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Newsletter > October 2012

In this issue: 1. Firm and Industry News 2. Undertaking to Provide Insurance in Contracts 3. Marine Insurance – Onus on Insurer to Prove Fortuity 4. Small Vessel Compliance Program 5. Direct Compensation for Vehicle Property Damage

The three masted schooner Empire Sandy at the Harbour Front in Toronto for the January 2017 newsletter.

1. Firm and Industry News

  • November 27th, Toronto – Canadian Board of Marine Underwriters Annual Meeting and Dinner.
  • November 28th, Toronto – Commons Institute Conference on Aviation Issues.
  • November 29th, Toronto – Toronto Transportation Club Annual Dinner
  • December 7th, Montreal – Grunt Club Annual Dinner
  • January 17, 2013 Toronto – Fernandes Hearn Annual Maritime and Transportation Law Seminar

Gordon Hearn and David Huard will be representing the firm at the Transportation Law Institute being held in Nashville, Tennessee on November 9, 2012.

Gordon Hearn will be presenting a paper on “The Identity Theft of Cargo: Reducing Losses and the Allocation of Liability by the Courts” at the Canadian Board of Marine Underwriters Annual Conference in Toronto on November 27, 2012.

Rui Fernandes will be a presenting a paper on “Environmental Concerns in the Aftermath of an Accident” at the Commons Institute Conference on Aviation Issues on November 28th in Toronto.


2. “You Promised to Include Us In Your Insurance … But You Didn’t”: A Model for the Award of Damages to a Contracting Party Left Without Insurance Coverage


Indemnity provisions in contracts are common, where one party agrees to make the other “whole” should some legal claim or event come to pass. They often incorporate or are accompanied by an undertaking by the party providing the indemnity to extend that party’s liability insurance over to and for the benefit of the other party, who would then become an “additional insured” on the former’s policy. In many cases, however, this obligation to provide coverage is not satisfied, and, as a result, the other party is left without recourse to the insurance policy in the event of a legal claim asserted against it by a third party. Named as a defendant in a law suit, the party who should have named as an insured will then have to fund the costs of its defence and “dig into its own pocket” to pay a settlement or a judgment that might otherwise have been funded by the insurance company.

What relief is available to the “aggrieved party” who is faced with a lawsuit and who finds out that it does not have the insurance protection that it thought it had? The recent Ontario Court of Appeal case of Papapetrou v. 1054422 Ontario Limited et al (*1) illustrates how this scenario may translate into a claim for monetary damages against the party who failed to place the insurance. The amount of the damages to be paid can, however, be a tricky “case by case” quantification depending on the scope of the “lost insurance” relative to the nature of the claims and the issues raised in the lawsuit that has to be defended. One complication may be the fact that perhaps only some of the claims or allegations raised by a plaintiff would have come within the scope of the insurance policy.


Maria Papapetrou commenced a lawsuit for injuries allegedly resulting from a slip and fall on black ice that had accumulated on stairs at the entrance of a building known as the Galleria. She sued the owner of the building and the manager, collectively known as “The Cora Group”, and Collingwood Landscape Inc. (“Collingwood”), which had been contracted by The Cora Group to provide winter maintenance and snow removal services for the Galleria.

Ms. Papapetrou’s claim alleged the standard allegations against those responsible for or in possession of the property – alleging that the defendants failed to prevent the accumulation of ice and to maintain the property in safe condition for visitors and so on. Ms. Papapetrou also cited ss. 3 and 4 of the Occupier’s Liability Act (*2), which prescribes as follows:

3(1) An occupier of premises owes a duty to take such care as in all the circumstances of the case is reasonable to see that persons entering on the premises, and the property brought on the premises by those persons are reasonably safe while on the premises.

(2) The duty of care provided for in subsection (1) applies whether the danger is caused by the condition of the premises or by an activity carried on on the premises.

(3) The duty of care provided for in subsection (1) applies except in so far as the occupier of the premises is free to and does restrict, modify or exclude the occupier’s duty.

4(1) The duty of care provided for in subsection 3(1) does not apply in respect of risks willingly assumed by the person who enters on the premises, but in that case the occupier owes a duty of care to the person to not create a danger with the deliberate intent of doing harm or damage to the person or his or her property and to not act with reckless disregard of the presence of the person or his or her property.

The Contract

Under the terms of the service contract, Collingwood assumed certain obligations and agreed to indemnify The Cora Group as follows:

The Contractor assumes sole responsibility for all persons engaged or employed in respect of the Work and shall take all reasonable and necessary precautions to protect persons and property from injury or damage. The Owner shall not be responsible in any way for any injury to or the death of the Contractor’s employees… or to any other person… in any way resulting from any act or omission of the Contractor … The Contractor shall indemnify and save harmless the Owner … against all claims, losses, liabilities, demands, suits and expenses from whatever source, nature and kind in any manner based upon, incidental to or arising out of the performance or non-performance of the contract by the Contractor.

Portions of the above contract clause are in italics so as to emphasize the key wordings taken into consideration by the Court of Appeal in its analysis and disposition of the case, which is discussed below.

Collingwood also agreed in the contract to obtain comprehensive general liability insurance “covering its liability and that of its employees, agents and representatives for bodily injury … for a minimum of $2,000,000” and to “include the [The Cora Group] as an additional insured” on the policy. Contrary to this obligation, Collingwood instead obtained an insurance policy with $1 million of coverage and it failed to name The Cora Group as an additional insured.

The Cora Group “Wants Out”

The Cora Group brought a motion for summary judgment in Ms. Papapetrou’s action, asking that Collingwood assume The Cora Group’s defence of the claim, citing the insurance obligation and the indemnity provisions in the contract. Collingwood opposed this application on the basis that the plaintiff’s claims against The Cora Group extended beyond allegations relating only to the “icy stairs” and therefore beyond the contract and Collingwood’s scope of involvement.

The judge hearing the motion for summary judgment ordered that Collingwood assume the defence of the action on behalf of The Cora Group and indemnify The Cora Group with respect to any damages awarded to the plaintiff. While agreeing with Collingwood’s argument that some of the allegations of negligence “fell within the general occupiers’ liability basket”, the judge concluded those allegations were still linked to the essential negligence alleged as pertaining to the failure to address the icy conditions causing the fall. Having regard to the nature of the claim and noting the contract language requiring Collingwood to “assume sole responsibility to protect persons from injury” and also to “indemnify and save harmless the owner… against all claims” Her Honour held that Collingwood was obligated to defend the action for The Cora Group and to indemnify The Cora Group for Ms. Papapetrou’s claims.

Collingwood appealed this decision to the Ontario Court of Appeal.

At the Court of Appeal

Collingwood raised two issues on the appeal:

1. The judge erred in ordering it to indemnify The Cora Group at this stage of the action; and 2. The judge erred in ordering that Collingwood assume the defence of The Cora Group, there being no contractual duty to defend.

The Cora Group conceded that the order that Collingwood indemnify it with respect to any damages awarded to the plaintiff in the main action was premature as no evidence was led on the motion for summary judgment touching on the matters of liability and damages (i.e. How could an order issue that “A” indemnify “B” if it had not yet been determined if “B” was liable, thereby triggering “A”‘s obligation to indemnify?). Collingwood’s obligation to indemnify was not absolute, but was, rather, limited to claims “based upon, incidental to or arising out of Collingwood’s performance or non-performance of the contract.” As no evidence concerning the issues of liability or damages was led on the motion for summary judgment, the Court of Appeal confirmed that it was premature for the trial judge to have dealt with the indemnity obligation.

The Tricky Part: Issue #2 and What to do With the Fact that The Cora Group was Paying for its Own Defence?

As to the second issue, Collingwood argued on the appeal that the contract does not say Collingwood must defend actions brought against The Cora Group, or, even if there was a duty for it to defend the action for The Cora Group, Collingwood asserted that such defence should extend only to claims arising out of Collingwood’s performance or non-performance of the contract.

The Court of Appeal drew a contrast between the notion of Collingwood having to “defend” The Cora Group as distinct from being liable to it for an award for damages respecting the costs borne by the latter in defending the action. Holding that the motion judge erred in ordering Collingwood to assume the defence of The Cora Group, the Court of Appeal found Collingwood liable for the cost of The Cora Group’s defence of the action, with the exception of any costs incurred exclusively to defend claims that did not arise from Collingwood’s performance or non-performance of the contract. Looked at another way, these damages equate to the cost of the defence that Collingwood’s insurer would have been obliged to provide for The Cora Group had Collingwood fulfilled its contractual obligation.

But what should the amount of such damages be for The Cora Group’s costs? Would it be “dollar for dollar” as incurred (or to still be incurred) by The Cora Group in its defence? The Court of Appeal did not have the usual direct means of looking at the language of a policy to determine the scope of the defence obligation as would have been owing to The Cora Group as there had been no “additional named insured” endorsement added to the policy. It was, therefore, necessary for the Court of Appeal to analyze the insurance obligation and the indemnity provision in the contract. Collingwood was to obtain comprehensive general liability insurance to insure against bodily injury; however, the scope of its obligation to indemnify was limited to “claims… based upon, incidental to or arising out of the performance or non-performance of the contract by the Contractor.” Accordingly the quantum of damages to be paid would be the amount that The Cora Group had to pay to defend claims for bodily injury arising out of the manner that Collingwood performed or failed to perform the contract. These costs included all costs for The Cora Group’s defence of the action, save for any costs incurred exclusively to defend claims that did not arise from Collingwood’s performance or non-performance of the service contract. The Court reasoned that this outcome is corroborated by the well established principle that an insurer’s obligation to defend is limited to defending claims that – if proven true – would fall within coverage under the policy. (*3)

The Court of Appeal did not agree with the motions judge’s ruling that all of the claims in the action could be characterized generally as claims in negligence for failing to maintain an ice-free pedestrian stairway, with the result that all claims in the action would have been captured under the insurer’s duty to defend. The Court of Appeal set forth a more nuanced approach to be taken in the analysis. In order to determine whether an insurer’s duty to defend arises in relation to the claims raised in a particular action, the court is required to assess the substance or the “true nature” of each claim contained within the pleadings to see if it fits within the scope of coverage. (*3) This assessment must be made substantially on the facts as stated in the pleadings themselves; however, extrinsic evidence may sometimes be considered, including when such evidence has been referred to in the pleadings. Pleadings may therefore include both covered and uncovered claims. If there is any possibility that any of the claims are captured by a policy of insurance, then that insurer has a duty to defend those claims. (*4)

In this case, the coverage would be limited to matters pertaining to Collingwood’s performance or non-performance of the contract. The Court of Appeal found that the “true nature” of the claims were best classified as allegations pertaining to:

i) negligent maintenance due to Collingwood’s performance or non-performance of the service contract (which may include claims under the Occupiers’ Liability Actwith regard to obligations delegated to Collingwood);

ii) negligent conduct on the part of The Cora Group extending beyond Collingwood’s obligations under the contract, and

iii) a statutory cause of action under the Occupiers’ Liability Act extending beyond those obligations delegated to Collingwood under the contract. The Court of Appeal noted that the duty to defend extends only to the first category of claims.

The Court of Appeal noted that when an action includes both covered and uncovered claims, an insurer may nonetheless be obliged by the terms of the policy to pay all costs of defending the action save for those costs incurred exclusively to defend uncovered claims. (*5)

The Court of Appeal drew on its 2008 decision in Hanis v. Teevan (*6) as further support for the outcome in this case. In that case, the Court addressed the question of the apportionment of defence costs when an action raises both covered and uncovered claims and costs incurred in respect of the defence to the former also aid in the defence of the latter. Unless the precise language of the insurance contract provides otherwise, the insurer would be responsible for all costs associated with the defence of the covered claims notwithstanding that such costs might have a common element with or benefit the insured in respect of defences to claims not covered by the policy.

In this case, there was nothing in the contract that would indicate any intention that the coverage that was to have been placed by Collingwood would exempt such ‘mixed’ claims as coming within the obligation to defend. Accordingly, Collingwood was liable for The Cora Group’s defence costs other than those clearly and exclusively pertaining to item ii) and iii) above.

The Difference Between “Assuming” a Defence and Liability for Damages for Defence Costs: Avoiding a Conflict of Interest

Collingwood also argued that that it should not be liable for damages as its insurer was already effectively defending The Cora Group and paying for counsel to defend Collingwood against the claims arising from the performance of the service contract. The Court of Appeal disagreed. The Court stated that it would be inappropriate for Collingwood to assume The Cora Group’s defence; that is, it would not be appropriate for one lawyer to represent both Collingwood and The Cora Group. The proper remedy was an award of damages based on The Cora Group having to pay its own lawyer to defend its interests. Where, as here, distinct claims were made against a service provider (Collingwood) and a property owner (The Cora Group), the ability of a single counsel to defend both claims was hampered by an inherent conflict of interest. While Collingwood and The Cora Group would have the same agenda in many respects in the overall defence of the action, these interests were not totally aligned. Collingwood might, for example, benefit by a finding that The Cora Group was liable to the plaintiff for damages arising from the claims captured under items ii) and iii) above, then falling outside of what would have been covered by the insurance policy. Thus, there is an apparent, if not real, conflict in the conduct of the defence as Collingwood could benefit to the detriment of The Cora Group depending on how liability would be assessed on the plaintiff’s claims at the end of the day. This conflict was exacerbated by the fact that both Collingwood and The Cora Group had cross-claimed against each other – each having an interest in blaming the other for what had happened.

In the circumstances, this conflict was best dealt with by The Cora Group continuing to retain its own independent counsel in respect of all allegations advanced by the plaintiff in the action. The Court noted that Collingwood’s obligation to pay (at least in part) for two defence counsel was a necessary consequence of Collingwood’s breach of its contractual obligation to place insurance.

Accordingly, the Court of Appeal allowed the appeal and set aside the motion judge’s order, substituting an order that Collingwood pay for The Cora Group’s defence of the action save for any costs incurred exclusively to defend claims that did not arise from Collingwood’s performance or non-performance of the contract.

Gordon Hearn

End Notes

*1 (2012) 111 O.R. (3d) 532 (C.A.) *2 R.S.O. 1990, c.O.2 *3 Non-Marine Underwriters, Lloyds of London v. Scalera, [2000] 1 S.C.R. 551 at paras. 74-76 and Nichols v. American Home Assurance Co. [1990] 1. S.C.R. 801 at pp. 810-812. *4 Monenco Ltd. v. Commonwealth Insurance Co. [2001] 2 S.C.R. 699 at para. 28-35 *5 Unger (Litigation Guardian of) v. Unger (2003) 68 O.R. (3d) 257 (C.A.) at para. 10 *6 (2008) 92 O.R. (3d) 594 (C.A.)


3. Marine Insurance – Insurers must prove lack of fortuity when relying on exclusions

Feuiltault Solution Systems Inc. v. Zurich Canada 2012 FCA 215

In our April 2011 Newsletter, Rui Fernandes reviewed the decision of the Federal Court of Canada in Feuiltault Solution Systems Inc. v. Zurich Canada 2011 FC 260. Justice Gauthier had reviewed the provisions of an “all risks” marine policy in the determination of whether damages to a book-binding machine shipped from Canada to Germany were covered under that policy. The court found for the defending insurer on the basis that the plaintiff insured had not proven that the loss was caused by a fortuity and, further, that the exclusion for insufficiency or unsuitability of packing also relieved the defending insurer of liability.

On January 17, 2012, the Federal Court of Appeal heard the appeal of the insured, Feuiltault Solutions Systems Inc. See Feuiltault Solution Systems Inc. v. Zurich Canada 2012 FCA 215.

There were two issues raised on appeal: (1) which party bears the onus of showing fortuity or lack thereof regarding the cause of the loss; and (2) whether the exclusion with respect to packing applied.

The Federal Court of Appeal’s Reasons for Judgment as provided by Pelletier J.A. for the court came to the same ultimate conclusion, but through a different route reminding insurers and insureds and their counsel alike as to the proper onus in such coverage cases.

The Facts

Feuiltault Solution Systems Inc. sued its marine insurers, Zurich Canada under an all risk policy (Institute Cargo Clauses A) for damage to book-binding machines shipped to Germany in three separate containers in May 2005. The trial judge accepted that the goods were received in good order, the machines had been trucked to the Port of Montreal and that the sea journey had been uneventful with no ingress of either fresh or sea water (as opposed to humid air) inside the containers.

Upon arrival at destination, however, the machines were variously rusted and ultimately declared a total loss. Regarding the proximate cause of the loss, Zurich’s expert, Captain Mel Fernandes, testified that the corrosion had resulted from a heavy condensation within the containers during transit and that the most likely source of that condensation was the high moisture content in the heat pressure treated lumber, a clearly unsuitable choice. Further, the expert opined that the steel machines were insufficiently packed before transit by Feuiltault having been left unwrapped in a container full of wood that had not been kiln-dried and with no use of desiccants. The trial judge accepted the expert’s evidence.

Ultimately, the main issue for the trial judge was whether or not Feuiltault had met its burden of proving that the loss occurred through a fortuity, whatever that fortuity might be. The second issue was whether Zurich had established that the proximate cause of the loss was the insufficient or unsuitable packing of the cargo inside the containers and thus excluding the loss per paragraph 4.3 of the Institute Cargo Clauses A, incorporated by reference into the Zurich policy.

The trial judge found that Feuiltault had not established by preponderance of proof that any fortuitous event or anything of an accidental nature had occurred during the insured transit. Further, the trial judge found that in respect of the packing and preparation of the machinery loaded by Feuiltault inside the three containers, that such packing was insufficient. The case was dismissed.

The Appeal

Issue No. 1: Which party bears the burden of proving a fortuity or lack thereof?

On this first issue, the Federal Court of Appeal found that the Federal Court at trial had erred in law in the imposition on the insured of the burden of proving that the loss in question was caused by a fortuity. By doing so, the contract between Feuiltault and Zurich, its insurer, had been given no effect.

The Court of Appeal reviewed the trial judge’s review of the law noting the reference to British and Foreign Marine Insurance Co. v Gaunt, [1921] 2 AC 41 (HL) (“Gaunt”) including the famous passage by Lord Sumner therefrom:

There are, of course, limits to “all risks”. There are risks and risks insured against. Accordingly the expression does not cover inherent vice or mere wear and tear or British capture. It covers a risk, not a certainty; it is something, which happens to the subject-matter from without, not the natural behaviour of that subject-matter, being what it is, in the circumstances under which it is carried.

The Court of Appeal noted the trial judge’s conclusion arising from her interpretation of the passage in Gaunt that, in order to succeed, the insured must establish on a balance of probabilities that the loss was due to a fortuity, being an external accidental cause. The trial judge had found that the insured did not show that the loss was caused by a fortuity on all the evidence presented.

The Court of Appeal disagreed with this interpretation finding that, “where the insurer has contractually excluded non-fortuitous losses, the onus of proving lack of fortuity with respect to those losses falls on the insurer.”

Pelletier, J.A. at paragraphs 21 and 22 in the Reasons went on to further quote from Lord Sumner in the Gaunt decision as reproduced above.

The roots of the issue with respect to fortuity raised by this appeal lies in the passage that immediately follows the one quoted above:

Finally, the description “all risks” does not alter the general law; only risks are covered which it is lawful to cover, and the onus of proof remains where it would have been on a policy against ordinary sea perils. I think, however, that the quasi-universality of the description does affect the onus of proof in one way. The claimant insured against and averring a loss by fire must prove loss by fire, which involves proving that it is not something else. When he avers loss by some risk coming within “all risks”, as used in this policy, he need only give evidence reasonably showing that the loss was due to a casualty, not to a certainty, or to inherent vice or to wear and tear.

Gaunt, cited above, at 455.

Two propositions emerge from these passages. The first is that the insured has the onus of showing that the loss was due to a fortuity or a casualty. The second is that inherent vice is not a fortuity. These two propositions must be considered together with another legal proposition, namely that the insurer has the burden of proving the exclusions upon which he relies when denying coverage:

A long standing line of authorities require an insurer, seeking solace in an exclusion from otherwise unlimited liability, to show that the exclusion applies.

Continental Insurance Co. v. Dalton Cartage Co., 1982 CanLII 13 (SCC), [1982] 1 S.C.R. 164 [Dalton Cartage Co.].

The Court of Appeal went on to state that the question of onus was important where the insurer excludes non-fortuitous losses, such as losses caused by inherent vice. The proposition that an insured under an all risks policy must show (even if only by inference) that the loss was caused by a fortuity is in conflict with the proposition that the insurer must prove the application of an exclusion (including that relating to non-fortuitous losses) upon which it intends to rely to deny coverage.

The Court of Appeal reminds us at paragraph 26 of the Reasons that any policy must be read as a whole to give effect to all terms of the contract. In essence the Court of Appeal states that, where the scope of coverage is to be determined solely on the scope of the insuring agreement, then the insured must show his loss if fortuitous as per Gaunt. But where the question of coverage depends upon both the insuring agreement and the exclusions and where the insurer has specifically excluded non-fortuitous losses, especially inherent vice, the insurer must be taken to have accepted the burden of proving lack of fortuity.

To find otherwise would require the insured to prove that the loss was due to a fortuity and render the exclusion of non-fortuitous losses superfluous. If the insured can prove that the subject loss was caused by a fortuity, the exclusions then cannot apply and, if he cannot so prove and his claim fails, then the exclusions will never arise.

To avoid this result, Pelletier J.A. states at paragraph 27,

The only way to give both the insuring agreement and the exclusions their proper scope is to hold that the insured under an all-risks policy needs only show that the cargo was in good condition when the insurance attached and that the goods were damaged while the insurance was in force. It is for the insurer who wishes to deny coverage to prove that the exclusion with respect to inherent vice or other non-fortuitous loss applies. (emphasis added)

Pelletier J.A. went on to comment on the “unqualified application” of the principles set out in Gaunt, in Nelson Marketing International Inc. v. Royal & SunAlliance Insurance Co. of Canada, 2006 BCCA 327, [2006] B.C.J. No. 1454. In that case, the British Columbia Court of Appeal had found that, had the insured been able to prove that the environmental conditions of the holds of subject vessels been out of the ordinary, it would have successfully proven a fortuity and brought the claim within coverage. At paragraph 32 of the Reasons, Pelletier J.A. comments that proofs of such a fortuity would render the exclusion for inherent vice superfluous thereby relieving the insurer of the burden to prove the application of the exclusion.

His Lordship then concluded at paragraph 33,

I am therefore of the view that, in order to give full effect to the terms of the policy in this case, it is necessary to treat the exclusions for non-fortuitous losses (inherent vice, wear and tear, deliberate acts of the insured) as an undertaking by the insurer to assume the burden of proving that the loss was not fortuitous, thereby relieving the insured of the obligation to do so. (emphasis added)

The Court of Appeal then found that the Federal Court erred in law in imposing on the insured the burden of proving that the loss was caused by a fortuity thereby failing to give effect to the contract between insured and insurer.

The insurer had not defended on the basis of a lack of a non-fortuitous loss and so the court did not have to consider whether the insurer had met the burden of proving same. However, there remained to be determined whether the insurer could still successfully deny coverage based on the application of the exclusion regarding unsuitable or insufficient packing.

Issue No. 2: Did the exclusion regarding insufficient or unsuitability of packing apply?

The policy contained the following exclusion:

4.3 Loss, damage or expense caused by insufficiency or unsuitability of packing or preparation of the subject matter insured (for the purpose of this Clause 4.3 “packing” shall be deemed to include stowage in a container or lift van but only when such stowage is carried out prior to attachment of this insurance or by the Assured or their servants).

The Court of Appeal confirmed the lack of case law in the area. Applying Helicopter Resources Pty Ltd v. Sun Alliance Australia Ltd. (The Icebird), (1991) 312 LMLN (Supreme Court of Victoria) at 31, Pelletier J.A. stated that the exclusion applies to the “steps taken by the insured to protect the cargo from ordinary incidents of carriage, including stowing cargo in a container and taking steps to immobilize it in the container. By necessary implication, I also understand this exclusion to refer to the suitability of the materials used by the insured for those purposes.”

For the exclusion to apply, the packing was required to have taken place at the insured’s premises and prior to the attachment of the insurance. Further, the loss or damage had been caused by the insufficiency or unsuitability of the packing. In this case, the trial judge had found that the rusting had been caused by the high moisture content of the pressure treated wood used in the containers and such wood (as a packing material) was unsuitable and the cause of the loss. The failure to protectively wrap the machines contributed to the loss and also satisfied the requirements of the exclusion.

The Court of Appeal concluded that the application of the exclusion was consistent with the general purpose of marine insurance to indemnify against risks of a marine voyage and not to guarantee the skill and workmanship of the insured in the preparation of the cargo for the voyage.


While the result in this case was the same for these parties upon appeal, the approach confirmed by the Federal Court of Appeal is that burden of showing a non-fortuity will be on the insurer when reliance upon an exclusion is sought in order to deny coverage.

Kim E. Stoll


4. Small Vessel Compliance Program – Non Pleasure Craft Requirements

The Small Vessel Compliance Program (SVCP)(*1) is for vessels that:

  • measure between 0 and 15 gross tonnage
  • carry between 0 and 12 passengers
  • is not a pleasure craft This includes workboats and government vessels.

The SVCP does not currently enroll fishing vessels or human-powered vessels.

If you own or operate a small vessel in Canada, there are safety and environmental requirements in the Canada Shipping Act, 2001 (CSA 2001) that apply to you and your veseel. The SVCP is not mandatory, but meeting these requirements is.

The federal government set out the objective and strategy of the program on its introduction.

Objective of the Program: To support safety in the small vessel community by increasing understanding of and compliance with legal requirements

Strategy of the Program:

  • Provide guidance and easy-to-use tools for small vessel owners/operators
  • Help small vessel owners/operators understand and meet all of their obligations under the Canada Shipping Act, 2001
  • Monitor the compliance of small vessel operations

The program is a practical response to the large number of small commercial vessels in existence, the concern for safety which has been paramount since the occurrence of a number of small vessel incidents involving passengers (for example, two children drowning on the vessel “True North II”), and the lack of government resources (inspectors) to effectively enforce the compliance with the legislation that exists.

The program has its origins in the July 2007 Canada Shipping Act 2001 changes to the Voyage classes for small commercial craft. Where there used to be ten voyage class definitions, there are now just four: Sheltered Waters Voyage; Near Coastal Voyage, Class 1; Near Coastal Voyage, Class 2; and Unlimited Voyage.

In April 2010 the government continued its legislative changes for small commercial craft with changes in construction requirements. A vessel built, imported or converted to commercial use prior to April 29 2010 was required to meet the non-pleasure craft requirements of the 2004 edition of the Construction Standards for Small Vessels (TP 1332), or, as applicable, the alternatives set out for vessels built before April 2005 in the Small Vessel Regulations. A vessel built, imported or converted to commercial use after April 29 2010 is now required to meet the non-pleasure craft construction requirements of the Small Vessel Regulations and the 2010 edition of the Construction Standards for Small Vessels (TP 1332).

For vessels more than 6 metres long, the requirements for pleasure craft and non-pleasure vessels are not the same. Vessel owners and operators must be aware that if they intend to use a vessel that is more than 6 metres long that was built to the pleasure craft requirements, it may have to meet additional construction requirements before they can use it commercially.

Depending on the type and the use of the vessel, these may include such things as a stability assessment, bilge pumping arrangements and additional fire safety equipment.

Commercial vessels must be designed, built and equipped to operate safely in their area of operation and must be operated in a way that respects their design limitations. This means the owner and operator must know both the vessel and the area where it is operate in.

The requirements for crewing, construction and equipment may change from one voyage class to another. Voyage classes are defined in the Interpretation section of the Vessel Certificates Regulations and are mainly based on distance from shore and, in some cases, nearest place of refuge. The following is a short description the each class.

Voyage Classes

Sheltered Waters Voyage – a voyage that is in Canada on a lake or a river above tidal waters, where a vessel can never be further than 1 nautical mile from the shore, or that is on the waters listed in Schedules 1 and 2 of the Vessel Certificates Regulations.

Near Coastal Voyage, Class 2 – a voyage, other than a Sheltered Waters Voyage, during which the vessel is always within 25 nautical miles from shore in coastal waters of Canada, the United States (except Hawaii) or Saint Pierre and Miquelon, and within 100 nautical miles from a place of refuge. Near Coastal Voyage, Class 1 – a voyage that is not a Sheltered Waters Voyage or a Near Coastal Voyage, Class 2; that is between places in Canada, the United States (except Hawaii), Saint Pierre and Miquelon, the West Indies, Mexico, Central America or the northeast coast of South America; and during which the vessel is always north of latitude 6°N, and within 200 nautical miles from shore or above the continental shelf.

Unlimited Voyage – a voyage that is not a Sheltered Waters Voyage or a Near Coastal Voyage.

Owners and operators must also respect any additional restrictions/requirements noted on the Notice of Inspection, if one has been issued to the vessel. Such restrictions are based on an assessment of the vessel’s design, the crew’s qualifications and the equipment carried on board. The Notice of Inspection may also define limits for the area the vessel can operate in or set environmental conditions (e.g., wave height and wind speed) and other voyage restrictions.

The Small Vessel Regulations contain safety requirements for five categories of vessels. Which requirements apply depends on the vessel’s purpose (what it is used for).

Table 1 indicates which parts of the Small Vessel Regulations apply to each category. Requirements of other regulations, such as the Collision Regulations, also apply to small vessels.

The Small Vessel Compliance Program is presently undergoing an assessment to determine if it has been effective in increasing compliance. Owners and operators have concurrently seen a stronger determination by Transport Canada inspectors to have boat owners fully comply with regulations. “You must comply” attitude is across all regions.

As reported in our February 2012 Newsletter on March 1st, 2012 the Canadian Federal Government introduced its discussion paper on the proposed regulations respecting compulsory insurance for ships carrying passengers. The objective of the regulations is described as:

[T]o ensure that marine carriers engaged in domestic carriage of passengers in Canada maintain insurance to cover their liability to those passengers. Such regulations, governing various forms of compulsory insurance, are the norm in other modes of transport (air, rail, and road) and marine passengers should expect to find the same safeguards in the marine mode.

As with the introduction of the SVCP, the initiative has its origins in an accident which occurred on June 16, 2000. The tour boat “True North II” sank in 15 metres of water in Georgian Bay resulting in the drowning of two teenage children. The inquest found that the owner-operator was not insured and recommended compulsory insurance for commercial vessels carrying passengers. Following the incident, the Minister of Transport made a commitment in 2001 to the House of Commons Standing Committee on Transport and Government Operations to enact regulations requiring compulsory insurance for ships carrying passengers.

The latest information from Transport Canada is that the legislation will come into force in the early spring of 2013.

Rui Fernandes

*1 This article has borrowed heavily from publication TP 14070E(2010).  


In Siena-Foods Limited v. Old Republic Insurance Company of Canada (*1), the Court of Appeal for Ontario recently reaffirmed the principles regarding direct compensation for property damage under section 263 of the Insurance Act regarding a vehicle lessee’s claim under the lessor’s insurance policy with Old Republic Insurance Company of Canada.

Section 263 of the Insurance Act states that an insured has recourse against its insurer and not against the at-fault driver for claims of property damage to the insured’s automobile or contents in respect of an accident involving two or more insured automobiles. The insurer cannot subrogate against the at-fault driver. The enactment of this section was intended to reduce transaction costs of subrogation claims between insurers.

Siena-Foods Limited rented a tractor and trailer from Ryder Truck Rental Canada Ltd. on May 21, 2009 to transport a food packaging machine. As part of this rental agreement, Siena-Foods and Ryder Truck signed an agreement that contained a provision for liability insurance, but excluded coverage for damage to Siena-Foods’ property. The rental agreement also contained a representation from Siena-Foods that the cargo to be carried was produce, which was obviously not the case.

On May 29, the tractor-trailer carrying the food packaging machine collided with another truck (which was considered at fault) in Durham, Ontario. Siena-Foods’ machine was damaged as a result of the collision. Siena-Foods sought payment for the damaged food packaging machine from Ryder Truck’s insurance company, Old Republic.

Old Republic denied coverage and brought a motion before Justice Roberts, posing three questions of law:

1. Is Old Republic the “insurer” of Siena-Foods for the purposes of s. 263(2) of the Insurance Act?

2. If Old Republic is Siena-Foods’ insurer for the purposes of s. 263(2), do the terms and conditions in the rental agreement between Siena-Foods and Ryder Truck limit Siena-Foods’ recovery?

3. If Siena-Foods misrepresented to Ryder Truck the type of cargo it was carrying, does this impact its recovery from Old Republic under s. 263(2) of the Insurance Act? (*2).

Justice Roberts ruled, as follows, in relation to these three issues:

1. Old Republic was not an insurer for the purposes of s. 263; 2. That the terms and conditions of the rental agreement limit Siena-Foods’ recovery; and 3. Siena-Foods misrepresentation of the type of cargo carried does impact its recovery under s. 263.

On appeal, the motion judge’s was overturned.

With respect to the first issue, the Court of Appeal held that the proper regime was that under section 263 of the Insurance Act (dealing with direct compensation for property damage) and not section 247 (governing third party liability coverage), because Siena-Foods’ claim was for damage to its own property which was clearly not a third party liability claim. As per section 263, Ryder Truck was entitled to claim for damage to the tractor-trailer and contents from its insurer Old Republic, and, as per the terms of its policy with Old Republic, it had also extended this coverage to lessees (in this case, Siena-Foods).

The court referred to two prior decisions to summarize the history of the enactment of section 263:

In Clarendon National Insurance v. Candow, 2007 ONCA 680, 87 O.R. (3d) 728, at para. 7, Juriansz J.A. explained the direct compensation scheme in s. 263:

Section 263 of the Insurance Act replaced the tort system that resolved automobile damage claims prior to its enactment. In the new statutory scheme, insureds can no longer sue the tortfeasor driver whose negligence has caused damage to their cars. Rather, their own liability insurer pays for the damage, to the extent that they were not at fault, under the third party liability section of their motor vehicle liability policies. Insureds can recover the at-fault portion of their damage by purchasing collision coverage. Insurers have no right of subrogation for payments to their own insureds, but, on the other hand, do not have to pay the subrogated claims previously brought by other insurers in the tort system. The result is that the statutory regime eliminates the transactions costs that were inherent in the tort system. (*3)

And further, it quoted from Justice Sharpe in McCourt Cartage Ltd. (c.o.b. Laser Transport) v. Fleming Estate (Litigation Administrator of) (1997), 35 OR (3d) 795 (Gen. Div.):

Before the enactment of s. 263, the common law tort regime applied to property damage claims. The result was that where an insured had purchased collision damage cover, and where the accident was caused at least in part by the fault of another driver, two insurers became involved. The insured would claim against his own insurer under the collision coverage, and that insurer would assert a subrogated claim against the insurer of the other driver to the extent of the other driver’s fault. The intended effect of s. 263 was to remove the insured’s right to sue for property damage and to confer the right to claim such losses not caused by the fault of the insured against one’s own insurer. In the words of Somers J. in 583809 Ontario Ltd. v. Kay, [1995] O.J. No. 1626, the section was intended

“to bring to an end claims which were really made by one insurance company against another in the names of their respective insureds strictly for the property damage that had occurred in an accident.”

See also Bassie v. Warren J. Brown Bituminous Paving Co., [1993] I.L.R. 2357, adopting Allan O’Donnell, Automobile Insurance in Ontario (1991), at p. 51:

“… under the new system with the exceptions outlined below [none of which apply here],subrogation has been abolished. Thus, we have a “knock for knock” system whereby each insurer absorbs most of its policyholders’ property damage claims without attempting to recover same from the insurers of tortfeasors causing such claims.” (*4).

The provision in section 6.1 of the standard form Ontario Automobile Policy reflects the provision of section 263 in the Act. The Court of Appeal held that Old Republic is Siena-Foods’ insurer for the purposes of Siena-Foods’ property damage claim, in accordance with a basic application of section 263 of the Insurance Act. (*5).

With respect to the second issue, the Court of Appeal reversed the motion judge and held that the rental agreement between Ryder Truck and Siena-Foods did not affect Old Republic’s obligation to indemnify Siena-Foods. Old Republic was “not a party to the rental agreement, and the rental agreement [was] not part of the automobile insurance policy between Ryder [Truck] and Old Republic”. (*6).

Finally, the Court of Appeal considered the third issue of whether Siena-Foods’ misrepresentation that the cargo contents were produce affected Siena-Foods’ recovery rights against Old Republic. The Court of Appeal concluded that this misrepresentation did not affect its entitlement to recovery. First, under section 264 of the Insurance Act, Siena-Foods is treated as a third party which results in it recovering from Old Republic even though it was not a party to the insurance contract between Old Republic and Ryder Truck. Therefore, Siena-Foods’ right to recover under section 263 is “unaffected” by any misrepresentation. (*7). Second, for Old Republic to terminate coverage vis-à-vis Siena-Foods, it was required to do so in accordance with the Insurance Act, the statutory conditions, and the Compulsory Automobile Insurance Act, which required, at a minimum, notice before termination. (*8).

Siena-Foods’ appeal was therefore allowed and the motion judge’s order against it regarding the three stated questions of law was set aside.

Kimberly Newton

*1 2012 ONCA 583. *2 Ibid., at para. 2. *3 Ibid. at para. 22. *4 Ibid. at para. 23. *5 Ibid. at para. 26. *6 Ibid. at para. 29. *7 Ibid. at para. 32. *8 Ibid. at para. 33.

This newsletter is published to keep our clients and friends informed of new and important legal developments. It is intended for information purposes only and does not constitute legal advice. You should not act or fail to act on anything based on any of the material contained herein without first consulting with a lawyer. The reading, sending or receiving of information from or via the newsletter does not create a lawyer-client relationship. Unless otherwise noted, all content on this newsletter (the “Content”) including images, illustrations, designs, icons, photographs, and written and other materials are copyrights, trade-marks and/or other intellectual properties owned, controlled or licensed by Fernandes Hearn LLP. The Content may not be otherwise used, reproduced, broadcast, published,or retransmitted without the prior written permission of Fernandes Hearn LLP.

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