In two Ontario Superior Court decisions released this week, insureds have been denied relief from forfeiture in actions against their insurers. The first is Niagara Gorge Jet Boating Ltd. v. AXA Canada Inc.
This is a decision of Madam Justice Linda M. Walters. In this motion, the plaintiff, Niagara Gorge Jet Boating Ltd., was seeking a declaration that its liability insurer, AXA Canada, had a duty to defend it in an action arising from a 1995 accident. AXA had denied coverage on the ground of late reporting of the claim. Niagara operated jet boat tours of the Niagara River. On July 2, 1995, one Patrick McCarthy moored his yacht directly in the path used by Niagara’s jet boats. Four days later, on July 6, 1995, Niagara received a letter from McCarthy, giving notice of a claim for damages as a result of the way in which its jet boats had been operated on July 2. (It appears that the claim was one for personal injuries.)
Niagara evidently believed that this was a mere “wake complaint” (which suggests that the notice letter was not very specific) and did not notify its liability insurer, AXA, of the letter. Niagara heard nothing further about the incident for almost five years. On February 23, 2000, it was served with a statement of claim, seeking damages of $2.1 million for personal injury. It sent a copy of the pleading to its insurance broker the next day and AXA received its first notice of the claim on February 28, 2000. As mentioned above, AXA denied the claim for “non-compliance with the prompt notice provision in the insurance policy”.
Niagara then undertook its own defence of the McCarthy claim. This included trying to have the action dismissed as not having been brought within the applicable two-year limitation period. The latter motion was dismissed, apparently on the basis that Niagara would suffer “little appreciable prejudice” from an extension of the limitation period. (This seems a rather odd ruling, but we have not been able to locate the actual reasons for the decision.) The McCarthy claim against Niagara is evidently on a trial list right now.
In the action against AXA, Niagara argued that if it had breached the policy by failing to notify AXA of the McCarthy letter, it was entitled to relief from forfeiture under either s. 129 of the Insurance Act or s. 98 of the Courts of Justice Act. Justice Walters had no difficulty in finding that the failure to notify AXA was a policy breach. This left the question of whether relief from forfeiture was available. She found that s. 129 of the Insurance Act does not apply to marine insurance policies. Without deciding whether s. 98 of the Courts of Justice Act applied to this type of insurance policy, she held that Niagara was not entitled to relief from forfeiture because it had not acted reasonably. It had, as she said, “gambled and lost”. Niagara had concluded that McCarthy’s claim was not meritorious and had deliberately chosen not to report the matter to its insurer.
Justice Walters also considered whether there was a basis for her to relieve against forfeiture on more general grounds of “equity”. She refused to do so. This is interesting, because she seems to have been of two minds on this issue. She noted that AXA had done nothing at all to investigate the claim after finally being notified in 2000. AXA had pointed to missing evidence, but had not shown that the evidence had not disappeared after it had been notified of the claim. Nevertheless, on balance, Justice Walters was satisfied that the equities favoured the insurer. She felt that the failure to provide notice had prejudiced AXA. In particular, she noted that “AXA was deprived of the opportunity to contact McCarthy directly in an effort to resolve the matter and settle the case at an early stage”. She also criticized certain aspects of Niagara’s own investigation and handling of the claim. Justice Walters even took into account the underwriting consequences of late notice of the claim. In the following paragraph, she stated her findings on the “prejudice” issue:
I am not satisfied that AXA has not suffered prejudice. One can only speculate as to what AXA would have done if it had received the McCarthy letter. It is not unreasonable to assume that there would have at least been some contact with McCarthy. AXA did not have the opportunity to retain its own counsel, investigate if it saw fit, negotiate or dialogue with McCarthy. There is no question that evidence has been destroyed or lost. Yes, witnesses may be called, but obviously memories fade with time. Accounting and underwriting decisions are central to profitability and success of any insurance company. AXA was not made aware of this claim until almost five years after the fact, and therefore could not make such necessary business decisions as establishing a reserve, modifying Whirlpool’s premiums, or estimating its loss ratios. In the result, Niagara’s action against AXA was dismissed.
The second case is Pilotte v. Zurich North America Canada. It related to a claim for accident benefits. The insurer (which was actually ING, successor to Zurich on this policy) argued that the claim was statute-barred. The insured sought relief from forfeiture but Mr. Justice Herman J.W. Siegel refused. His approach was reminiscent of that taken by Justice Walters in the Niagara case. He was not satisfied that that the insured had acted reasonably, in that she had delayed, for a long time, in giving notice of her claim to Zurich. Further the court felt that there was evidence of prejudice to Zurich. Justice Siegel pointed to several instances of prejudice, such as the fact that the late notice had made it impossible for Zurich to arrange IMEs of the plaintiff. There was also an issue in this case, as to whether the plaintiff’s delay in taking certain steps (completing accident benefits application, proceeding to mediation, commencing action) constituted “non-compliance” or “imperfect compliance”. (The phrase “imperfect compliance” comes from s. 129 of the Insurance Act, which allows relief from forfeiture to be given in cases of “imperfect compliance with a statutory condition as to the proof of loss to be given by the insured or other matter or thing required to be done or omitted by the insured with respect to the loss”.)The caselaw, such as the Supreme Court of Canada’s decision in Falk Bros. Industries Ltd. v. Elance Steel Fabrication Co., has suggested that relief from forfeiture is available in the case of “imperfect compliance” (such as failure to give timely notice) but not “non-compliance” (e.g., failure to commence an action within a limitation period). Justice Siegel felt that the facts of this case made it one of “non-compliance”. However, he went on to say “I am sympathetic to the plaintiff’s argument that, in the absence of evidence of intentional non-compliance by the plaintiff, the principle in Falk Bros. should not apply. However, even if the Court were not precluded from exercising its discretion by the decision in Falk Bros., I would not grant relief against forfeiture for the reasons set out above. It is therefore unnecessary to make a final determination on this issue and I decline to do so.” Justice Siegel declared that the insured’s action against Zurich was statute-barred and denied the insured’s motion, requesting relief from forfeiture.
These two cases show how important it is, in cases in which insureds are seeking relief from forfeiture, for the insurer to bring forward evidence of prejudice if it wishes to rely on a policy breach constituting “imperfect compliance”. The Supreme Court of Canada, in the Falk Bros. case, said:
The purpose of allowing relief from forfeiture in insurance cases is to prevent hardship to beneficiaries where there has been a failure to comply with a condition for receipt of insurance proceeds and where leniency in respect of strict compliance with the condition will not result in prejudice to the insurer. [Emphasis added]
While such evidence may not be necessary in cases of “non-compliance” (such as failure to commence action within a prescribed limitation period), relief from forfeiture will almost certainly be granted to the insured in “imperfect compliance” cases (e.g., late notice of a claim), if the insurer cannot point to any particular prejudice that it has suffered. Vague suggestions of prejudice will not usually suffice either (although in the Niagara case above, Justice Walters seemed to feel that the insurer’s evidence of prejudice was, in some respects, weak. Still, it was enough to carry the day for AXA.) Typical examples of prejudice relied on by insurers are inability to conduct a timely investigation of the claim or disappearing evidence and witnesses. But counsel acting for the insurer should consider other possible kinds of prejudice, such as the loss of the opportunity to effect an early settlement of the claim. As noted above, this was one form of prejudice found to exist in the Niagara case.