Intact loses court battle over voiding auto policy for misrepresentation

If an Ontario auto insurer discovers a client made a material misrepresentation or non-disclosure in its application, could the insurer treat the policy as invalid to begin with?

Not now. Or at least, not if the fact situation is the same as in ING Insurance Company of Canada, also known as, or formerly, ING Halifax Insurance Company v. Karla Garay Merino, et al.. The Supreme Court of Canada announced Thursday it will not hear an appeal from ING Insurance Company of Canada (renamed Intact of 2009) on this issue.

It all started in 2002 when Timothy Klue and his wife, Sonia Abou-Khalil, applied for coverage with ING for their 1994 Jeep Grand Cherokee.

At his broker’s office on May 29, Klue signed a form indicating neither he nor his wife had had any accidents or insurance claims, no history of convictions for motor vehicle related offences in the last three years, and had not had their licences suspended within the previous six years. His wife did not sign the form.

A binder valid until June 29, 2002 was issued the same day.

Two days later, ING received the application from the broker. Soon afterward, ING’s underwriting department discovered Abou-Khalil had an at-fault accident the previous September, had been convicted of speeding twice and careless driving once, and had her driver’s licence suspended for non-payment of fines.

Reasoning that the risk was outside its underwriting guidelines for new business, ING sent Klue and Abou-Khalil a registered letter July 2, telling the couple their policy is void from its inception date.

Three months later, a pedestrian was catastrophically injured after being hit by the jeep for which Klue applied for insurance. The vehicle was driven by Klue. The pedestrian, Karla Merino, sued the couple. Merino was awarded $2 million in 2011, an award upheld on appeal in 2013.

The vehicle was considered uninsured so the plaintiff could not recover the full amount of the judgement directly from the defendants. So the plaintiff went back to court looking for compensation from ING. Initially, she was not successful.

At trial, Ontario Superior Court of Justice Gregory Verbeem ruled in favour of the insurer, finding that the vehicle was in fact uninsured. In his decision, released in October 2017, Justice Verbeem reasoned that Klue and Abou-Khalil knew that the Jeep was uninsured before the event, giving rise to the claims against them. They appreciated that the vehicle needed to be insured to operate it on a highway and they had over two months before the accident to obtain alternative insurance, the trial judge noted.

“The Jeep’s uninsured status at the time of the accident did not arise from an attempt by the insurer to rescind the contract after the accident,”wrote Justice Verbeem. “Instead, its uninsured status arose as a result of a volitional choice by Klue and Abou-Khalil not to insure the vehicle after they became aware that it was not insured by ING.”

That ruling was overturned in a Court of Appeal for Ontario ruling released April 25, 2019.

Intact applied June 21 for leave to appeal to the Supreme Court of Canada, which announced Sept 26 it will not hear an appeal. The Supreme Court of Canada does not release reasons for dismissing leave applications.

This past April, the Court of Appeal for Ontario found that Justice Verbeem made an error in law when he found that an auto insurer is allowed to rescind an automobile policy, at common law, based on misrepresentation in the application.

The province has a regulation that sets out the statutory conditions for auto insurance. It specifies that if an insurer wants to terminate a policy for reasons other than non-payment of premium, the company must give the client 15 days notice by registered mail or five days notice by personal delivery.

If the notice of termination does not comply with that section, then the insurance contract remains in force, Justice Kathryn Feldman of the Court of Appeal for Ontario wrote. In ING, the insurer did not give Klue and Abou-Khalil 15 days’ notice in its registered letter.

In a case like that, the insurer should not be able to rescind the contract at common law and make it void ab initio or  invalid to begin with, wrote Justice Feldman.

The purpose of Ontario’s auto insurance laws are to protect innocent victims of automobile accidents, and to provide some statutory accident benefits to everyone who is involved in an accident, added Feldman.

“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.”