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Newsletters > Fall 1998

1. What is an "Accidental Fire"?

A number of boats were damaged by fire while being stored at a marina. The cause of the fire was never determined. The boat owners brought an action against the marina, asserting that the marina breached it's obligation to safeguard the boats. The trial judge found that the marina was a bailee for reward as it was being paid a storage fee. The judge ruled that the marina accordingly had to show that it exercised the same degree of care as it would have over its own possessions. The trial judge ruled that, as there was no evidence as to how the fire started, the marina was liable because it failed to lead the necessary evidence to disprove that it was negligent.

The marina appealed on the basis of the Accidental Fires Act R.S.O. 1990 c. A.4 (since incorporated into the Fire Protection and Prevention Act, S.O. 1997, c.4) which provides that a person "in whose house or building or on whose land any fire accidentally begins" is not liable for damages. The appeal presented an interesting conflict, requiring reconciliation between the explicit wording of the statute and the onus placed on a bailee for reward cited by the trial judge, which is a well established principle at law.

The Court of Appeal confirmed that an accidental fire is not one that is proved to be accidental, but rather is one that cannot, on a balance of probabilities, be traced to a particular cause. There must be a cause identified to be able to assess the bailee's conduct, relative to its duty of care as a bailee for reward. Once it is established that the cause is unknown, the bailee has then established that there is no connection between its conduct and the loss so as to make it liable as a bailee. The explicit wording of the Act superceded the common law to benefit the marina.

In its reasons the appeal court noted that in most cases there would be some suggestion, or some evidence led as to the cause of loss and that, each case being taken on its own merits, a party will usually have the opportunity of leading evidence to suit its own case. The inference is that it will only be in the exceptional case that a bailee will succeed under the Act on the basis of a total lack of evidence as to the cause of a fire.

This decision clearly underscores the importance of timely and effective investigation in a fire claim.

Neff. v. St. Catharines Marina Ltd. (1998) 37 O.R. (3d) 481 (Ont. C.A.).

2. PUBLIC TRANSIT STANDARDS

Most people who take public transit are familiar with the stop-and-go jerking motions of buses, subways, and streetcars. Particularly in winter, those left without a seat will often lose their footing and fall. The question then becomes whether the carrier is liable for any damages sustained by passengers. In Wang v. Horrod, the British Columbia Court of Appeal dealt with an appeal by a transit company and its driver in_ a decision which placed 75% of liability on them for damages sustained to an elderly woman traveling on a city bus. The woman had boarded the bus and found a seat, but got up during a routine stop to take off her coat. When the bus moved forward, the woman fell and, due to the way she fell and her age, was rendered quadriplegic. The evidence was that the driver of the bus did not check his rearview mirror before proceeding. The trial judge held that there was a greater degree of care required of the transit company to safeguard its elderly or disabled passengers, and the majority of the Court of Appeal agreed. They held that the driver knew or ought to have known that he had elderly passengers aboard, that they could be standing at a stop, and that he should therefore check his mirrors before proceeding.

It should be noted that there was a strong dissent in this case. Justice Southin would have dismissed the case against the driver, as the driver was merely acting in his capacity as an employee of B.C. Transit. He would also have dismissed the case against the company, as there was no evidence that the bus was operated in an abnormal way or that it had "lurched" forward. Finally, in reasons which clearly indicated a belief that the desire to compensate had won out over the law, Justice Southin said, "We are all experts on proper driving, or so we think. ...But the proper standard in matters peculiar to public conveyances is quite a different matter. There are, in this Province, very few judges that spend time as passengers on motor buses. ...The learned trial judge had a difficult task in which, in my opinion, she allowed a kind heart to prevail over legal considerations."

Wang v. Horrod (1997), 36 B.C.L.R. (3d) 71 (C.A.). Application for leave to appeal to S.C.C. filed July 31, 1998.

3. WHERE AN INSURER RESCINDS AN INSURANCE CONTRACT, THE CONTRACTUAL LIMITATION PERIOD IS NOT OPERATIVE

The Ontario Court of Appeal has recently determined a novel issue -- whether an insured is relieved of its obligation to commence legal proceedings against an insurer within a contractual limitation period where the insurer has rescinded or repudiated the insurance contract.

The Court determined that where an insurer repudiates the contract, the insured is excused from affirmative future obligations contained within the contract including the contractual obligation to commence an action within a prescribed limitation period.

Gordon Capital purchased a fidelity bond from Guarantee Company of North America. Excess coverage was provided by CHUBB Insurance and Laurentian General Insurance. During the coverage period, one of Gordon Capital's employees was involved in fraud.

Gordon Capital filed a Proof of Loss to which it appended the report of forensic investigators Lindquist Avery. Lindquist had been contracted by Gordon Capital to investigate the fraud.

Lindquist had determined that the fraud had gone undetected over a period of time because the employee who had committed the fraud had sole authority to review various customer accounts which he managed. The practice was contrary to representations Gordon Capital had made to Guarantee at the time of its purchase of the policy that there was always separate and independent monthly review of customer accounts activity.

Guarantee rescinded the policy based on this material misrepresentation and returned the premium to Gordon Capital. Gordon Capital refused to accept the premium refund and disputed that Guarantee had any justification to repudiate the contract and deny the claim.

Guarantee brought a declaratory action against Gordon Capital based on the failure by Gordon Capital to commence any action against it within the two year contractual limitation period. Therefore, the issue arose whether the limitation period could be relied upon by Guarantee in the circumstances.

Decisions in other cases, by the Supreme Court of Canada and other provincial Courts, addressed either circumstances where the insured had failed to meet terms of the contract with perfection or where an insurer had repudiated the contract and the insured had subsequently failed to file Proofs of Loss with perfection. There was no authority on point where an insurer repudiated the contract and the insured had failed to comply with the contractual time limit for institution of legal proceedings.

Older English authorities establish the proposition that there may be effective differences in provisions in a policy. Some can be likened to an "executive obligation" or "operative term" that is inserted for the benefit of one of the parties. Such are distinct from provisions which are "neutral features" of the insurance contract. For example, an arbitration provision is a neutral feature of the insurance policy as it is inserted for the benefit of both parties to prescribe the means by which disputes will be resolved. Such a provision operates even in the context of complete repudiation of the insurance contract.

The obligation to institute legal proceedings within a prescribed time period is inserted for the benefit of the insurer. It serves to eliminate uncertainty as to future claims obligations. It was classified as an "operative term". Such a provision does not survive purported repudiation of the insurance contract by the insurer.

In the end result, the insured was not required to commence legal proceedings within the contractual limitation period of two years.

The implications of this decision are significant -- Insurers who contemplate rescission of the insurance contract must be very careful to do so properly and must recognize that by attempting to do so they will not be able to rely upon contract provisions which the Court categorizes as operative terms in the event the rescission is not later upheld by the Court. Operative terms include the requirements to file a Proof of Loss and to commence any legal action against the insurer within the prescribed time period.

Guarantee Co. of North America v. Gordon Capital et al (1998) 157 D.L.R. (4th) 644 (Ont. C.A.).

4. Fellow Air Passenger Causing Harm Is Considered An "Accident"

Have you ever been caught next to a smoker on an airplane? In Naval-Torres v. Northwest Airlines Inc., the Ontario Court dealt with a plaintiff's claim for bodily injury allegedly arising from exposure to second-hand smoke while on board a Northwest Airlines flight from Toronto to the Philippines. The Claim alleged breach of contract, negligence, misrepresentation and misleading advertising on the part of Northwest. The airline brought a motion to restrict the claims to only those that fell within the Warsaw Convention, enacted in Canada by the Carriage by Air Act. It argued that the smoking passenger constituted an "accident" for the purposes of Article 17 of the Convention. The judge agreed, stating that "accident" was an unexpected or external event, and included intentional wrongdoing on the part of another passenger. The Convention therefore applied, and all claims external to it were struck. Further, as the Convention did not allow claims for anything other than direct damages, the plaintiff could not claim punitive damages against the airline. Finally, the two year limitation period was not affected by the allegation of willful misconduct. The plaintiff was given leave to file a fresh claim within 30 days.

Naval-Torres v. Northwest Airlines Inc. (1998), 159 D.L.R. (4th) 67 (Ont. Gen. Div.).

5. Privilege Is Waived When Information Is Given to Crime Prevention Bureau

An Ontario judge has recently ruled that communications between an insurer and the Insurance Crime Prevention Bureau ("ICPB") are not privileged. It is well settled that disclosure of privileged information to outsiders constitutes a waiver of privilege. However, the common law has recognized an exception to this known as "common interest privilege". In Re Supercom of California Ltd. and Sovereign General Insurance Company, Justice Wilson considered the issue of whether an adjuster waived privilege by providing his reports to the ICPB, or did common interest privilege apply.

Supercom was a distributor and manufacturer of computer equipment. It had theft insurance with Sovereign General Insurance Company. Following a break-in, Supercom made a claim for approximately $2,000,000.00. At first instance, the Master held that the release of investigative reports to the ICPB amounted to a waiver of privilege and ordered the reports produced. Sovereign appealed, and the ICPB was granted intervenor status.

ICPB filed additional evidence to explain its role within the insurance industry. That information indicated that the ICPB used reports submitted to it in order to create a database for other insurers. The database contains only select key information from the reports received from insurers. This includes the name of the insured, the insurer, the date of the occurrence, the claim amount, the reason for the denial and the disposition. The summary of information provided by the database is marked "privileged and strictly confidential".

After carefully considering the role of the ICPB and the facts of this case, the court found that there had in fact been a waiver of privilege to the information in the computerized database as well and the underlying reports, unless the doctrine of common interest privilege applied. The court noted that common interest privilege "implies the dynamic of parties sharing a united front against a common foe." (P. 612) ICPB had argued that common interest privilege should be extended to apply "to all insurers co-operatively fighting the plague of potential insurance fraud by plaintiffs". The court rejected this concept finding that in this particular case a number of insurers were in fact adverse in interest, aside from sharing common defence on trying to deny the claim. The court also went on to consider whether or not the relationship between insurers
and the ICPB was a relationship that "ought sedulously to be fostered," a key element underlying the right to common interest privilege. Wilson J. Had the following comments:

"It would, in my view be contrary to the interests of our adversary system to grant to the powerful insurance industry the rights and the advantage of freely pooling information to ICPB investigators without the obligation of it advising the plaintiff of the nature of the information received. To do so would create a very uneven playing field. The principles of waiver of privilege are well founded. A litigant cannot take a position inconsistent with privilege and maintain the privilege. To extend the principles of common interest to the ICPB and its members in the insurance industry would be a quantum leap from the limited extent of common interest privilege developed to date in the case-law." (p. 616)

In light of this judgment, insurers and their adjusters should be careful in choosing what documents and information they provide to the ICPB in the future. Rather that provide investigative reports, it would be safer to simply provide summaries containing the factual information which would, in any event, have to be disclosed to an insured in litigation. This will avoid the risk of sensitive privileged information being obtained by an insured in the course of coverage litigation.

Re Supercom of California Ltd. and Sovereign Gen. Ins. Co. (1998), 37 O.R. (3rd) 597 (Gen. Div.)

6. Bill S-4 Into Effect

On August 10, 1998 the new limitation of liability provisions of the Canada Shipping Act came into effect.

For vessels less than 300 tons, the maximum liability of a shipowner is $1,000,000 in respect of claims for loss of life or personal injuries and $500,000 in respect of any other claims (property). For claims involving a ship over 300 tons there are increased limits which are tied to the ship's tonnage and based on a formula. The greater the tonnage the greater the limitation fund.

A person is not entitled to limit liability if it is proved that the loss resulted from his or her personal act or omission, committed with the intent to cause such loss, or recklessly and with knowledge that such loss would probably result. This test is similar to the "willful misconduct" test found in the Carriage By Air Act which has been shown to be difficult to break.

The new Bill provides for special limitation amounts for passenger claims which are not yet in force. Until then the general limits set in the Bill apply.

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