.81. In addition to the cases discussed by Foster, supra, see United Realty Ltd v.Guardian Insurance Co. of Canada (1986), 7 B.C.L.R. (2d) 119, 21 C.C.L.I. 175(C.A.); Stephanishin v. Becic (1987), 21 B.C.L.R. (2d) 119, 31 C.C.L.I. 291 (S.C.);Townsend v. Johnson (1987), 19 B.C.L.R. (2d) 370, 30 C.C.L.I. 315 (S.C.).

104 See comments by Richard C.J. in Stamper v. Finnigan (1986), 75 N.B.R.(2d) 301, (sub nom. Di Domenicantonio v. Finnigan) 22 C.C.L.I. 283 (Q.B.), appealallowed (1987), 81 N.B.R. (2d) 213, (sub nom. Domenicantonio v. Finnigan) 26C.C.L.I. 207 (C.A.), leave to appeal refused (1987), 83 N.B.R. (2d) 90, 26 C.C.L.I.207n (S.C.C.).

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possibility of awarding punitive damages. 105 Until now this has beenno more than a crude threat, as few such awards were upheld onappeal. 06 Moreover, there were serious doubts about the legitimacy ofsuch awards. These doubts should now be removed by the recentdecision of the Supreme Court of Canada in Vorvis v. InsuranceCorporation of British Columbia,10 7 where the Court held that punitivedamages could be awarded in a case of breach of contract. However,the majority decision by Mr Justice McIntyre stressed that it would bevery unusual to do so and then only for an "actionable wrong". 08 Heexplained that "punitive damages may only be awarded in respect ofconduct which is of such nature as to be deserving of punishmentbecause of its harsh, vindictive, reprehensible and malicious nature".1 09

Given the narrow circumstances in which punitive damages canbe awarded, they may have little actual impact on the conduct ofinsurers. A more significant incentive for the insurer to negotiate andsettle without delay may be found in the courts' discretion in awardingcosts. This discretion is more often exercised against insurers than theaward of punitive damages, and the award of costs is seldom success-fully appealed.l1O However, so far the courts have done little to describethe kind of conduct by insurers that justifies an award of costs on asolicitor-and-client basis, and this aspect of their judgments is toopoorly digested and indexed to determine general trends.

C. Relief from Forfeiture

As in the past, there have been few cases concerned with theprecise scope of the insured's evidentiary duties after loss - such asthe requirement to give notice and proof of loss. Instead, on theassumption that any breach of these obligations leads to forfeiture ofthe insured's claim, the courts have been largely concerned withdefining the appropriate circumstances for the granting of relief fromforfeiture.

1os See Baer, supra, note 102.106 Apart from Labelle v. Guardian Insurance Co. of Canada (1989), 38

C.C.L.I. 274, [1989] I.L.R. 1-2465 (Ont. H.C.), which is currently under appeal, Ido not know of any insurance case in which an award of punitive damages has beenupheld on appeal. For instance, the trial judge's award of punitive damages in St-Laurent v. Sun Life Assurance Co. of Canada (1989), 95 N.B.R. (2d) 110, 37C.C.L.I. 85 (Q.B.) was overturned on appeal and an award of solicitor-and-clientcosts substituted instead (1989), 40 C.C.L.I. 41, [1989] I.L.R. 1-2495 (N.B.C.A.)[hereinafter St-Laurent (C.A.)].

107 [1989] 1 S.C.R. 1085, 58 D.L.R. (4th) 193 [hereinafter Vorvis cited toS.C.R.].

108 Ibid. at 1106.109 Ibid. at 1107-08.110 See, e.g., St-Laurent (C.A.), supra, note 106.

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The matter has recently been examined by the Supreme Court ofCanada in Falk Brothers Industries Ltd v. Elance Steel FabricatingCo.,"' but the Court's judgment may contain little to satisfy thoseinterested in the development of insurance law and its assimilation togeneral contract law principles. The case involved a payment perfor-mance bond which required written notice of any claim within 120days after the last materials were supplied. The claimant failed to givenotice of its claim within this period and instead made its claimtwenty-eight days after the expiry of the 120 day period. In thesubsequent litigation, the claimant applied for a declaration that it wasentitled to relief from the forfeiture caused by this late notice. Reliefwas granted at trial"l2 but the Saskatchewan Court of Appeal, whileaffirming that there was authority under The Saskatchewan InsuranceAct 13 to grant relief, held that relief should not be given in anapplication to determine a point of law.114 The surety appealed to theSupreme Court of Canada, submitting that the authority to grant reliefwas confined to statutory conditions as opposed to contractual provi-sions and extended only to imperfect compliance and not non-compliance.

The Supreme Court of Canada dismissed the surety's appeal. Onthe first point, the Court found that section 109 was ambiguous andcould be interpreted to favour either of the interpretations suggestedby the parties. However, the Court found that a number of considera-tions favoured the broader interpretation, including the fact that thesection was remedial and that courts had uniformly given it the moregenerous interpretation for more than a decade. These arguments maybe pretty thin gruel, and there may be more compelling reasons tosupport the Court's conclusion. For instance, it would be anomalousif the courts could only relieve against forfeiture for the breach of aStatutory Condition where presumably some thought has been givento balancing the interest of the parties and some control has beenplaced on excessive overreaching by the insurer. In addition, theremay be some evidence of legislative intention from the history of thesection. Why was it moved from Part IV (the Fire Part) if it was notintended to apply to other types of forfeitures besides those that resultfrom a breach of the Statutory Conditions which are found in the FirePart?

As to the second point, the Supreme Court seems to accept thedistinction between imperfect compliance and non-compliance, but thenmakes its position very confusing by referring to the distinction bet-

"' [1989] 2 S.C.R. 778, 39 C.C.L.I. 161 [hereinafter Falk Brothers cited toS.C.R.]

112 Elance Steel Fabricating Co. v. Falk Brothers Industries Ltd (1986), 22

C.C.L.I. 268, [1987] I.L.R. 1-2143 (Sask. Q.B.).,13 R.S.S. 1978, c. S-26.,,4 Elance Steel Fabricating Co. v. Falk Brothers Industries Ltd (1987), 62

SASK. R. 304, 27 C.C.L.I. 20.

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ween failure to give notice in a timely fashion and failure to institutean action within the prescribed time period. This distinction is furtherdescribed as based on the distinction between a term (meaning apromissory condition) and a condition (meaning a condition precedentor suspensive condition). No reference is made to the criticisms thathave been made of the courts' refusal to relieve against failure to meeta limitation period." 5 On the contrary, Mine Justice McLachlin quotesthe typical explanation of the distinction between a right and remedywith apparent approval. She also refers to the actual bringing of anaction as "the legal crystallization of the claim which sets its para-meters and magnitude".16 Much of this would not stand up to anyserious analysis. Both types of time limits serve much the same purpose- that is, to allow for the early investigation and verification of aclaim and preservation of evidence. The potential for prejudice exists,but is not inevitable, where delay occurs in either situation. The inquiryof whether the insurer has actually suffered prejudice (and hencewhether relief should be granted) is the same in either context. Mo-reover, it is not clear how this distinction relates to the supposeddifference between imperfect compliance and non-compliance.

Given this discussion, one has a sense of relief tinged with anxiousconcern about the future development of the courts' jurisdiction torelieve against forfeiture. The Supreme Court of Canada was facedwith a narrow simple issue and reached a sensible result. But a morepurposeful analysis may be required for the more complex issues thatremain unsettled. These include the reach of the "clean hands" doctrinein liability insurance designed to compensate innocent third-party vic-tims, and the application of the relief provision to what does notappear conceptually to be a breach of contract (for example, the failureto exercise a conversion privilege in a timely manner).

The former issue was considered by the Ontario Court of Appealin Perry v. General Security Insurance Co. of Canada."17 In that case,the Court found that the insurer was prejudiced by the failure of itsinsured to give notice and cooperate in the defence of the plaintiffs'claim. If the insurer had not been prejudiced, the Court would stillhave been inclined to deny relief on the basis that the plaintiffs stoodin the shoes of the insured and their action was "subject to the sameequities" as the insurer would have against the insured." 8 This conclu-sion may not be so obvious. The phrase "subject to the same equities"does not mean (at least in other contexts) that the rights of the twoparties are identical. In the absence of prejudice to the insurer, denialof relief must be based on the general public policy against encouragingwrongdoing. A flagrant flouting of the conditions of the policy should

115 See Baer & Rendall, supra, note 49 at 685.116 Falk Brothers, supra, note 111 at 785.17 Supra, note 52.

1,8 See ibid. at 239-44.

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be punished. However, to punish an innocent claimant subjects him todifferent equities, or so it could be argued. The point is that whetherthe claimant should be granted relief cannot be determined solely byinvoking the typical imagery of "clean hands" or "standing in theshoes" or through an automatic application of the statutory phrase"subject to the same equities". It requires some consideration of thereasons for denying relief to the insured and whether these reasonsextend to the claimant.

The notion that the court only has power to relieve against thepenalties and forfeitures that result from breach of contract has causedconsiderable difficulties in other branches of the law, for instance inoil exploration leases and consumer-hire purchase agreements. In theseareas it seems artificial to allow one of the parties to extract a penaltyunder an option or alternative contract theory. A similar issue hasoccurred in the insurance context. In Yao v. Exide Canada Inc."19 theinsured failed to exercise his conversion privilege within the timespecified in a group insurance policy. The Court refused to grant theinsured relief on the grounds that there was no breach of contractleading to a forfeiture. The Court explained that the insured "had anopportunity to apply for and obtain certain insurance coverage and hechose not to do so within the required time frame. He committed nobreach, and the consequent failure to obtain the insurance coveragecannot be termed a forfeiture". 20

D. Replacement Cost Endorsements

Replacement cost endorsements are common in property insurancecontracts. They meet a legitimate need of insureds who would other-wise be forced to find an additional source of funds to cover thebetterment which occurs when new property replaces old. They allowthe insured to recover the costs of such unplanned improvements whichare the unavoidable consequences of an insured hazard. Yet they mayaugment "the moral hazard" by removing some of the incentive forloss prevention. For this and other reasons the industry includes severaltypical terms in these endorsements designed to guarantee the sincerityof the insured's claim and to minimize the loss. The terms include therequirements that replacement shall be effected by the insured withdue diligence and dispatch, and that settlement shall be made on thebasis of replacement cost only when replacement has been effected bythe insured.121 Typically, there are other terms which provide that the

119 (1987), 44 MAN. R. (2d) 287, 22 C.C.L.I. I (C.A.) [hereinafter cited toC.C.L.I.]

120 Ibid. at 9, Huband J.A.121 See J. A. Rendall, Annot.: Datatech Systems Ltd v. Commonwealth Insur-

ance Co. (1983) 1 C.C.L.I. 210. See also Andriash v. Canadian Northern ShieldInsurance Co. (1987), 24 C.C.L.I. 91, [1987] I.L.R. 1-2175 (B.C.S.C.); White SpotLtd v. Continental Insurance Co. (1986), 21 C.C.L.I. 191 (B.C.S.C.).

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endorsement does not apply to property which has become obsolete orunusable, to unique items which have no standard value, or to articleswhich by their inherent nature cannot be replaced. 22

The requirement of due diligence and dispatch has the samepurpose as the requirement to "sue and labour"123 that is found in mostproperty insurance contracts. Both requirements are designed to mini-mize further loss once an insured hazard occurs. Thus, the requirementof due diligence and dispatch could be regarded as similar to thegeneral contract duty to mitigate damages, which suggests that theinsurer will not be liable for avoidable losses, including those causedby inflation. Alternatively, it could be regarded as similar to otherinsurance obligations (including those following loss) which are essen-tial pre-conditions to any liability by the insurer at all. Since theendorsement is usually expressed to be an alternative way of deter-mining the loss, the latter approach would probably result in theinsured recovering on the basis of the "actual cash value". In anyevent, the precise consequences of the insured's failure to replace withdue diligence and dispatch have not been authoritatively settled. Muchof the recent case law has been concerned with when the insured'sdelay is excusable. 24 These cases have held that the insurer cannotcomplain about delay if it has wrongfully denied liability. However,the courts have usually stopped short of finding the insurer liable forthe insured's consequential loss. 25

The second requirement, that settlement shall be made on thebasis of replacement cost only when replacement has been effected bythe insured, has created some confusion for the courts. This confusionmay have been compounded by the treatment of the endorsement as aseparate contract from the contract to indemnify the insured. Theinsured in effect is required to elect between two separate bases forrecovery. The insured's rights are not seen to be cumulative so thatthe insured has an immediate right to indemnity on the basis of actualcash value and an additional claim to the extra cost of replacementwhen that has actually occurred. Hence, at least according to somecourts, the insured is not entitled to recover the actual cash value inorder to finance the replacement.

122 Chrapko v. Pilot Insurance Co. (1988), 30 C.C.L.I. 196, [1988] I.L.R. 1-2275 (Ont. H.C.).

123 The term "sue and labour" is derived from the wording of the typicalmarine insurance clause. The fire insurance equivalent is found in Statutory Condition9(1) where it is referred to as an obligation to salvage. As to the effect of suchclauses see Hariford Fire Insurance Co. v. Benson & Hedges (Canada) Ltd, [1978]2 S.C.R. 1088, 85 D.L.R. (3d) 467.

124 See M. Baer Annot.: Chrapko v. Pilot Insurance Co. (1988) 30 C.C.L.I.196.

125 See in particular the trial decision in Olynyk v. Advocate General InsuranceCo. of Canada (1984) 12 C.C.L.I. 7, [1985] I.L.R. 1-1885, (Man. Q.B.), affd 12C.C.L.I. 17, [1985] I.L.R. 1-1938, (Man. C.A.) [hereinafter Olynyk].

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Much of this confusion can be traced to comments made by MrJustice Esson in Carlyle v. Elite Insurance Co.126 In that case theinsurer had not denied liability altogether. Instead, the insurer hadadopted the position that the endorsement would not cover increasedcost of reconstruction by reason of the operation of any municipal by-laws. There was several months delay while the parties disputed thismatter. During this time the insured's solicitor informed the insurerthat his client would be unable to obtain interim construction financingunless he could provide a financial lending institution with an assurancethat the insurer would honour its obligation under the policy. Theinsurer eventually paid the actual cash value, but refused to pay anyreplacement cost until replacement actually occurred and continued todeny liability for the extra cost of complying with the municipal by-laws. The insured sued for a declaration of his rights along withjudgment for the loss of rental income and debris removal. The insurerdefended, relying not only on the by-law exception but also on thecontention that the insured had not acted with due diligence anddispatch. Both defences were rejected by the trial judge, who grantedthe declaration sought by the insured, and judgment was entered forbreach of contract in the full amount of the cost of replacement, thefull amount of the loss of rental until completion of the rebuilding,and the cost of debris removal.1 27

The matter of due diligence and dispatch was not raised on appealand the Court affirmed the trial judge's finding that the by-law excep-tion was not applicable. However, while affirming the declaration, theCourt set aside part of the judgment awarding damages. In particular,the Court found there was no authority which would support the viewthat the measure of damages was not confined to the policy limits.Hence, there could be no claim for loss of rent in excess of the policylimit. This point was apparently conceded by the respondents. It seemsto be based on a common failure to recognize the compensatory natureof a claim for damages for breach of an insurance contract. 123 TheCourt also set aside the judgment for the full amount of the cost ofreplacement. In explaining this part of the decision Mr Justice Essonstated:

The option clause clearly contemplates that the insurer will pay the costof replacement after the replacement is complete. As a matter of practice,it appears that insurers will generally pay the actual cash value wherethat is less and may make other progress payments, but the policy does

126 (1986), 1 B.C.L.R. (2d) 338, 18 C.C.L.I. 111 (C.A.) [hereinafter Carlylecited to C.C.L.I.].

127 Carlyle v. Elite Insurance Co. (1984), 56 B.C.L.R. 331, [1984] I.L.R. 1-1830 (S.C.).

128 See discussion, supra, under the heading Compensatory Damages, PunitiveDamages and Costs.

[Vol. 22:2


not, as I read it, require them to do so. So, even now there has been nobreach of contract by the defendant in respect of the replacement costprovision. 12 9

Aside from viewing the claims for actual cash value and repla-cement cost as mutually exclusive, this reasoning also seems to ignorethe doctrine of anticipatory repudiation. It ignores the fact that eachparty's promises are dependent on continued assurance of performanceby the other. There is a significant difference between the insuredfinancing a replacement with the confident knowledge that the costswill be covered by insurance and financing the replacement in the faceof the insurer's wrongful repudiation of liability. Of course, in thiscase, the insurer did not repudiate liability altogether. The insurer didpay the actual cash value and acknowledged its liability for part of thereplacement cost. However, its repudiation of liability for the balanceof the replacement costs was alleged to have a significant impact onthe insured's ability to finance the work.

Mr Justice Esson's views were not completely shared by othermembers of the Court who preferred to leave open the question ofwhether the insurer was obliged to pay the actual cash value. Never-theless, they seem implicitly to accept that the insurer's repudiation ofliability for part of the replacement costs did not amount to a breachwhich entitled the insured to a judgment for the cost of replacement.

The troublesome doctrine launched by Mr Justice Esson wasrelied upon in Anastasov v. Halifax Insurance Co.130 to strike down aconditional order in which the trial judge had allowed the insured sixtydays to replace any insured item. The order provided that replacementwas deemed to be effected by the insured either purchasing the itemor giving the insurer notice that they had agreed with a merchant topurchase the item. The insurer was given the option of paying thereplacement cost to the insured or directly to the merchant.

It is not easy to understand why the Court of Appeal thought thatthis judgment was wrong. The trial judge's order was conditional anddid not require payment by the insurer in advance. So the Court'sview seems to involve the idea that unless there is a dispute as to themeaning of the replacement cost endorsement, there can be no orderenforcing it until after replacement has actually occurred. 131

129 Carlyle, supra, note 126 at 123-24.130 26 C.C.L.I. 7, [1987] I.L.R. 1-2245 (B.C.C.A.).131 See the conditional order made by Grange J. in Donald A. Foley Ltd v.

Canadian Indemnity Co. (1982), 137 D.L.R. (3d) 274, [1982] I.L.R. 1-1556 (Ont.H.C.), and that approved by the Manitoba Court of Appeal in Olynyk, supra, note125 (C.A.).

1990]

424 Ottawa Law Review/Revue de droit d'Ottawa [Vol. 22:2

VI. Conclusion

This survey suggests that Canadian courts continue to regard theparties' autonomy and the policy of insurance as the touchstones ofinsurance doctrine. However, for many courts this simple approach nolonger seems sufficient. They have shown a renewed recognition thatinsurance doctrine does more than fill gaps; it also responds to severalcentral concerns. These are collective concerns that in the past, havenot been left to individual settlement. The emerging judicial trend,however, is one of uncertainty rather than a true renaissance ofpurposeful analysis. There have been isolated models of how such apurposeful analysis should be done, and a more general renaissancemay yet occur. Meanwhile, all too often issues are addressed inisolation, with no real attempt to understand collective goals, industryneeds or social impact.

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