Additional Insured Not Liable for Unpaid Premium

The Ontario Court of Appeal has just released its decision in McMynn v. Lombard General Insurance, a copy of which we attach.

Although the amount of money at stake in the case was relatively modest ($33,271.44), the case is of some interest because it involves “additional named insured” status, which is of growing importance in the worlds of insurance and commerce.

In this case, the named insured leased some buses from a couple named “McMynn”. One of the terms of the lease obliged the lessee (“Maple Rhodes”) to insure the buses and to name McMynn (the lessor) as an additional named insured.

Maple Rhodes took out insurance with Lombard and, as it had agreed to do, arranged for the policy to show McMynn as an additional named insured.

One of the buses was heavily damaged in an accident in October, 2001. The proof of loss submitted by Maple Rhodes for the cost of repairs was for $174,678.27.

At the time, Maple Rhodes owed Lombard premiums of $33,271.44. Accordingly, Lombard authorized payment for the amount claimed less the outstanding premiums. Lombard made its cheque payable to the company that did the repairs, Maple Rhodes and McMynn.

McMynn sued Lombard for the unpaid $33,271.44, contending that Lombard had no right to collect from McMynn premiums owing by Maple Rhodes. Lombard relied on s. 134(2) of the Insurance Act, which provides that “The insurer may sue for the unpaid premium and may deduct the amount thereof from the amount for which the insurer is liable under the contract of insurance.”

The lower court accepted the argument of McMynn, that this section confers rights that the insurer can enforce against the party responsible for payment of premiums, but not against a third party. Judgment was given against Lombard and it appealed to the Court of Appeal.

Lombard’s appeal was dismissed. The Court of Appeal agreed with the judge below. It said: “The amounts payable under the insurance policy in the instant case are for property damage sustained by a third party insured, the McMynns. The McMynns are not the party with whom Lombard contracted. Therefore, Lombard is not entitled to withhold the amount it was owed by Maple Rhodes for unpaid premiums when making a payment to the McMynns.”

The reasons don’t make it entirely clear what the policy said about whose responsibility it was to pay the premiums. It appears, though, that there was no obligation on the lessor to pay premiums that the lessee failed to pay. This emerges from remarks made by the court about another case, where “the lessor was required to pay any premiums that the insured failed to pay”. The court said that “there is no similar provision or endorsement in the case at bar.”

On the other hand, there is no indication in the decision, that the policy expressly limited the obligation to pay premiums to the named insured, Maple Rhodes.

There have been cases in the United States where this issue has come up and in which additional named insureds have been found liable to pay the premiums. In Hartford v. L & T Inc. and in Commercial Union v. A-1 Contracting, it was held that additional named insureds had an obligation to pay premiums because, having gotten the benefit of the insurance contract, they could not avoid the “burdens”. (In both of these decisions though, there was some overlap in the ownership of the named insureds and the additional named insureds.)

More and more frequently, we encounter cases in which issues of contractual loss transfer arise, whether in the form of the familiar “indemnity agreement” or the more complicated additional named insured, or both. Because there is no uniform wording for these provisions, it can be difficult to predict how they will be interpreted by courts. A common issue, for instance, is whether an additional named insured is to be indemnified for liability arising out of its own actions or against any liability arising at all?

There is a wealth of jurisprudence in the U.S. (even an entire book called “The Additional Named Insured”, which we have in our office). Analysis of the interaction of policy provisions and the wording of leases and other commercial agreements that purport to transfer risk can be challenging, to say the least, and American caselaw is helpful.

The McMynn case does not speak to these larger issues. But it does suggest a willingness on the part of the Court of Appeal to draw a clear line between the rights and duties of the original “named insured” and those of an “additional named insured”. Stay tuned!

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