C.A. Says Insurance Act Bars All Auto Tort Claims for Property Damage

In a case that has already received a lot of attention from the insurance industry, the Court of Appeal held in Clarendon National Insurance et al. v. Candow that where it applies, s. 263 of the Insurance Act bars all tort claims for property damage consequent upon an automobile accident. In this case, a U.S. driver and his insurer, which had not signed an undertaking to be subject to the provisions of the Ontario Insurance Act, were nevertheless prevented from pursuing a claim for property damage against the owner and driver of the other vehicle involved in a collision.

This case arose out of a 2004 collision on Highway 401. One plaintiff (“Bounthai”) was driving a tractor for a Texas trucking company. The other plaintiff, Clarendon National Insurance, was the physical damage insurer of the truck. (A different insurer, American Home Assurance, carried the liability coverage.) In this action, Bounthai and Clarendon sued the defendants in negligence, seeking reimbursement for the cost of repairing the tractor. (The claim was for about $20,000.)

In their defence, the defendants relied on s. 263 of the Insurance Act. Subsection 5 of that section prohibits suits in tort “against any person involved in the incident other than the insured’s insurer for damages to the insured’s automobile or its contents or for loss of use”. Actions in contract are also prohibited by the section, except those brought “under an agreement, other than a contract of automobile insurance”. (The Court of Appeal gave as an example of the latter a lease agreement that requires the lessee to return the vehicle in an undamaged state. It said that an action to enforce such a provision would not be barred by s. 263.)

For section 263 to apply, three requirements must be met:

  1. The automobile or its contents, or both, must suffer damage arising directly or indirectly from the use or operation in Ontario of one or more other automobiles;
  2. The automobile that suffers the damage (or the contents of which are damaged) must be insured under a motor vehicle liability policy issued by an insurer licensed in Ontario or that has filed with the Superintendent an undertaking to be bound by section 263; and
  3. At least one other automobile involved in the accident must be insured under a motor vehicle liability policy issued by an insured licensed in Ontario or that has filed with the Superintendent an undertaking to be bound by section 263.

The idea of the legislation was to establish a “knock for knock” system, whereby insurers would give up the right to sue other companies’ insureds for subrogated property claims, but would also be immune from such suits themselves. All companies would save the transactional costs associated with a tort system. In place of such claims, the system created by s. 263 substituted a first-party compensation scheme, but expressly provided that “an insured is entitled to recover for the damages to the insured’s automobile and its contents and for loss of use from the insured’s insurer under the coverage described in subsection 239 (1) as though the insured were a third party“.

Non-Ontario insurers can “opt into” this system by providing to the Superintendent an undertaking to be bound by s. 263. (A list of insurers that have signed the undertaking can be found here and the actual wording of the undertaking itself here.)

Insurers that sign the undertaking receive both the benefit and the burden of the scheme.

In the present case, Clarendon National (Bounthai’s property insurer) had not signed the undertaking, although American Home (Bounthai’s liability insurer) had. The plaintiffs moved under Rule 21, for a declaration that their action was not barred by s. 263. The motions judge, relying on a 2005 Court of Appeal decision in Tuttle v. Travelers Indemnity, granted the motion and ruled that subsection 263(5) of the Act only applied if the insurer that made the payment did so under a motor vehicle liability policy. Since Clarendon’s policy was for property coverage only, the motions judge held that the plaintiffs’ claims were not barred by subsection 263(5).

The Court of Appeal reversed the decision and dismissed the claims. It held that because American Home had filed the s. 263 undertaking with the Superintendent, its insured had been entitled to recover the property damage claim from it (even though its policy was for liability coverage only), because that was what the undertaking required. As a result of American Home having given that undertaking, the three requirements (listed above) for the operation of s. 263, were satisfied: the automobile was damaged as a result of the use or operation in Ontario of another automobile (the defendants’ car); the automobile that suffered the damage was insured by an insurer that had filed the s. 263 undertaking with the Superintendent (American Home); and the other automobile involved was insured under an Ontario motor vehicle liability policy.

So, even though Mr. Bounthai had actually been paid by Clarendon, he was entitled to have his claim paid by American Home. Because he was within the s. 263 compensation scheme (even though he had not availed himself of it, since he had claimed from Clarendon), he had no right of action, either personally or for a subrogated claim, for property damage resulting from the accident, against anyone except his own insurer. The exception in s. 263, for agreements other than contracts of automobile insurance did not apply as the claims in this action were brought in negligence only.

Since Bounthai had no right to sue, his insurer, Clarendon, could stand in no better position in pursuing its subrogated claim. Thus, its action was barred because its insured’s right of action had been taken away by s. 263.

(We wonder whether, on this reasoning, Clarendon and Bounthai could now sue American Home, on the theory that s. 263 expressly gives the insured the right to recover damages from his own insurer “as though the insured were a third party”. Even if such an claim could be made, this accident occurred in 2004, so it would probably be too late now to advance it.)

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