In Transportaction Lease Systems Inc. v. Guarantee Co. of North America, decided earlier this week, the Ontario Court of Appeal held that cancellation of auto insurance by a lessee was ineffective to terminate the coverage of the lessor. Accordingly, when the insured automobile was damaged beyond repair while being driven by the lessee, a month after cancellation of coverage, the lessor was still entitled to recover from the insurer. Its coverage, according to the Court of Appeal, was still in force.Although the Court was unanimous in allowing the appeal, it split 2-1 on the reasons for doing so. As noted in the minority judgment of Justice Borins, the approach endorsed by the majority (Justices Laforme and Blair) “creates the potential for complications in future cases that raise a similar issue”. We agree with this observation. The majority decision will have broad and, we think, unpredictable implications for future cases, involving other types of insurance.The appellant in this case leased a Porsche to one Martin Beals. The lease agreement required Beals, the lessee, to secure and maintain insurance on the leased Porsche on behalf of himself and the lessor. He purchased a standard policy of automobile insurance from the Guarantee Company of North America . The policy named both the lessor and Beals as insureds. Beals paid the premiums.In January of 2002, Beals asked that Guarantee delete all insurance coverage on the leased Porsche except for fire and theft because he planned to store the Porsche for the winter. On February 1, 2002, the insurer wrote to the leasing company to advise that effective January 8, 2002 various coverages, including collision, had been deleted on the leased Porsche at Beals’ request. Upon learning of the deleted coverage, the lessor demanded that Beals sign and return a letter stating that the Porsche was being put away for seasonal storage and that he surrender the licence plates.
span>Instead, without reinstating the deleted coverage, Beals drove the Porsche and was involved in an accident on February 21, 2002. The Porsche was damaged beyond repair. The lessor submitted a claim to the respondent insurer for the damaged vehicle. The insurer denied coverage for the claim on the ground that the collision coverage had been terminated in January, 2002 at Beals’ request. All three members of the Court of Appeal agreed that the lessor and Beals had separate and distinct interests in the policy of insurance. Writing for himself and Justice Blair, Justice Laforme concluded that the insurer had intended to treat the parties separately under the contract of insurance. As such, he felt that Guarantee “was entitled, and required, to put the appellant on notice of Beals’ cancellation to determine whether the appellant wished to continue its coverage, and was prepared to pay the premiums in order to keep its policy in good standing”. He considered that fifteen days’ notice to the lessor had to be given by the insured, to end the coverage. Although there was no provision to this effect in either the policy or the Insurance Act, Laforme J.A. arrived at the fifteen day figure by analogy to statutory condition 11(1), which allows an insurer to terminate coverage on fifteen days’ notice.Thus, the majority has, in effect, “read into” the policy a requirement that the insurer give fifteen days’ notice of cancellation of coverage by the lessor. Although nothing was said about this in the majority reasons, Justices Laforme and Blair seem to have assumed that upon the giving of such notice by the insurer, the lessor would then be obliged to pay premiums if it wished the coverage to continue. (Of course, no such provision is to be found in the policy or the Act, so presumably, the obligation on the part of the lessor to start paying premiums would also have to be “read into” the policy.)An obvious problem that will arise from the majority’s ruling is that there are all sorts of insurance contracts which insure the interests of multiple insureds (e.g. additional insured endorsements, mortgage endorsements, etc.) The reasoning in this case seems likely to apply equally to those other kinds of policies.It is apparent from the majority reasons in Transportaction, that the interests of those insureds will probably be found to be several, not joint, and that cancellation or alteration of the coverage of one insured (even the premium-paying insured) will have no effect on the coverage of the other insureds unless the insurer gives notice to those other insureds. In this case, the majority of the Court referred to statutory condition 11(1), which provides for a fifteen day notice period by an insurer wishing to terminate a contract of insurance. Even though the majority found that (a) what happened here was not a termination of coverage; and (b) statutory condition 11(1) was “not directly applicable in these circumstances”, it nevertheless used the statutory condition as a basis for reading into the policy an obligation on the part of the insurer to give the lessee fifteen days’ notice of cancellation of coverage.What about insurance contracts other than auto, where there are no statutory conditions? How many days’ notice must an insurer give to a co-insured, when the premium-paying insured alters or cancels the coverage? What form must this notice take? Is the co-insured then required to take up the obligation to pay premiums in the same amount as they were originally being paid by the named insured, even if the risk is substantially different?We think that the majority’s approach is likely to give rise to a great deal of confusion (and probably litigation) in cases involving co-insureds, under all sorts of insurance contracts. In his minority reasons, Justice Borins seems to have come to the same conclusion. While he agreed in the result, he did so on a different basis. He did not think there was any need to saddle the insurer with an obligation to give any notice (fifteen days or any other period) to the co-insured. And he expressly said that the imposition of a notice requirement might cause “complications” in future cases. He went on to make this observation: “the requirement of a notice provides the risk of creating unnecessary issues. For example, issues may arise concerning whether the notice was received and the proper calculation of the notice period.”Instead, he reasoned that because there were co-insureds in this case, each having separate interests in the contract of insurance, the lessee could not change the coverages without the consent of the lessor. He put it this way: “because the contract of insurance between the insurer and Transportaction was a separate and distinct contract insuring its ownership interest in the leased car, its coverage was not deleted when Beals, who also had a separate and distinct contract, instructed the insurer to delete coverage that applied to him.”Justice Borins’ analysis is not without problems of its own. If the lessee can terminate his coverage but leave unaffected the coverage for the lessor, who has the obligation to pay premiums on the policy, once the lessee has terminated? In what amount?Justice Borins suggests that alteration of coverage by one insured will only affect that insured’s interest, unless the consent of the other insured has been obtained. But why would an insured ever bother to obtain the consent of a co-insured, if the insured can effect the desired alterations to his own coverage without getting the co-insured’s consent? Assuming that the insured does cancel coverage without the consent of the co-insured (which Justice Borins seems to think would be perfectly valid), what is the insurer’s recourse in relation to the remaining coverage for the co-insured (for which it would be receiving no premiums)?Nevertheless, despite these issues arising from Justice Borins’ reasons, his approach would still seem to be preferable to that of the majority. The latter suggests that future cases will see courts imposing various obligations in relation to termination of coverage, that do not actually appear in the contract and whose scope is quite unpredictable.