Newsletter > February 2007
McIntosh v. Royal & Sun Alliance Insurance Co. of Canada 2007 FC 23: Pleasure Craft Warranties and Commercial Purposes Defined
In 2002 Mr. McIntosh purchased a 32 foot cigarette boat for $290,353. In July 2002 he spoke with his insurance broker to obtain insurance on the vessel. He indicated at that time that he was interested in using the vessel for a business involving poker runs and charters. At the time the broker advised him that getting commercial coverage was going to be difficult in the market existing at the time.
Mr. McIntosh testified that he advised his broker to obtain a pleasure craft policy. He understood that until he had an actual paying customer he did not need a commercial policy.
On July 18, 2002 he incorporated a company “Offshore Performance Tours.” On July 24, 2002 he opened business bank account and had business cheques printed. The same summer he placed a decal of business name on the vessel to attract potential customers, he printed 100-150 business cards, he entered poker runs to promote his business and while his friend and brother-in-law took the boat out on the runs he would stand by the dock and hand out business cards. He testified that in 2002 he never had a paying customer.
In 2003 Mr. McIntosh created a website for the business, he took friends out during poker runs to make it look like his business was more successful than it actually was, he printed and distributed 100-150 postcard flyers which showed the vessel and the price list for day tours and poker runs and advertised the business in power boating magazines. He testified that he never took out paying customers.
The Royal & Sun Alliance policy of insurance issued in 2002, under the heading “WARRANTIES”, stated:
“In order to keep this policy in effect you must make, and must keep, certain promises. These are know as warranties. If any of these promises are violated, coverage will be suspended from the time of such violation. ”
“The following warranties apply to this insurance: The vessel will be used solely for Private Pleasure Purposes. The vessel will not be chartered or leased or used for any commercial purpose.”
“Private Pleasure Purposes” was defined in the policy meaning that “the insured Vessel is used for recreational or leisure time activities, and includes entertainment of business clients provided it is not being chartered or hired”
The Royal changed its policy wording in 2003 and sent out a tag sheet explaining some of the changes. Under the heading “WARRANTIES”, the policy stated:
“All warranties have been split into two sub-categories, either Absolute (which apply to the entire policy period) or Suspensive …. ”
“Warranties- Absolute: The following absolute warranties apply to this insurance. 1.The vessel will be used solely for Private Pleasure Purposes. The vessel will not be chartered or leased or used for any commercial purpose….If any of the above absolute warranties in this section have been breached, [c]overage will cease immediately and cannot be reinstated once the violation ends. You will have no coverage from the date of the breach.”
“Private Pleasure Purposes” was defined in this policy as meaning that “the insured Vessel is used for recreational or leisure time activities.” The reference to the entertainment of business clients being allowed was deleted from this version of the policy.
The court heard some additional evidence of the activities prior to the loss. Mr. McIntosh produced banking statements that showed cash deposits ranging from $100 to $3210 at a branch near where the vessel was stored near Bancroft. One such deposit was for $401.25 the exact amount advertised for a charter (including the taxes). Mr. McIntosh testified that all deposits at the ATM were in cash. This was considered as odd by the judge as one does not normally deposit such large amounts of cash or coins in ATM machines in Brantford when one lives in Windsor.
The boat was stolen in October 2003 and Mr. McIntosh made a claim against the policy.
A number of issues arose at trial.
1. Did Mr. McIntosh take paying customers on his boat?
2. Did the marketing activities engaged in by Mr. McIntosh and his brother-in-law amount to use of the boat for a commercial purpose, thereby breaching the insurance policy?
3. Was Royal liable under the policy?
4. Was the broker liable for Mr. McIntosh’s loss? Had the broker failed to advise Mr. McIntosh about the change in the wording from one year to the next?
The court found that in fact Mr. McIntosh took out paying customers. The cash deposits in the ATM were not explained to the satisfaction of the court. The brother-in-law did not testify and the court found that the $401.25 deposit was done by the brother-in-law. There was no explanation to the court why the brother-in-law was not called to testify. An adverse inference was drawn by the court for the failure to testify.
In addition the court found that the use of the vessel was use of a commercial nature. The judge found that:
“It is also not necessary to determine whether marketing activities, such as the handing out of flyers, and the creation of a web site – activities that do not actually involve the use of the boat itself – amount to use of a boat for a commercial purpose. This is because I am satisfied that, at a minimum, the activities in issue here involving the actual use of the boat, including the storing of the boat at a location specifically because of its proximity to business opportunities, the transporting of the boat to poker runs in order to promote the business, the participation in those poker runs for promotional reasons, and the taking of friends and family on the boat during the poker runs in order to make the business appear operational, are not recreational or leisure time activities, and amount to the use of the boat for a commercial purpose.”
The court also found that the broker failed to meet the standard of care required of reasonably prudent marine insurance brokers. However, the broker was found not liable because there was not a causal link between “the broker’s” actions and Mr. McIntosh’s loss.
“While the broker unquestionably gave Mr. McIntosh bad advice, at the end of the day, Mr. McIntosh did not rely on that advice to his detriment. Rather Mr. McIntosh chose instead to disregard the broker’s advice, in the full knowledge that his insurance coverage could be affected by his actions.”
This decision is important not only for a clear determination of what pleasure craft warranties mean and how they will be interpreted and the duties of brokers but it has implications in other areas of marine law. The Athens Convention (Part 5 of the Marine Liability Act) governs transportation of passengers by water in Canada. It applies to “a person carried on board a ship other than a ship operated for a commercial or public purpose.” The words used in the Convention of “commercial purpose” had not been subject to judicial interpretation in Canada prior to this decision.
The court in McIntosh states:
“Moreover, I am satisfied that the meaning of the words ‘commercial purpose’, as they are used in the insurance policy in issue here, cannot reasonably bear the interpretation advanced by Mr. Macaulay, and extends beyond the narrow definition advanced by him.” [of paying customers]
“While the phrase “any commercial purpose” is not defined in the policy, the ordinary meaning of the term clearly extends beyond that suggested by Mr. Macaulay. It is not necessary to try to lay down a global definition as to what will and will not amount to a commercial purpose, and indeed, the experts struggled to come up with a clear and all-encompassing definition of the term. That does not, however, mean that the term is ambiguous. Rather, it simply reflects the fact that the determination of whether activities involving the use of a boat amount to use for a commercial purpose will depend to a large extent on the specific facts in issue in a given case.”
In Canada we have some guidance as to how a court will approach some very important issues.
[Rui Fernandes and Kim Stoll represented Royal & Sun Alliance at the hearing]
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