Total Auto Loss KO’d

In a move that has surprised even the most seasoned legal advisers, the Ontario Court of Appeal has planted itself squarely in favor of the insurance industry on an issue that initially appeared staunchly determined against it. In David Polowin Real Estate v. Dominion of Canada, the court revisited the issue of the insured’s requirement to pay a deductible when the insurer retains the salvage following the total loss of an automobile. The court was required to overturn the original 2001 decision in favor of policyholders upon discovering that an insurer can still apply a deductible in circumstances of a total loss even if the insurer retains the salvage. The end result is that the court has now dismissed a number of high profile class actions against Ontario auto insurers brought by their auto policyholders.

The story began June 2001 when the Ontario Court of Appeal reached the now infamous decision regarding McNaughton Automotive Ltd. v. Co-operators. In McNaughton, the court was asked to determine whether or not insurers could still apply a deductible to a total auto loss in circumstances where they retained the salvage. The policyholder’s argument was that statutory condition 6(7) of the standard Ontario automobile policy prevented the insurer from applying the deductible in such circumstances.

Statutory condition 6(7) states, “if the insurer exercises the option to replace the automobile or pays the actual cash value of the automobile, the salvage, if any, shall vest in the insurer.” Counsel for the policyholders plead that the provision must be interpreted as follows: the amount of the payment owing to the insured must be established before the insurer can claim the salvage. They argued that the statutory condition provides for payment of “actual cash value” and not “actual cash value less deductible.” The industry retort stated the clause merely dictated the conditions under which the insurer obtained the right to the salvage – it was never intended to address the amount owing to the insured. The court verdict sided with the policyholder’s argument.

The fallout from the McNaughton decision was swift and predictable. Class action counsel entered the ring and immediately commenced round one of actions against a number of Ontario auto insurers. Counsel sought recovery of all wrongly applied deductibles on behalf of historical total loss claimants.

Defending insurers banded together and moved to dismiss the class actions, arguing that McNaughton was wrongly decided. Like Tyson vs. Holyfield, the much anticipated rematch was on.

Not surprisingly, the industry’s position did not initially fare well. The motion’s judge felt bound by the McNaughton decision and refused to dismiss the class actions. Round one left insurers bloodied and bruised. Round two, the insurers appeal. Requesting that the Court of Appeal consider overturning its prior decision in McNaughton, the insurers dealt the first punch. Many anticipated a swift knock-out but with ample time to analyze flaws in the McNaughton reasoning, the insurers were able to enter the ring stronger than ever, swinging hard and serving the K/O blow.

The court acknowledged that prior to 1993 the language of the Insurance Act permitted insurers to retain the salvage and apply a deductible in total losses. Furthermore, it noted that the legislature never intended to amend the Insurance Act in such a way as to alter it. The court recognized the commercial value of deductibles to both the insurer and the insured and, relying upon a number of other ‘indicators,’ (see Table One) the court concluded unanimously that McNaughton was wrongly decided and that the industry’s position was correct.

The court did not reach its decision in haste – a panel of five judges considered at length whether, even in the face of being wrong, McNaughton must stand. The court ultimately concluded that the advantages of overruling McNaughton outweighed the disadvantages. It also noted that both the British Columbia and Alberta Courts of Appeal had expressly disagreed with the reasoning in McNaughton, confirming that the court should seek consistent application of similar provisions amongst provincial appellate courts.

While the monetary effect of McNaughton has been capped by recent legislative amendments, the impact of the Polowin decision cannot be downplayed. There is no question that the judiciary and the industry are often at odds, however, take heart that the ‘right’ decision may eventually present itself allowing reasonable expectations to prevail over strict construction. In addition, the Polowin decision confirms that no provincial appellate decision, no matter how influential, is absolutely free from reconsideration.

This good news may come as little consolation to those companies that followed “the law” and refunded deductibles following the McNaughton decision.

While an appeal to the Supreme Court of Canada is possible, it is worth noting that that court rejected a similar request for leave from the industry in the McNaughton case.