Decision mean insurer 'cannot rescind a contract prior to a loss,' says lawyer

A ruling by the Ontario Court of Appeal may be headed for the Supreme Court of Canada, after a decision that lawyers say has had wide-reaching effects on the insurance industry.

Karlay Merino, a university student, was injured in September 2002 in Windsor, Ont. as she crossed a road and was struck by a jeep.

Recently, in Merino v. ING Insurance Company of Canada, 2019 ONCA 326, the court ruled that Merino was entitled to sue the insurance company, even though the insurer had tried to argue that it had terminated coverage for the driver, Timothy Klue, and his wife, Sonia Abou-Khalil, before the crash occurred. The insurance company had said due to “misrepresentations in the application regarding Ms. Abou-Khalil’s driving record,” it had rescinded the policy before the crash happened. However, the Court of Appeal disagreed, saying that the insurance company had not given proper notice to the couple under the Insurance Act about rescinding the coverage.

“An automobile insurer in Ontario cannot rescind an automobile insurance contract at common law ab initio, and the respondent’s letter purporting to do that was not effective. Because the letter did not give 15 days’ notice of termination, it also did not have the effect of terminating the contract under s. 11 of the Regulation. The contract therefore remained in effect on the date of the accident,” said the Ontario Court of Appeal ruling.
It went on to state that Merino and the other appellants “were entitled to sue the respondent under s. 258 of the Act to directly recover the amount of the judgment awarded against the at-fault driver and owner of the 1994 Jeep up to the policy limits.”

“Because the respondent did not establish on the record that Mr. Klue knowingly misrepresented facts in the application or acted as the agent of Ms. Abou-Khalil, the respondent has not established a defence under s. 258(11) of the Act. It is accordingly liable for the full amount of the policy limits,” said the ruling.

Doug Wallace, a partner at Wallace Smith LLP in London, Ont., was one of the lawyers who represented ING Insurance Company of Canada in the matter. He says he will be seeking leave to appeal the matter to the Supreme Court of Canada, with the support of the Insurance Bureau of Canada.

“I was very surprised by the Court of Appeal’s decision because they really made a grand pronouncement, which I didn’t expect, and it has very wide-reaching implications. I can tell you I’ve received dozens of phone calls and continue to get phone calls from counsel and from insurers who are saying, ‘What is happening with this?’” he says.

Wallace says the decision is a “fundamental break” from prior understandings of the law and that, as a result, the decision means that, “for the first time, an insurer cannot rescind a contract prior to a loss.”

“The wide-reaching effect of the decision should not be underestimated,” he says.

Wallace says it “has long been understood that [an] automobile insurer cannot rescind a contract and treat it as void ab initio when it discovers a material misrepresentation or non-disclosure on an application after an accident occurs.”

“This is because of the consumer protection afforded by s. 233 and 258 of the Insurance Act, which require that the contract remains in force to respond to the claims of innocent third parties as well as statutory accident benefits. The Court of Appeal in Merino, however, held that a contract cannot be rescinded prior to an accident,” he says.

“Based on the decision, this change occurred when s. 233 and 258 were enacted in 1932 and it means that every contract of automobile insurance rescinded since that date remains valid and subsisting notwithstanding that no premiums have been paid. Since s. 233 and 258 or their equivalents exist in almost all provinces, the decision applies across the country.”

Due the decision, Wallace says the court has “essentially taken every contract that has been rescinded by an automobile insurer . . . and said those policies all remain valid and subsisting.”

“So, any contract that has been rescinded since 1932 in Ontario continues in force today notwithstanding that premiums haven’t been paid for those,” he says.

Donald Leschied, a partner at Shibley Righton LLP in Windsor, is one of the lawyers acting for the appellants. He says that, if the decision stands, “auto insurers, at least in Ontario, can no longer rescind an auto policy for a material misrepresentation in an application.”

He says that, as a result of the decision, auto insurers now have to give advance notice to terminate coverage.

“It is one of the more important appellate court decisions in Ontario on auto insurance in years,” he says. Leschied says that, prior to the decision, insurers could rescind an auto insurance policy without prior notice, based on alleged misrepresentation by those applying.

“As a result of this ruling, auto insurers have to comply with giving advance notice, because the regulations in the [Insurance Act] require termination of an auto policy with advance notice and not a rescinded policy,” he says.

Leschied says notice must now be given with a minimum of 15 days if it’s personally delivered or 30 days by registered mail.

Bevin Shores, an associate with Agro Zaffiro LLP in Hamilton, Ont., says the decision in Merino has led to a lot of uncertainty for auto insurers.

“From an insurer’s perspective, I think what is particularly jarring is that the insurer in this case likely felt they had handled everything properly, and the evidence from both insurer and insured was that they believed the vehicle in question was not insured at the time,” says Shores.