Minister of Finance v. Progressive Casualty Insurance Company of Canada contains an interesting discussion of what an insurance company must do before it can terminate an auto policy for non-payment of premiums. (Perhaps the word, “interesting” in the last sentence is a bit misleading. In fact, the discussion of banking records and practices in this decision and in our summary is a bit mind-numbing. Still, the case is an important one for insurers to take note of because what occurred in this case probably takes place thousands of times a day in the insurance industry.)
In this decision of Mr. Justice David Brown of the Ontario Superior Court, the issue was whether the Motor Vehicle Accident Claims Fund or Progressive Casualty Insurance was responsible for paying accident benefits to a passenger in a serious single-car accident. Progressive had insured the driver of the car but took the position that it had validly cancelled the policy several weeks prior to the accident, for non-payment of premiums. Hence, Progressive argued that there was no policy in effect on the day of the accident, so it could not be liable to pay accident benefits to anyone.
The Fund (represented in the litigation by the Minister of Finance) disputed the validity of Progressive’s cancellation, on several grounds. Mr. Justice Brown ruled in favour of the Fund and held that the insured had not failed to pay his premium but rather, Progressive had tried to withdraw the payment from his bank account one day too late. As a result, Progressive had not been entitled to terminate the policy.
The insured’s name was Huu Thang Nguyen. He was killed in the accident. Under the terms of his contract with Progressive, it had been agreed that on the 22nd day of every month, he would make a premium payment of $314.91 by means of Electronic Funds Transfer from his bank. The payments were to commence on May 22, 1997. On May 23, 1997, Progressive’s bank made an electronic request for a withdrawal from Nguyen’s bank (Canada Trust), in the amount of $314.91. Canada Trust declined the request. Although Nguyen’s account had a balance of $480.17 at the time, more than sufficient to cover the withdrawal, the bank’s records showed that on May 21, the account had had a balance of only $325.20. On May 23, Nguyen made a “book deposit” of $274.97 and a withdrawal of $120.00, leaving that balance of $480.17. (The term, “book deposit” was not defined in Justice Brown’s reasons, although the evidence was that such a deposit could take the form of either cash or cheque.)
Thus, at all times in this brief sequence, Canada Trust’s records showed Nguyen having sufficient funds to honour Progressive’s electronic premium payment request.
At trial, a witness from Canada Trust was unable to explain why Progressive’s request had been declined by the bank. She thought it was probably because there had been a hold placed on Nguyen’s deposit of $274.97, such that that deposit had not “cleared” by the time of Progressive’s electronic request on May 23.
Therefore (and it is important to grasp this in order to understand the decision), while the bank’s records showed that there had always been sufficient funds to pay the premium, it apparently treated the May 23 deposit as not having been made because the deposit had not cleared. However, the bank knew that Nguyen’s $120.00 withdrawal, also made on May 23, had cleared. So, when Progressive’s request was processed on May 23, the bank ignored the May 23 deposit but took account of the $120.00 withdrawal. It treated the account as having a balance of $205.20 on that day. The result was that there were insufficient funds to pay the premium.
Progressive did not file its own banking records at trial, but did file its internal records, which showed that the request for transfer of funds had not cleared because of there being “not sufficient funds” (“NSF”) at the bank.
The Fund argued that there had been some mistake made internally at Progressive, such that the “funds not cleared” message from the bank had mistakenly been interpreted as “NSF”. However, His Honour said that even if Progressive had received a “funds not cleared” message, it would have been entitled to treat that as non-payment of premium, entitling it to terminate the policy. He noted that the insurer was not required, under the terms of the policy, to try to access its insured’s account more than once.
However, that was not an end of the matter. What proved to be the pivotal point was whether Progressive could rely on non-payment on May 23, when the contract with the insured required that the electronic transfer of funds take place on the previous day, May 22. Justice Brown ruled against the insurer on this point and, in so doing, held that Progressive had not been entitled to cancel the policy and so, was required to pay accident benefits to the injured passenger.
After undertaking a detailed review of the transactions in Nguyen’s bank account in the days leading up to May 23, Justice Brown concluded that, on May 22, there had been sufficient funds to pay the premium then owing to Progressive. A deposit that had been made on May 17 must have cleared because the records showed that on May 21, Canada Trust had itself withdrawn funds from the account to make a loan payment to itself. It could not have done so if Nguyen’s May 17 deposit had not cleared because previous to that, the balance had been only $44.68.
Therefore, the balance that must have been in the account on May 22, $325.20, was more than enough to cover Progressive’s premium of $314.76 that had become due on that day.
Justice Brown discussed the sequence of events that led to Progressive attempting to withdraw funds on May 23. He ruled that the insurer had proceeded improperly in doing so and his observations are a cautionary tale for other companies, given the number of times daily that something similar probably occurs in the course of dealings between insurers and their banks.
The sequence was as follows. On May 18, 1997 (remember, the premium was to have been withdrawn on May 22), Progressive asked its bank to initiate an electronic funds transfer from Nguyen’s account, for $314.76. May 18, 1997 was a Sunday. Since the bank required at least four business days to process an electronic funds transfer, the request was delayed until May 23 (apparently because the request had been made on a Sunday). As we have already seen, if the request had been processed on May 22, Nguyen’s account had a balance of $325.20, more than enough to pay the premium. The next day (May 23), Nguyen deposited $274.97 but he also withdrew $120.00. The bank took account of the withdrawal but not the deposit and so, Nguyen’s account appeared to have a balance of only $205.20 on that day (although its records showed otherwise), not enough to pay the $314.76 premium.
The agreement to withdraw funds on the 22nd day of each month was determinative. Justice Brown said the contract “imposes an obligation on the insurer to withdraw the premium on the stipulated date. Accordingly, the mutual obligations of the parties under such a contract are for the insured to make funds available on the specified date to satisfy the automatic withdrawal request, and for the insurer to withdraw the funds on that date.”
Because Progressive had tried to withdraw its premium a day later than it had agreed to, its termination of the policy was held by Justice Brown to be improper. Without a valid “triggering event”, he said, there could be no valid cancellation:
The triggering event for Progressive’s cancellation of the Policy was the non-payment of the premium on May 23, 1997 because Mr. Nguyen’s account lacked a sufficient amount of cleared funds. However, had Progressive complied with the terms of the Policy and sought to have withdrawn the premium on May 22, 1997, no default would have occurred because Mr. Nguyen’s account contained sufficient funds on that day to cover the premium. The shortfall was created by Progressive, not by Mr. Nguyen. Accordingly, there was no reason for Progressive to issue a notice of cancellation to Mr. Nguyen in respect of the May, 1997 premium and its Notice of Cancellation dated May 30, 1997 should be set aside.
In this case, the court was satisfied that if Progressive had made the request for payment on the agreed-upon date (May 22), there would have been funds available in the insured’s bank account. In other words, the default in payment could be attributed entirely to Progressive’s one-day delay in processing the request for payment. What would have happened if the request had been made on the 23rd (one day late) but the insured’s bank account had not had sufficient funds to make the payment on either the 22nd or the 23rd? Would the insurer have been entitled to terminate the policy, based on a request for payment made one day after the date specified in the contract, even though there would not have been sufficient funds to pay the premium if the insurer had made the request on the correct date? Although Justice Brown placed considerable emphasis on the fact that the insured had sufficient funds on the 22nd, it is not clear what the result would have been, had that not been the case. Our guess is that the insured would have been in found to have breached the contract and that the insurer would have been able to terminate, even with a request for payment that came one day late.
One thing that is clear from this decision though, is the importance to insurers of timing their requests for transfers of funds precisely. This is a tall order though, since the processing of these requests is largely outside their control.