Changes to Vicarious Liability

In the fall of 2005 it was reported that the largest motor vehicle accident settlement in Ontario history had been negotiated. The accident was a single car rollover in which a young lady sustained devastating injuries. The involved vehicle was leased and the insurers of the leasing company paid the bulk of that settlement. Following that press announcement, representatives of the leasing and car rental industries met with officials from the Ontario Ministry of Finance seeking changes to the rules governing vicarious liability.1

The industry sought the abolition of vicarious liability for leasing and car rental companies. They hoped to convince the Ontario government that the lessees and renters of such vehicles should be treated as owners. Lobbying by both industries had achieved this result in the United States, but only after legislative intervention by the federal government.

The leasing industry argued a lease was simply a method of financing the acquisition of a car. It contended leasing companies should not be exposed to unlimited liability simply because the vehicle continued to be owned by the leasing company under this form of financing. The government listened and on Mar. 1, 2006 the rules for vicarious liability for leasing and rental companies changed significantly. However, it is not clear that the goals of the legislation have actually been achieved due to the government’s failure to amend a number of standard automobile insurance policies and endorsements.

The New Regime

One might have expected the government to make a choice between two alternative models to address the concerns of the industries. It could make the lessee solely liable for negligence of those who operated the leased vehicle and relieve the lessor of any liability. Alternatively, it could make both the lessor and lessee liable, but cap the lessor’s exposure. The Ontario government chose to adopt the second route, but added its own complex twists to this solution.

Under Bill 18, which came into force on March 1, 2006, vicarious liability was imposed on those who rented or leased vehicles. It did not, however, remove the liability from the actual owners of these vehicles. This change applies to both bodily injury and property damage claims.

The balances of the reforms apply to bodily injury claims only. First, it chose to make both the lessor and the lessee jointly liable but capped the lessor’s liability. Incidentally, this was the approach taken in a number of U.S. jurisdictions before the federal legislation abolishing vicarious liability for car rental and leasing companies was passed in 2005. In addition, the Ontario reforms altered the priority of insurance policies making the leasing or rental company’s policy excess to any insurance of the lessee or driver. Again, this reform only applies to bodily injury claims. For property damage claims the lessor’s policy continues to be primary.

The Ontario government made this new scheme applicable to both long-term leases and short-term rentals. The U.S. reforms also apply to both short- and long-term rentals. Given that these reforms apply to both short-term rentals and long-term leases, I will refer to both leasing and rental companies as lessors and to persons who lease or rent cars as lessees.2

The scheme is contained in a series of amendments to the Compulsory Automobile Insurance Act, Highway Traffic Act and The Insurance Act. The bill containing these amendments was passed in December 2005 and was proclaimed in force Mar. 1, 2006.

The basic scheme of the new regime is fairly easy to understand. However, as we will see later, the scheme may not actually work as advertised because the required changes to several automobile insurance policies and endorsements have not yet been approved by the Financial Services Commission of Ontario (FSCO). The endorsements that have been issued since the legislation came into force contain some problematic language. This may lead to some unintended results.

The definition of “lessee”, in section 192 of the Highway Traffic Act, has been amended. A lessee is now defined as “a person who leases or rents a motor vehicle or street car for any period of time” (emphasis added). Another amendment makes a lessee liable, in the same manner as an owner of such vehicles, for any loss or damage caused by the negligent operation of the vehicle. This lessee liability is new in Ontario. The liability of the owner, operator and lessee is explicitly stated to be joint and several. It appears that they are jointly and severally liable to plaintiffs, but it is unclear what their liability is to each other. The above-referred two provisions apply to both property and bodily injury claims.

The details of the limited liability scheme, which applies to both leasing and rental companies, are set forth in the amendments to the Insurance Act. The provisions, which limit the liability of lessors, apply only to bodily injury claims. Lessors are still fully liable for property damage claims. The liability of lessors is essentially limited to $1 million less any insurance the lessee or operator of the vehicle has available to respond to the claim. If such other policies exist, then the lessee’s policy responds first, the operator’s policy responds second and the lessor’s policy responds third. This scheme does not apply to motor vehicles used as taxicabs, livery vehicles or limousines for hire. The $1 million maximum liability of the lessor can be modified by regulation (there are currently no regulations) or by a provision in another act or regulation obliging that vehicle to carry higher minimum limits of liability. For example, the liability of the lessor of a public bus would be $8 million as required by the Public Vehicles Act. These amendments only apply to the vicarious liability of the lessor. If the lessor was itself negligent, then these provisions do not reduce the lessor’s liability for such negligence.

The insurance priority and damage cap provisions discussed above are inapplicable to property damage claims.3 Accordingly, if a rental vehicle takes out a bridge, the rental company’s insurer is obliged to respond to such a claim as the primary insurer. Any insurance the renter or driver has would be excess.

After Mar. 1, 2006 the following would be a typical situation involving the negligent operation of a leased vehicle. The leased vehicle is owned by Leaseco, leased by John Lessee and operated at the time of the accident by Tom Driver. Lessee has insurance of $1 million, which names Leaseco as the lessor of the vehicle. Driver also has insurance on his own vehicle with limits of $1 million. If the plaintiff’s damages are assessed at $2.5 million, then $1 million will be paid out under Lessee’s policy. That payment will reduce Leaseco’s exposure to zero. Driver’s policy will then pay the next $1 million of the judgment. That will leave a shortfall of $500,000 for which Lessee and Driver are jointly and severally liable to the plaintiff. It is unclear whether Lessee would have any right to indemnity from Driver in respect of this personal liability.

This is how the legislation is supposed to work. However, the insurers of Leaseco may discover the regime does not work as advertised because appropriate changes to several automobile insurance policies have not yet been made.

Finally, amendments to the Compulsory Automobile Insurance Act requires persons renting or leasing vehicles for periods in excess of 30 days to be able to demonstrate that the leased or rented vehicles are insured under automobile insurance policies.

What Vehicles are Subject to the Legislation?

The amendments to the Highway Traffic Act (HTA) change the definition of lessee as outlined above. These changes apply to any vehicle that falls within the definition of “motor vehicle” in the Act and to streetcars. Motor vehicle under the Act is defined as follows:

Includes an automobile, motorcycle, motor assisted bicycle unless otherwise indicated in this Act, and any other vehicle propelled or driven otherwise than by muscular power, but does not include a street car, or other motor vehicles running only upon rails, or a motorized snow vehicle, traction engine, farm tractor, self-propelled implement of husbandry or road-building machine within the meaning of this Act.

The Compulsory Automobile Insurance Act (CAIA) applies to motor vehicles as the term is defined under the HTA together with trailers, accessories and equipment of a motor vehicle and deems streetcars to be motor vehicles. Accordingly, the amendments under both acts apply to essentially the same vehicles.

The same does not appear to be true for the amendments to the Insurance Act. The provisions that deal with the liability of the lessor specifically adopt the HTA definition of “motor vehicle” and the provisions that deal with insurance priorities specifically limit their application to motor vehicles as that term is defined in the HTA. However, these provisions do not appear to apply to streetcars. Accordingly, the lessors of streetcars are not subject to the amendments in the Insurance Act, which limit the liability of lessors and re-arrange the priority of insurance policies.

It is also clear that these provisions do not apply to any vehicle that does not fall within the definition of “motor vehicle” in the HTA. This would include leased snowmobiles, leased farm tractors, road-building machinery, etc.

Rental Vehicles

It is clear that the liability limitations and insurance priority scheme also applies to short-term rentals. We believe this could lead to some unexpected results.

As an example: Let us assume that Johnny Renter, who does not own his own car, rents a car to go on a trip. He is involved in an accident in which the injured party sustains injuries, which are assessed at trial as being worth $1.5 million. The rental company’s insurer will be obliged to pay $1 million to the accident victim thereby discharging the obligations of both the insurer and the rental company to the victim on behalf of the rental company. Renter will still be liable to the victim for the balance of the judgment. However, he will likely not have access to any insurance to satisfy this liability.

Depending on how the rental company has structured its automobile insurance, the rental company and its insurer may also argue they are entitled to be reimbursed for a portion of the amount they have paid to the accident victim. Whether such a claim could be successfully pursued would require a detailed analysis of the recent Court of Appeal decision in Avis v. Certas. Such an analysis is beyond the scope of this note.

It remains to be seen what car rental companies will do to implement this new regime. We would not be surprised if they started promoting the purchase of additional liability coverage by renters. However, car rental companies are not licensed to sell automobile insurance and therefore may not be able to make additional coverage available to renters. If a rented vehicle is involved in an accident where the renter has car insurance, then the renter’s insurer will often be obliged to respond first to the claim. However, where no such insurance exists or is not obliged to respond to the claim, the renter may well be exposed to significant uninsured claims.

The Insurance Issues

The basic problem with the scheme is that it was enacted without appropriate changes being made to a number of automobile insurance policies and endorsements before it came into force. Insofar as it purports to change the liability of lessors and lessees, those goals have been accomplished. However, without amendments to a number of standard automobile insurance policies and endorsements the scheme cannot actually work as envisioned. Since its enactment, the insurance industry has also pointed out several practical problems with the scheme. A few revised policies and endorsements have now been released by FSCO, but several have not yet been released.4 Until they are, it is difficult to comment on how exactly the scheme will work. In the interim, however, it is our view that while the scheme limits the liability of car rental and leasing companies it has done nothing to reduce the exposure of their insurers for the negligence of the drivers of leased and rented vehicles.

The usual method for insuring a leased vehicle obliges the lessee to obtain insurance on the vehicle, which shows the lessor as an insured. The policy must be endorsed with an OPCF 5 (Permission to Lease Endorsement). This latter endorsement permits the leasing of the vehicle, which the standard owner’s policy prohibits. Most leases require the lessee to obtain $1 million of third party liability coverage. If such coverage responds to the claim this should be sufficient to cover any potential liability of the lessor under the new scheme.

Unfortunately, two specific problems have complicated this picture:

First, the legislation reduces the lessor’s prima facie liability of $1 million by subtracting from that amount any amounts available under any other policy that insures the vehicle other than policies issued to the lessor (emphasis added).5 Of course, in the typical lease situation, the policy is issued to the lessee and the lessor. This would suggest the lessor has a $1 million of liability in excess of any amount the lessee insures the vehicle for. When this was pointed out by the writer to the Insurance Bureau of Canada (IBC), a provision was incorporated into the revised OPCF 5 and 5C endorsements to provide that any policy where such endorsements were attached were deemed not to be issued to the lessor. Hopefully, the policy limits under such policies can now be subtracted from the lessor’s limited exposure under section 267.12 of The Insurance Act.

The second problem is more serious. Recent case law has confirmed that excess and umbrella policies that provide automobile coverage insure not only the named insured, but also any occupant (including the driver) of the vehicle. In the past, insurers had recognized this exposure and created manuscript wordings that were designed to limit any excess or umbrella coverage to the named insured only. The decision of the Court of Appeal in Avis strongly suggests these manuscript endorsements will be considered to be automobile insurance policies and coverage for drivers will be read into them. If that is correct, then, even though the liability of the lessor may be reduced by the legislation, the lessor’s excess policy probably continues to insure the driver. If that is the interpretation adopted by the courts, then until there is a new SPF 7 (Excess Automobile Endorsement), which specifically limits coverage in leasing and rental situations to the leasing or rental company, the lessor’s insurer will still be liable for the driver’s negligence. In other words, there currently may not be any basis for insurers of lessors to assume these amendments have reduced their exposure at all. Until insurers know they are insuring only the lessor, there is no reason for them to reduce rates for excess or umbrella coverage to leasing or car rental companies.

A similar problem may arise under the SPF 8 (Lessors’ Contingent Policy). That policy may also provide coverage to drivers. Unless it is made clear the coverage under such a policy is limited to the leasing company, then an SPF 8 insurer (and any excess insurer of the SPF 8) may also insure the driver of the leased vehicle.

That brings us to the SPF 6. This is the standard non-owned endorsement. This coverage will now be much more important than it has been in the past. Non-owned coverage was almost always excess coverage, as the policy of the owner of the automobile was obliged to respond as the primary insurer. These endorsements were routinely placed on CGL policies without any real concern about the exposure they may create for the insurer. Now, where an automobile is rented in the name of the company, these policies will provide the primary coverage. Accordingly, the exposure th is endorsement creates needs to be re-evaluated by insurers. Prudent insurers are now asking commercial insureds to provide full particulars of how often employees, partners, etc. are renting automobiles, as well has how often they drive their own cars on company business. This information can then be used to properly rate the risk attaching to the SPF 6 endorsement.

The standard auto policy did not provide coverage to a named insured who lent their rented vehicle to someone who was involved in an accident. It was not necessary to do so as “lessees” previously had no vicarious liability for the negligence of the persons they lent the automobile to. The new OAP 1 specifically provides such coverage to the named insured and his or her spouse. However, no such coverage is extended to other insureds, such a child who rents a vehicle and lends it to someone else. Additionally, the person who is actually driving obtains no coverage under the revised OAP 1. Therefore, if a named insured rents a vehicle and lends it to their child, the named insured would have coverage for their liability as the lessee of the vehicle. However, the child would not have any coverage under his parents’ policy. It is unclear what will happen if the child is shown as a driver on the parent’s policy. There is also a question whether the driver could argue that he or she is entitled to coverage, in any event, as section 239 of The Insurance Act provides that all automobile policies extend coverage to all occupants of the insured vehicle.

I should also comment on the new OPCF 5C. This is the Permission to Lease Endorsement, which applies to short-term (30 days or less) rentals. It purports to provide coverage for the lessee and the driver whose coverage is reduced by the amount of insurance available to the driver and lessee from their own policies. It is awkwardly worded and difficult to interpret. It accomplishes its goals, in part, by creating a sub-limit of coverage. This word concerns me. It implies the policy has multiple independent limits of coverage available to each of the lessor, lessee and the driver. This conjures up the frightening image of the “stacking” of limits, a concept that should be familiar to anyone who dealt with underinsured motorist endorsements (SEF 42) in the early 1980s. There is also an argument that by reducing limits to the driver and the lessee, this endorsement contravenes the minimum liability provisions set forth in section 252 of The Insurance Act. I do not think such an argument is correct, but if the courts apply it, it could increase the coverage under a rental company’s policy.

As mentioned earlier, this endorsement purports to deem the policy it is attached to was not issued to the rental company. The policy is clearly issued to the rental company and the courts may well balk at enforcing this provision. If they do refuse to enforce it, then the coverage provided under the rental company’s policy might not be subtracted from its $1 million exposure under section 267.12 of The Insurance Act. Since the SPF 7 is a forms follow policy it is possible that the rental company’s excess insurance would also be considered to have been issued to the rental company and must respond in full to any claim.

The last comment I would like to direct specifically to the OPCF 5C concerns priorities for property damage claims. The legislation is fairly clear the rental company’s policy is primary for property damage claims. However, the OPCF 5C purports to make it excess coverage to any insurance held by the renter or driver for all claims. This creates an inconsistency between the OPCF 5C and section 277 of The Insurance Act. In my view, the Superintendent’s Bulletin does not clearly indicate such a change was intended. This suggests section 277 should govern. Nevertheless, I am anticipating litigation over whether the rental company’s policy is or is not primary for property damage claims.

The FSCO Bulletin that advised the industry of these new endorsements indicated that they would take effect on Jan. 1, 2007. It also suggested that insurers apply those provisions, which increase coverage effective Mar. 1, 2006. The provisions that increase coverage are the changes discussed earlier to the OAP 1. The other changes all restrict coverage. It is my belief the courts will not make the endorsements that restrict coverage effective on Jan. 1, 2007, but rather will only apply them upon renewal. Therefore, I would suggest that for car rental companies accounts, insurers should, with the consent of the insured, immediately amend their policies to endorse them with the new OPCF 5C.

Additional Comments

We anticipate problems with short-term rentals. Renters, who do not own cars, will be stuck with whatever insurance the car rental company carries. They cannot legally purchase additional coverage from the car rental company and no insurer, that I am aware of, is selling drivers’ policies. It is quite possible that car rental companies will use OAP 1s endorsed with OPCF 5Cs with limits of only $200,000. This leaves such renters with only $200,000 of coverage and no easy method of acquiring additional coverage. There is a real need for insurance companies to issue a driver’s policy for those who rent regularly and want more than the minimum coverage that will be provided by the rental company.

Unfortunately, the government has fumbled what should have been a relatively simple reform of the law. I anticipate that years of expensive litigation will be required to sort out precisely how this legislative scheme will mesh with the new endorsements issued by FSCO. The fact that the legislation has been in force for over a year and that we have not yet seen new SPF 7s and 8s is unconscionable.

Stephen Moore is a partner with the Toronto law firm Blaney McMurtry LLP and was called to the bar in 1982. He specializes in commercial automobile regulatory issues and the defence of personal injury motor vehicle claims.

Note:

This article was submitted at the beginning of July. By the time it is published, the Financial Services Commission of Ontario may have approved SPF 7 and SPF 8 endorsements. If that occurs, then many of the concerns expressed in this article about the operation of the new vicarious liability rules may have been resolved.

References:

1. By vicarious liability I mean liability imposed by statute on a person for the negligence of another person. The Highway Traffic Act has always imposed such liability on the owner of vehicle for the negligence of any person who operated the vehicle with the owner’s permission. This liability is imposed even though the owner may not have been negligent.

2. You should know that the situation in B.C. changed last spring (2006). Previously, the B.C. courts had concluded that the lessor was not to be considered an owner under a lease with an option to purchase but rather the lessee should be considered to be the owner. Last spring the Court of Appeal re-interpreted several older cases and concluded that lessors were owners and, therefore, vicariously liable for the negligence of persons who operated their vehicles with consent. Although some provinces do not impose vicarious liability on leasing companies, generally speaking, rental companies in those provinces are vicariously liable for the negligent operation of their vehicles.

3. It must be remembered that property damage claims involving other vehicles may trigger section 263 of the Insurance Act.

4. A new OAP 1, OPCF 2, 5, 5C and 27 were released on October 23, 2006. There is some confusion on when they will take effect. What is still required is for FSCO to issue a new SPF 7 and SPF 8. A new SPF 6 may also be issued.

.section 267.12