



COURT OF APPEAL FOR ONTARIO

CITATION: Merino v. ING Insurance Company of Canada, 2019
ONCA 326

DATE: 20190425

DOCKET: C64596

Feldman, Pepall and Pardu JJ.A.

BETWEEN

Karla Garay Merino, Margarita Merino, Adis Perez
Charles and Lou Ann Garay

Appellants (Plaintiffs)

and

ING Insurance Company of Canada, also known as,
or formerly, ING Halifax Insurance Company

Respondents (Defendant)

Myron W. Shulgan and Donald W. Leschied, for the appellants

Douglas A. Wallace and Sean T. Miller, for the
respondents

Heard: October 15, 2018

On appeal from the judgment of Justice Gregory J. Verbeem
of the Superior Court of Justice, dated October 20, 2017, with reasons reported
at 2017 ONSC 6281.

Feldman J.A.:

Introduction

[1]

The appellant, Karla Merino, a pedestrian, was catastrophically injured when
she was struck by a car driven by Timothy Klue. Mr. Klue and his wife, Sonia Abou-Khalil,
were joint owners of the car. They had applied for automobile insurance
coverage over three months before the accident and the respondent insurer had
issued a one-year policy. However, because of misrepresentations in the
application regarding Ms. Abou-Khalils driving record, the respondent insurer
purported to rescind the policy shortly after issuing it, a couple of months
before the accident. Mr. Klue did not drive the car from then until the day of
the accident.

[2]

By Statement of Claim issued on August 19, 2004, the appellants sued Mr.
Klue and Ms. Abou-Khalil, and obtained judgment on July 28, 2011 for
$2,000,000. Having been told by the respondent that Mr. Klue and Ms.
Abou-Khalil were not insured by it because the policy had been rescinded, the
appellants also sued Ms. Merinos mothers insurer, Allianz, in the same action
pursuant to the uninsured automobile coverage it provided to the appellants. After
non-pecuniary accident benefits of $181,107 paid by the Société de lassurance
automobile du Québec were deducted, Ms. Merino obtained a net award of $18,893
against Allianz. The respondent did not seek to be added to that action.

[3]

In the context of an arbitration hearing regarding a dispute among
insurers over the obligation to pay accident benefits, the respondent insurer delivered
a copy of its underwriting file to counsel for the appellants on September 1,
2005. However, the respondent insurer continued to contend that the policy had
been rescinded before the accident.

[4]

On April 16, 2012, after obtaining judgment against Mr. Klue, Ms.
Abou-Khalil, and Allianz, the appellants commenced the action under appeal
against the respondent insurer under s. 258(1) of the
Insurance Act
,
R.S.O. 1990, c. I.8 (the 
Insurance Act
 or the Act) on the basis
that the insurance contract had not been properly terminated by the respondent,
and Mr. Klue and Ms. Abou-Khalil were in fact insured by the respondent on the
date of the accident.

[5]

On summary judgment, the motion judge was required to determine whether
the respondent insurer was entitled to rescind the insurance contract with Mr.
Klue and Ms. Abou-Khalil, and if so, whether the purported rescission had the
effect of precluding the injured appellant, as an innocent third party, from
making a claim against the respondent under s. 258(1) of the
Insurance Act
. That section
provides:

Any person who has a
claim against an insured for which indemnity is provided by a contract
evidenced by a motor vehicle liability policy, even if such person is not a
party to the contract, may, upon recovering a judgment therefor in any province
or territory of Canada against the insured, have the insurance money payable
under the contract applied in or towards satisfaction of the persons judgment
and of any other judgments or claims against the insured covered by the
contract and may, on the persons own behalf and on behalf of all persons
having such judgments or claims, maintain an action against the insurer to have
the insurance money so applied.

[6]

The motion judge dismissed the appellants action on summary judgment. He
found that the respondent insurer was entitled to rescind the insurance
contract based on material misrepresentation, making it void
ab
initio
;
that it had done so effectively; and that, as a result, s. 258(1) was not
available to the appellants, as there was no contract with the respondent that
provided indemnity to the at-fault driver or owner at the time of the accident.

[7]

The appellants appealed each of those findings. For the reasons that
follow, I would allow the appeal. The scheme of the automobile insurance provisions
of the Act prescribes how an insurer may terminate its obligations under a
contract it has issued, including for misrepresentation. That scheme makes it
clear that an insurer may not effectively rescind a contract at common law,
making it void
ab initio
; it must comply with the
Act
. One of the sections in that scheme
is s. 258, which allows innocent third parties to sue and recover from the
at-fault drivers insurer, at least up to the statutory minimum liability coverage
of $200,000 prescribed in s. 251, as long as the automobile insurance contract had
not been validly terminated by the insurer before the accident.

Factual Background

(1)

The insurance policy issued by the respondent

[8]

On May 29, 2002, Mr. Klue and his spouse, Ms. Abou-Khalil, attended at
the offices of Gulliver Insurance Brokers in Windsor. There, an application for
insurance for a one-year coverage term for both of them as owners and drivers
of a 1994 Jeep Cherokee was executed by Mr. Klue but not by Ms. Abou-Khalil,
and was submitted to the respondent. The application contained accurate
information about Mr. Klue and his past driving record, which was clean, but
inaccurate information about Ms. Abou-Khalils record, which was not clean.
Gulliver provided a 30-day binder to both as insureds, followed by a one-year
automobile insurance contract.

[9]

The respondents subsequent underwriting investigation disclosed Ms.
Abou-Khalils true driving record, which included an at-fault accident,
convictions for speeding and careless driving, a license suspension for
non-payment of fines, and the cancellation of a previous policy for non-payment
of premiums. The respondent therefore decided to treat the insurance contract
as void based on misrepresentation or failure to disclose required information.

[10]

On
July 2 2002, the respondent sent a registered letter to the insureds, advising
that because of the non-disclosure of Ms. Abou-Khalils previous driving
record, the insurance coverage was void from the inception date and their
right of indemnity was forfeited. Both Mr. Klue and Ms. Abou-Khalil read the
letter. Believing that the vehicle was uninsured, they did not drive it until Mr.
Klue drove on the date of the accident, after he had lost his job and consumed
alcohol.

(2)

The accident

[11]

The
accident occurred on September 12, 2002. The appellant, Ms. Karla Merino, was a
University student at the time. As she was crossing the road, she was hit by Mr.
Klue, driving the 1994 Jeep. She was catastrophically injured as a result.

(3)

The action against the owner and driver and the claim for uninsured
coverage

[12]

On
March 19, 2003, counsel for the appellants wrote to Ms. Abou-Khalil giving
notice of the accident and the claim and asking her to notify her insurer, the
respondent, identifying a specific policy number. A field adjuster for the
respondent responded on March 25, 2003, stating that neither Ms. Abou-Khalil
nor Mr. Klue had an automobile policy with the respondent, and enclosed a copy
of the letter that the respondent had sent to them purporting to rescind their
insurance policy.

[13]

As
a result of the respondents position, the appellants sued the owners and
driver of the car, Mr. Klue and Ms. Abou-Khalil, as well as Allianz, Ms. Merinos
mothers insurer, for uninsured motorist coverage. Mr. Klue and Ms. Abou-Khalil
did not defend the action, but through counsel appointed by the Superintendent
of Insurance, Mr. Klues liability was admitted. The respondent was not joined
in the action as a third party. Following trial, in July 2011, the appellants
obtained judgment against Mr. Klue and Ms. Abou-Khalil in the amount of
$2,000,000, but they were unable to collect from them. Since the accident was
in Ontario, the Allianz policy was required to provide coverage of $200,000,
the minimum limits of uninsured coverage in accordance with the Ontario
Insurance
Act
. The appellant also received accident benefits paid by the Société de lassurance
automobile du Québec. After deduction of the non-pecuniary benefits, she
recovered a net award of $18,893.00 plus interest from Allianz.

(4)

The action against the respondent

[14]

In
the context of the 2005 accident benefits arbitration, which was a dispute
among insurers, counsel for the appellants obtained the respondents complete
underwriting file on the policy it had issued to Mr. Klue and Ms. Abou-Khalil. While
the respondent continued to maintain that it had validly rescinded the policy, in
April 2012, the appellants brought the within action under s. 258(1) of the
Insurance
Act
against the respondent on the basis that the policy was not validly
terminated before the accident. Both sides brought summary judgment motions.

(5)

The motion judges findings

[15]

The
motion judge found that the
Insurance Act
provisions that govern how
an automobile insurer may terminate an automobile policy and the effect of
termination do not preclude an automobile insurer from rescinding a contract at
common law and making the contract void
ab initio
.
He concluded
that the respondent was entitled to rescind its contract with the insureds, Mr.
Klue and Ms. Abou-Khalil, based on material misrepresentation, and that the
respondents July 2, 2002 letter to them had the effect of rescinding their
insurance contract, making it void
ab initio
and of no effect.

[16]

On
this summary judgment motion, in order to determine whether the respondent had
the right to rescind, the motion judge had to decide whether there was a
genuine issue requiring a trial regarding the events surrounding the
application, including the materiality of the misrepresentation, how it
happened that Mr. Klue signed the application and not Ms. Abou-Khalil, whether
he signed on her behalf, and whether either of them knew that the application
contained false information about her driving record. The information before
the court consisted of: (1) the transcripts or partial transcripts of the
examinations for discovery of Mr. Klue and Ms. Abou-Khalil, taken in 2006 for
the appellants original action against them; (2) some hearsay information from
the Gulliver representative contained in a letter from Gullivers solicitor to
INGs solicitor; and, (3) some unsworn and undated statements. The motion judge
gave no effect to the latter evidence.

[17]

The
motion judge concluded that because the record before him was what it would be
at a future trial, there was no purpose in deferring any issue to a trial. He
noted that by 2006, Mr. Klue said he did not have a specific recall of what
occurred during the meeting at the brokerage. By the time of the motions, 15
years had passed since the accident.

[18]

I
will discuss the details of the motion judges findings with respect to the
misrepresentation in the context of the analysis of that issue on the appeal.

[19]

Having
found that the respondent had validly rescinded the insurance contract, the
motion judge went on to consider whether the appellants could still sue the
respondent for indemnity under s 258(1) of the Act. In concluding that they
could not, the motion judge found that this case was distinguishable from the
case law that held that ss. 258(4) and (5) precluded a defence based on
misrepresentation. In the cases where the court applied ss. 258(4) and (5), the
insurer had sought to avoid its obligations only after the accident on the
basis that the misrepresentation in the application voided the contract, whereas
in this case, the insurer rescinded the contract before the accident. Because
the contract was rescinded before the date of the accident, the appellants
could not recover under s. 258(1) because there was no contract of indemnity in
place when the accident occurred.

[20]

As
a result of these findings, it was not necessary to address other issues,
including whether the appellants had waived their rights under s. 258(1) by
electing to seek coverage based on the vehicle being uninsured, the quantum of
any damages claimed, and whether the respondent could rely on ss. 258(11) because
it had not been properly pleaded.

Issues

[21]

The
following issues are raised on this appeal:

1)

Are the appellants entitled to recover against the respondent under s.
258(1) of the
Insurance Act
if the contract was not validly rescinded?

2)

Is an automobile insurer entitled to rescind an automobile insurance
contract at common law, making it void
ab initio
, based on
misrepresentation in the application?

3)

If the contract was not validly rescinded, is the appellants recovery
limited to the statutory minimum of $200,000 under s. 251 of the
Insurance Act
,
based on the defence of knowing misrepresentation, asserted under s. 258(11)?

4)

Are the appellants
barred from recovery under s. 258(1), based on the doctrine of waiver or abuse
of process, because they initially pursued uninsured motorist claims against
Allianz?

Analysis

(a)

Issue 1: Are the appellants entitled to recover against the respondent
under s. 258(1) of the
Insurance Act
if the contract was not validly
rescinded?

[22]

Subsections
258(1), (4) and (5) are known as the absolute liability provisions of the
Insurance
Act
:
Campanaro v. Kim
(1998), 41 O.R. (3d) 545, at p. 547 (C.A.).
Subsection (1) permits an injured plaintiff who has recovered judgment against
a negligent driver to sue the drivers automobile insurer directly and have the
insurance money payable under the contract applied in satisfaction of the
judgment. Subsections (4) and (5) preclude the insurer from defending on the
basis that because the insured made a misrepresentation in the application for
insurance, including a misrepresentation as to ownership of the vehicle, there never
was an insurance policy. However, subsection (11) limits that restriction to
the $200,000 minimum liability that every automobile policy is required to
provide under s. 251.

[23]

Subsections
(4) and (5) provide:

258(4)
The right of a person who is
entitled under subsection (1) to have insurance money applied upon the persons
judgment or claim is not prejudiced by,

(a) an assignment, waiver,
surrender, cancellation or discharge of the contract, or of any interest therein
or of the proceeds thereof, made by the insured after the happening of the
event giving rise to a claim under the contract;

(b) any act or default of the
insured before or after that event in contravention of this Part or of the
terms of the contract; or

(c) any contravention of the
Criminal
Code
(Canada) or a statute of any province or territory of Canada or of any
state or the District of Columbia of the United States of America by the owner
or driver of the automobile,

and nothing mentioned in clause (a),
(b) or (c) is available to the insurer as a defence in an action brought under
subsection (1).

(5) It is not a defence to an action under this section
that an instrument issued as a motor vehicle liability policy by a person
engaged in the business of an insurer and alleged by a party to the action to
be such a policy is not a motor vehicle liability policy, and this section
applies with necessary modifications to the instrument.

[24]

Subsection
(5) was added to the Act in 1947 to overcome and preclude the interpretation
given to the comparable section in the New Brunswick Act by the New Brunswick
Court of Appeal in
Bourgeois v. Prudential
,
[1946] 1 D.L.R. 139 (N.B.C.A.).
In
Bourgeois
, the court
held that in the case of a material misrepresentation by an insured as to
ownership of the vehicle, there was no insurance policy because the policy
never came into existence.

[25]

However,
despite the addition of subsection (5), this court held in
Ministry of
Transport et al v. London & Midland General Insurance Co.
, [1971] 3 O.R. 147-149 (C.A.)
, that an insurer
could still defend a third-party action if the insureds misrepresentation was
with respect to the ownership of the vehicle. The court found that where the
insured misrepresents that he is the owner of the vehicle, the policy cannot be
an owners policy and therefore cannot cover the risk.

[26]

In
Campanaro
, a five-judge panel of this court was struck to reconsider
London
& Midland
and to clarify the extent of the protection the legislature
intended to provide to third parties in s. 258. Osborne J.A., speaking for the
court, made the following statements, at pp. 560, 562, 563:

I think that it is clear that the 1947
Insurance Act
amendment was intended to overcome the effect of
Bourgeois
and
preclude an insurer from defending an innocent third party judgment creditors
claim on the basis of any material misrepresentation, including a
misrepresentation as to ownership of the insured automobile.



In my opinion, for the purposes of the action contemplated by
s.258(1), s. 258(5) prevents the insurer from relying upon material
representations made by, or on behalf of, the named insured, if the insurer
issued an instrument as a motor vehicle liability policy.



With respect, I think that in exempting one type of
misrepresentation, that is a misrepresentation about ownership, from the
defence-limiting provisions of s. 258(5),
London & Midland
was wrongly
decided. In my opinion, if s. 258(5) precludes the insurer from contending that
the instrument it issued as a motor vehicle liability policy is not a motor vehicle
liability policy, it must follow that the insurer cannot rely on any
misrepresentation which, if given effect to, would result in the instrument
issued by the insurer as a motor vehicle liability policy being taken not to be
a motor vehicle liability policy.

[27]

Osborne
J.A. also explained that the addition of uninsured motorist coverage as part of
the no-fault scheme for comprehensive coverage does not influence or change the
interpretation of s. 258 in order to relieve the insurer from its absolute liability
obligation imposed by that section. He commented, at p. 563, that:

The absolute liability provisions
of s. 258 have remained unchanged since the introduction of uninsured motorist
coverage. It seems to me that the language of s. 258 is clear and I see no
basis to change the interpretation of the section because there is another available
payer. In the present scheme of things the tortfeasors insurer is the first
payer.

[28]

To
summarize, the court found and clearly stated that s. 258(1) applies to give an
injured third party the right to collect his or her judgment against the
at-fault driver from that drivers insurer where the insurer issued an
automobile insurance policy that provided for indemnity, regardless of any
misrepresentation that the insured may have made in the application for
insurance.

[29]

The
motion judge acknowledged the meaning and legal effect of s. 258. However, he
observed that in every reported case where the insurer sought to rely, as a
defence under s. 258(1), on a misrepresentation by the insured in the
application to obtain the policy, the policy had not been validly terminated
before the accident. Conversely, in this case, the insurer rescinded the
insurance contract before the accident occurred. Therefore, there was no policy
in existence at the date of the accident in this case, not because of the legal
effect of misrepresentation, but because the policy had actually been rescinded
before the accident occurred. The motion judge accordingly found that because
the respondent rescinded the insurance contract
ab initio
, and there
was no contract at the date of the accident, s. 258 of the Act did not apply.

[30]

I
agree with the motion judge that s. 258 can have no application where an
automobile insurance policy is no longer in existence at the date of the
accident because it was properly and effectively terminated by either party
before that date. However, in this case, the respondent did not terminate the
contract in accordance with the provisions of the Act and the regulations: see
infra
,
at paras. 32-34 of these reasons. Therefore, the next issue is whether the
motion judge erred in law by finding that an automobile insurer may effectively
terminate the contract by rescinding the contract
ab initio
at common
law, and that the respondent did so in this case.

(b)

Issue 2: Is an automobile insurer entitled to rescind an automobile
insurance contract at common law, making it void
ab initio
, based on
misrepresentation in the application?

[31]

For
the reasons that follow, I conclude that the motion judge erred in finding that
the respondent was entitled to rescind the contract at common law based on
misrepresentation in the application, making it void
ab initio
. After
summarizing the motion judges reasons for concluding that the respondent was
entitled to rescind the contract in this manner, I will explain why, in my
view, he erred in so finding.

(i)

The motion judges reasons

[32]

In
dealing with the rescission issue, the motion judge first considered the common
law right of a party to rescind a contract that was induced by a material
misrepresentation. Referring to the written application for insurance that was
signed by Mr. Klue but contained information about both applicants, the motion
judge found that the misstatement or omission of the significant negative features
of Ms. Abou-Khalils driving record in the application constituted a material
misrepresentation that entitled the respondent to rescind the contract.
Further, he found that the respondent had in fact rescinded the contract by its
July 2, 2002 letter.

[33]

Second,
in discussing the options open to an insurer to avoid liability under an
automobile policy, the motion judge set out the termination provisions of the
Act and the regulations. Section 11 of O. Reg. 777/93 (the Regulation)
provides the methods by which an insurer may terminate an automobile insurance contract.
Under that section, an insurer may either give 15 days notice by registered
mail, or five days notice by personal delivery. In both cases, the insurer
must refund the excess premium paid by the insured. However, an insurers
ability to terminate a contract by notice and return of premium is not
unlimited. Section 11 is subject to s. 12 of the
Compulsory Automobile
Insurance Act
,
R.S.O. 1990, c. C.25,
which precludes
an insurer from terminating a contract after 60 days, except in four prescribed
circumstances. One of those circumstances is where there has been a knowing
misrepresentation of a fact in an insurance application.

[34]

While
the respondent could have terminated the policy it issued in accordance with s.
11, it did not do so. The July 2, 2002 letter was sent by registered mail, but
it did not give 15 days notice of termination. There was no return of premium
because no premium had been paid. Because the contract was not terminated in
accordance with the Regulation, if the respondents attempt to rescind was not
effective, the contract remained in force and the respondents position would
be governed by ss. 233 and 258 of the Act

[35]

Third,
the motion judge discussed s. 233 of the Act, which provides the consequences as
between the insured and the insurer of a knowing misrepresentation made by the
insured in a signed written application for insurance.

[36]

Section
233 provides that:

(1) Where,

(a) an applicant for a contract,

(i) gives false particulars of the
described automobile to be insured to the prejudice of the insurer, or

(ii) knowingly misrepresents or
fails to disclose in the application any fact required to be stated therein;

(b) the insured contravenes a term of
the contract or commits a fraud; or

(c) the insured wilfully makes a false
statement in respect of a claim under the contract,

a claim by the insured
is invalid and the right of the insured to recover indemnity is forfeited.

(2) Subsection (1) does not invalidate
such statutory accident benefits as are set out in the
Statutory
Accident Benefits Schedule
.


(3) No
statement of the applicant shall be used in defence of a claim under the
contract unless it is contained in the signed written application therefor or,
where no signed written application is made, in the purported application, or
part thereof, that is embodied in, endorsed upon or attached to the policy.

[37]

The
section does not contain the terms void or voidable. It neither requires nor
contemplates any action by an insurer to terminate the contract. Rather, it
describes the consequences, as between the insured and the insurer, when the
insured has knowingly misrepresented or omitted a fact in a signed application.
Those consequences are three-fold: 1) a claim by the insured (for own property
damage or own loss due to injury) is invalid; 2) the right of the insured to
recover indemnity (from a claim by a third party who suffered damage where the
insured was at fault) is forfeited; but 3) the insured remains entitled to certain
statutory accident benefits under the
Statutory Accident Benefits Schedule
:
see O. Reg. 403/96, s. 30.

[38]

While
a number of cases still express the effect of s. 233 as rendering the contract
void as between the insurer and the insured
[1]
,
it is clear that that language is intended to do no more than reflect the
express consequences of s. 233, which makes claims by the insured for personal loss
or indemnity invalid and unrecoverable. As Wittman J.A. stated in
Schoff v.
Royal Insurance Co of Canada
,
2004 ABCA 180, 348 A.R. 366, at para 49, s. 613 [of the Alberta Act], however,
only renders the insureds claim invalid. It does not end all of the insurers
obligations. He went on to refer to the insurers direct obligation to third
parties under the Alberta equivalent of s. 258(1) of the Act.

[39]

The
motion judge noted that the appellants provided no authority to support their
position that rescission was not an available alternative remedy for an insurer
to either terminating under s. 11 of the Regulation or relying on s. 233 of the
Act, and concluded that an insurer may still elect the common law remedy of
rescission
ab initio
. In my view, for the following reasons, that
conclusion constitutes an error in law.

(ii)

Analysis

[40]

Automobile
insurance is compulsory in Ontario. Section 2(1) of the
Compulsory
Automobile Insurance Act
prohibits an owner or lessee of a vehicle from
driving it or permitting it to be operated unless the vehicle is insured under
a contract of automobile insurance. The purpose of the legislative policy requiring
all vehicles that operate on Ontario highways to be insured is to protect
innocent victims of automobile accidents, and to provide some statutory
accident benefits to everyone who is involved in an accident:
Matheson v.
Lewis
, 2014 ONCA 542, 121 O.R. (3d) 641, at paras. 20, 22;
Insurance
Act
, s. 233(2).

[41]

The
motion judges conclusion on this issue is inconsistent with the statutory
scheme created by the
Compulsory Automobile Insurance Act
and the
Insurance
Act
. If an insurer were permitted to rescind an insurance contract at
common law
ab initio
, a person who believed they were operating a
vehicle with insurance could have that contract rescinded with retroactive
effect, putting the person in automatic contravention of the
Compulsory
Automobile Insurance Act
, a result which is clearly inconsistent with the
intent of the legislature.

[42]

The
termination and renewal provisions of the Act and regulations provide notice
periods to allow an insured time and opportunity to obtain alternate coverage
when they receive notice that their insurance is going to be terminated or not
renewed. There are also restrictions on when an insurer may refuse to renew:
Compulsory
Automobile Insurance Act
, s. 12(1); O. Reg. 777/93, ss. 11(1.1), (1.2);
Insurance
Act
, ss. 236(1), (2). The purpose of these requirements is to ensure that
a person who drives a car always knows whether they are insured, so that they
can take steps to bridge any gap in their coverage, both for their own benefit
and for the benefit of other drivers. If they are not able to secure alternate
coverage, they must not drive the vehicle or allow it to be driven.

[43]

The
scheme of the Act and its regulations prescribes the rights and obligations of
the insured and the insurer under the automobile provisions, requires strict
compliance, and provides an orderly and predictable set of consequences for
compliance and non-
compliance. For example, if a
notice of termination does not comply with s. 11 of the Regulation, then the
insurance contract remains in force:
Ontario (Finance) v. Traders
General Insurance (Aviva Traders)
, 2018
ONCA 565, 142 O.R. (3d) 45, at para. 43
.
That predictable set of consequences would be undermined if an insurer could
circumvent the requirements
of the Act by rescinding the contract at
common law, making it void
ab initio
.

[44]

Sections
233 and 258 are consistent with the legislative scheme. Section 233 addresses
the rights of an insurer under an existing automobile contract that it did not
terminate before an accident, but which was obtained by an insured who
knowingly made misrepresentations in the applications for insurance. As I
discussed in para. 32, an insurer may terminate the contract of insurance for
misrepresentation by providing notice to the insured. However, if the insurer
does not take that step and an accident occurs, then s. 233 governs the rights
as between the insurer and the insured, while s. 258 gives the injured third
party the direct right to sue the at-fault drivers insurer.

[45]

Additionally,
unlike earlier statutory provisions, a misrepresentation does not render the
automobile insurance contract void under s. 233 of the Act. Prior to the
uniform automobile insurance legislation in 1932, which introduced the concept
of compulsory minimum third-party liability automobile insurance, the effect of
misrepresentation was to void the contract. Section 177(5) of
The Insurance
Act
, R.S.O. 1927, c. 222 then provided:

Upon every written application there shall be printed
or stamped in conspicuous type, not less in size than ten point, and in red
ink, the following words:

If the applicant falsely describes the property
to the prejudice of the insurer or knowingly misrepresents or conceals or omits
to communicate any circumstances required by this application to be made known
to the insurer,
the contract shall be void as to the property insured or
risk undertaken in respect of which the misrepresentation or omission is made.
[Emphasis added.]

[46]

Appellate
cases interpreting the pre-1932 version of the misrepresentation provision held
that untrue statements in the application for insurance rendered the policy
void and, in first-party claims, insureds were unable to recover under the
policy:
Rocco v. Northwestern National Insurance Co.
, [1930] 1 D.L.R.
472 (Ont. S.C.A.D.);
Holdaway v. British Crown Assurance Corp.
, [1925]
3 D.L.R. 269 (Ont. S.C.A.D.).

[47]

That
is no longer the law. Under s. 233, a misrepresentation does not render the
contract void; it is neither terminated, nor rescinded as void
ab initio
:
see Craig Brown and Thomas Donnelly,
Insurance Law in Canada
(Toronto:
Thomson Reuters Canada Ltd., 2002) (loose-leaf updated 2019, release 1), at p.
5-14, n. 63. The contract remains in effect, but the insureds rights are
limited to his or her right to receive certain statutory accident benefits; the
insurer is not obligated to compensate the insured for other losses, or to
indemnify the insureds obligation to third parties. Also, because the
automobile insurance contract remains in effect, third parties injured by the
insured or the insureds automobile retain the right to recover the losses they
suffer from the insureds insurer under s. 258 of the Act.

[48]

Consequently,
allowing an insurer to rescind at common law for misrepresentation would undermine
the policy of the legislature in ss. 233 and 258 to provide certain statutory
accident benefits to every person who obtains a policy of insurance, including
by misrepresentation, and to provide protection to innocent third parties.

[49]

The
respondent relies on a statement made in
Hansra v. York Fire & Casualty
Insurance Co.
(1982), 38 O.R. (2d) 281 (Ont. Co. Ct), that an insurer has
three options when it learns of a misrepresentation in an insurance application:
it may a) refund the premium and treat the policy as void
ab initio
; b)
retain the premium and treat the policy as valid and subsisting; or c) treat
the policy as valid but cancel unilaterally in accordance with the statutory
conditions:
Hansra
, at p. 286. The motion judge also referred to this
statement.

[50]

However,
the statement in
Hansra
that an insurer may treat an automobile policy
as rescinded was made
per incuriam
, and does not represent the law in
Ontario. The case of
General Security Insurance Co. v. Howard Sand & Gravel
Co.
, [1954] S.C.R. 785 was cited as authority for the proposition, but
Howard
Sand
does not so state.
[2]
There is no analysis in
Hansra
of the issue, or of the conflict
between the policy of the automobile insurance scheme contained in the two Acts
 the
Insurance Act
and the
Compulsory Automobile Insurance Act
 and the ability of an automobile insurer to rescind
ab initio
.

[51]

The respondent also argued that t
his courts
decision in
Ontario (Finance) v. Elite Insurance Company
,

2018 ONCA
809, 143 O.R. (3d) 1, allows an automobile policy to be terminated other than
in accordance with the statutory provisions. In that case, the court upheld a
decision of an arbitrator who found that the insured and the insurer had
mutually agreed to terminate the policy. The case did not involve a unilateral
termination by the insurer. In upholding the arbitrators decision, the
majority found that on the facts of the case it was open to the arbitrator to
conclude that both the insured and the insurer had agreed to terminate the
policy, referring to the unfettered ability of an insured to terminate its
automobile policy under s. 11(2) of O.Reg. 777/93, and that s. 236(5) of the
Act did not preclude such an agreement. The court summarized its conclusion to
give deference to the arbitrators decision at para. 59, stating:

Section 236(5) may well oust the common law that a policy will
lapse when it is not renewed, but it does not preclude the consideration of
other circumstances that may have arisen and brought the policy to an end. In
my view, this is a reasonable interpretation that does not undermine the policy
behind s. 236(5) to ensure continuous coverage.

[52]

I
conclude that an automobile insurer in Ontario does not have the option of unilaterally
rescinding a contract of insurance at common law
ab initio
, but is
bound by the statutory scheme contained in the two Acts and the Regulation. The
rights and obligations of insurers and insureds, as well as those of injured
third parties, are governed by those statutory provisions.

(c)

Issue 3: Has the respondent proved the defence of knowing
misrepresentation in the application for insurance, and can it rely on s
258(11) to limit its liability to the statutory minimum of $200,000?

[53]

Section
251 of the
Insurance Act
provides that every motor vehicle liability
policy is required to insure for liability to a minimum amount of $200,000 for
any one accident. Section 258(11) allows an insurer to raise against a third-party
claimant any defence it could have raised against its insured in respect of any
amount of coverage that the policy provides that exceeds the $200,000 minimum.
In this case, the policy provided $1,000,000 of liability coverage. Therefore,
the respondent may raise the defence of knowing misrepresentation in respect of
the $800,000 coverage in the policy it issued to Mr. Klue and Ms. Abou-Khalil
that exceeds the statutory minimum requirement.

[54]

The
appellants submit that the respondent is precluded from relying on s. 258(11)
because, although it pleaded reliance on s. 258, it did not particularize this
subsection when asked. The motion judge did not find it necessary to deal with
this position.

[55]

I
would not give effect to this technical argument. Much of the focus of the
motion was on the issue of whether there was a material misrepresentation that
could be the basis for rescission. While the respondent relied mainly on its
rescission position, it also sought to minimize any liability it might have
based on the circumstances that occurred. It was clear that the respondent was
seeking to rely on a misrepresentation defence.

[56]

In
order to rely on the knowing misrepresentation defence, the insurer must prove
that the applicant for a contract knowingly misrepresent[ed] or fail[ed] to
disclose in the application any fact required to be stated therein:
Insurance
Act
, s. 233(1)(a)(ii). Further s. 233(3) goes on to specify that [n]o
statement of the applicant shall be used in defence of a claim under the
contract unless it is contained in the signed written application therefor.

[57]

In
this case, only Mr. Klue signed the application, while the misrepresented facts
related only to Ms. Abou-Khalils application for insurance. Section 232(1) of
the Act recognizes that an application may be signed by the insured or his
agent. Therefore, the first issue is whether Mr. Klue signed the application
as agent for Ms. Abou-Khalil.

[58]

Fortunately,
there was evidence in the record on that issue from Mr. Klue. In the
examination for discovery transcript of Mr. Klue from the tort action that was
filed on the motion, he was asked directly about the agency issue in the
following exchange. He clearly denied that he signed on Ms. Abou-Khalils behalf:

Q115.  When you were signing this application did you realize
you were signing on behalf of Sonia?

A.  No I didnt.

Q 118.  Heres my puzzle. The application on the face of it
says you and Sonia were applying for insurance and yet you signed the application,
not Sonia. Did you believe you were the one applying for insurance or that both
of you were?

A.  I cant answer that because regardless of whether were
both there it wouldnt have been my responsibility to sign for Sonia. Now if I
was asked to sign that document from their staff, then it would have been their
responsibility to ask Sonia to sign it as well.

Q 126.  Did you believe that you were signing for you and you
alone?

A.  I only sign for myself, sir. I cant forge other peoples
signatures.

[59]

There
was no other evidence in the record on the issue. The respondent did not
provide sworn evidence from either of the two insurance agents from Gulliver
who took the insurance application and witnessed Mr. Klues signature, and Mr.
MacLean, INGs Senior Claims Examiner, could provide no explanation for why Ms.
Abou-Khalil did not sign the application.

[60]

From
a procedural point of view, where s. 258(11) permits an insurer to avail itself
of any defence it is entitled to set up against the insured, including a
misrepresentation defence pursuant to s. 233, the onus is on the insurer to
prove a breach of the insureds disclosure obligation on a balance of
probabilities: Barbara Billingsley,
General Principles of Canadian
Insurance Law
2nd ed. (Markham: LexisNexis Canada Inc., 2014), at p. 114; Denis
Boivin,
Insurance Law
, 2nd ed., (Toronto: Irwin Law Inc., 2015), at p.
175;
Barsheshet
v. Aviva Canada Inc.
,
2015 ONSC
4439
, [2015] I.L.R. I-5766
.

[61]

In
the summary judgment context, because both parties moved for summary judgment,
at least as respondents they were each required to put their best foot forward.
Moreover, the motion judge found that, given the passage of time (15 years at
the time of the motions), he had the best evidence before him on the issues
surrounding the insurance application. I agree. As a result, it is appropriate
for this court to make the necessary findings based on the record that the
parties placed before the motion judge.

[62]

On
that record, there is no basis to find that Mr. Klue signed the application for
insurance as Ms. Abou-Khalils agent or on her behalf. He denied doing so, and
there is no evidence from the respondent that it had any contrary belief.

[63]

Since
Ms. Abou-Khalil was an applicant for insurance who did not sign the application
either personally or by her agent, the respondent cannot rely on the defence of
knowing misrepresentation contained in ss. 233(1)(a)(ii) and (3):

Ontario (Finance)
,
at para.
37;
Campanaro
,
at p. 550.

[64]

Another
position may be that, as the person who signed the application, Mr. Klue was
the applicant who made the misrepresentations. However, it is not possible to
find on a balance of probabilities that he knowingly misrepresented the facts
about Ms. Abou-Khalil. Had he signed as agent for his wife, her knowledge would
be the relevant knowledge:
Sleigh v. Stevenson
[1943] 4 D.L.R. 433, at
para. 42 (Ont. C.A.). However, as he did not do so, it is his knowledge that is
relevant.

[65]

The
motion judge did not make a finding that Mr. Klue knowingly misrepresented his
wifes driving record. The motion judge only went so far as to find that Mr.
Klue had the means to ask her whether the facts were true. Mr. Klue was not
asked on his discovery whether he knew the facts were false. Again, there is no
evidence from the agents on the point. In oral argument, counsel suggested that
one could speculate that a husband would know his wifes driving record.
However, because the issue was not explored in the evidence that was put before
the motion judge, there is no basis to draw that inference from the record.

[66]

In
conclusion, as the respondent did not prove the defence of knowing
misrepresentation, the appellants entitlement is not limited to the $200,000
minimum liability limit. They are entitled to the policy limit of $1,000,000,
subject to the waiver and abuse of process arguments.

(d)

Issue 4: Is the appellants claim under s. 258 barred by waiver or abuse
of process?

[67]

The
respondent submitted to the motion judge that if he found that the appellants
were entitled to claim under s. 258, their claim was barred by waiver and by
abuse of process. The motion judge did not find it necessary to deal with these
submissions because he found that the contract had been rescinded. The respondent
renews these positions on this appeal.

[68]

The
respondent says that by suing Allianz under the uninsured motorist provisions
of its policy on the basis that the 1994 Jeep was an uninsured vehicle, the
appellants waived their right to claim against the respondent under s. 258.
They rely on the Supreme Court of Canadas decision in
Saskatchewan River
Bungalows Ltd. v. Maritime Life Assurance Co.
, [1994] 2 S.C.R. 490.

[69]

This
submission can be dealt with summarily. While counsel for the appellants was
aware that the respondent had issued a policy to Mr. Klue and Ms. Abou-Khalil,
the reason the appellants resorted to a claim against Allianz under the
uninsured motorist coverage was because the respondent denied it had a contract
with them on the date of the accident.

[70]

As
the respondent properly states in its factum,
Saskatchewan River Bungalows
provides that, for waiver to be established, the waiving party must have had full
knowledge of its rights and an unequivocal and conscious intention to abandon
those rights. Not only was that clearly not the case here, but it lies ill in
the mouth of the respondent to suggest that it was when it was the respondent
that told the appellants counsel that it had no contract with the at-fault
driver.

[71]

Furthermore,
under s. 258(14), the respondent had the right to apply to be added as a third
party to the tort action. It did not take advantage of that right.

[72]

Nor
has the respondent provided any authority for the proposition that s. 258 can
be waived. It is a right of action given to an innocent third party. There is
nothing in the section to suggest that that right can be waived. As I have
found there was no waiver, it is not necessary to finally decide the issue in
this case.

[73]

Finally,
the respondent also submits that this action is an abuse of process, relying on
an
obiter
statement in this courts decision in
Loftus v.
Robertson
, 2009 ONCA 618, 96 O.R. (3d) 721.

[74]

In
Loftus
, the plaintiff was stopped at a red light when she was struck by
an uninsured vehicle that was being chased by police. The plaintiff sued the
driver and her own insurer under the uninsured coverage provisions of her
policy. Her insurer claimed over against the police involved in the chase for
contribution and indemnity. The issue was whether the innocent injured third
party could sue her own insurer under the uninsured motorist coverage provision
without also suing potential third parties who may have caused or contributed
to the accident.

[75]

The
court held that an injured party may choose whether to pursue potential joint
tortfeasors in the action against the uninsured driver and its own insurer for
the uninsured coverage: citing
July v. Neal
(1986), 57 O.R. (2d) 129 (C.A.).
But, recovery against the joint tortfeasor will preclude recovery against the
insurer under the uninsured coverage. And if the injured party elects to sue
only the insurer for the uninsured coverage and not the possible joint
tortfeasors, then she cannot later sue the possible joint tortfeasors. The
court stated, at para 47:

If an injured insured chooses to obtain judgment against his or
her own insurer under the uninsured coverage in an action that does not include
other potential joint tortfeasor(s), in our view, that choice signifies an
election. It signifies that the insured has elected not to subsequently pursue
a claim against the potential joint tortfeasor(s) to the extent that a judgment
on the claim would have barred recovery under the uninsured coverage if brought
in the same proceeding as the claim on the uninsured coverage. In these
circumstances, in our view, any attempt to pursue such a claim would constitute
an abuse of process.

[76]

The
courts reference to an abuse of process is of course,
obiter dictum
in the
Loftus
case. However, the impugned conduct is seeking to obtain
double recovery, first from the uninsured driver coverage and then from
possible tortfeasors who may be jointly liable with the uninsured driver.

[77]

On
its face, it may appear that that is what occurred here: the appellants first
sued their own insurer, Allianz, under the uninsured coverage provision of the
policy, then later, the respondent as the insurer of the at fault driver, Mr.
Klue. Clearly, the driver cannot be both insured and uninsured.

[78]

However,
there was no election here. The appellants were misled by the respondent
regarding the status of the policy it issued to the at-fault driver and they first
acted on that information.

[79]

In
any event, the appellants make it clear that they do not seek to obtain an
improper benefit by double recovery. They state in their factum that [a]ny
recovery by the appellants of funds for claims for which they were compensated
by Allianz will be received in trust by the appellants for Allianz benefit.
They may also have to address the amount that Allianz set off as against Société
de lassurance automobile du Québec.

[80]

I
would not give effect to this ground of appeal.

Conclusion

[81]

I
would set aside the judgment and reasons of the motion judge. An automobile
insurer in Ontario cannot rescind an automobile insurance contract at common
law
ab initio
, and the respondents letter purporting to do that was
not effective. Because the letter did not give 15 days notice of termination,
it also did not have the effect of terminating the contract under s.11 of the Regulation.
The contract therefore remained in effect on the date of the accident.

[82]

The
appellants were entitled to sue the respondent under s. 258 of the Act to
directly recover the amount of the judgment awarded against the at-fault driver
and owner of the 1994 Jeep up to the policy limits. Because the respondent did
not establish on the record that Mr. Klue knowingly misrepresented facts in the
application or acted as the agent of Ms. Abou-Khalil, the respondent has not
established a defence under s. 258(11) of the Act. It is accordingly liable for
the full amount of the policy limits.

[83]

There
was no waiver or abuse of process. The appellants have undertaken to the court
that they will account for any double recovery.

[84]

I
would therefore allow the appeal with costs fixed in the amount of $40,000 on
the partial indemnity scale, inclusive of disbursements and HST.

Released: K.F. April 25, 2019

K.
Feldman J.A.

I agree.
S.E. Pepall J.A.

I agree.
G. Pardu J.A.





[1]

See e.g.
Campanaro
;
Ashton
v. Tu
(1998),
40 O.R. (3d) 690 (C.A.)
;
Burns
v. Hedge
(2001),
146 O.A.C. 333 (C.A.)
.



[2]

The three options were stated by McRuer C.J.H.C. in the trial
decision in
Ellis v. London-Canada Insurance Co
., [1952] O.R. 644 (H.C.),
revd [1953] O.R. 141 (C.A.),affd [1954] S.C.R. 28, but were not endorsed by
the Court of Appeal or the Supreme Court of Canada.



