INSIGHT: When Time is Money

Lawyers acting for defendants or subsequent parties had better watch out: Ontario’s Limitations Act has tightened the long leash that insurers previously enjoyed to the point of a choke chain, legal experts warn. If insurers don’t immediately consider whether claims for contribution and indemnity exist (and add the necessary parties), they may well find themselves on the receiving end of negligence suits.

The Limitations Act, 2002 came into force in Ontario on Jan. 1, 2004. Of particular note to insurers, the legislation contains, among other things:

* a common two-year period to commence litigation against insurers, the period beginning from the date of discovery of the injury, loss or damage;

* an ultimate limitation period of 15 years, regardless of discoverability, with certain exceptions;

* retention of some specialty limitation periods that are listed in a schedule to the Act;

* a prohibition on contracting out of the Act; and

* transition rules for acts or omissions that took place before Jan. 1, 2004.

A number of insurance industry representatives from western Canada have noted that Ontario’s Limitations Act has served as a model for proposed changes to the Limitations Acts in both Alberta and British Columbia. So it may be of some interest to observe recent remarks made by Ontario lawyers that Ontario’s act is “labyrinthine” in its application.

Graeme Mew, a partner at Nicholl Paskell-Mede’s Toronto office, made such remarks at the Ontario Bar Association’s “Third Annual Hot Topics in Motor Vehicle Insurance,” held in Toronto on Nov. 12, 2007. Mew’s presentation focused on some of the pitfalls of the new legislation encountered by insurance coverage and defence lawyers.

His paper, co-written with his colleague, Anna Casemore, refers to how “labyrinthine” certain areas of the law of limitations have become. Mew told his audience that his initial expectation was that the act would make limitations simple and straightforward. But “that hasn’t happened yet,” he said.

Some of the highlights from Mew’s speech and paper are:

Contracting out the new act

Prior to The Limitations Act 2002, the limitations regime did not speak to the issue of contracting out of limitation periods. Parties could agree to extend, shorten or extinguish a statutory limitation period — which only made sense, according to Mew.

But s. 22 of the new act explicitly prohibited parties from contracting to vary a limitation period in most circumstances. Agreements made prior to Jan. 1, 2004 were grandfathered under the new act, but the explicit prohibition meant:

* parties could no longer enter into tolling or standstill agreements. In addition, arguably, they could not incorporate effective representation and warranty clauses into contracts. Also, they could not limit the timeframe in which a party could commence an action for breach;

* contractual limitation periods, commonly found in insurance policies, were of no force and effect (unless incorporated into the contracts as statutory conditions or by legislation.)

The absolute prohibition contained in s. 22, which was likely intended to protect parties from unwittingly compromising their rights, was a dramatic step backward for certain commercial parties.

Ontario legislators responded to the extensive criticism of s. 22 on Oct. 19, 2006, bringing into force amendments that allowed parties to a “business agreement” — defined as an agreement made by parties, none of whom is a consumer as defined in the Consumer Protection Act — to vary (i.e. to extend, shorten and suspend) or exclude a statutory limitation period, and to vary the ultimate limitation period. However, parties to a business agreement cannot suspend or extend the ultimate limitation period beyond 15 years until after the claim has been discovered, at which time, they could agree to extend it beyond 15 years. The ability to shorten or exclude a limitation period is restricted to business agreements, not consumer agreements.

Statutory Condition 14 of s. 148 of the Insurance Act

Many insurance policies contained clauses purporting to extend the application of statutory conditions that ostensibly related only to fire loss to all perils insured under the particular policy. Prior to new act, Ontario courts had upheld the one-year limitation period set out in Statutory Condition 14 of s. 148 of the Insurance Act — even in situations in which it had been incorporated as a term of a multi-peril policy, and where the loss had not been the result of fire. However, in K.P. Pacific Holdings Ltd. v. Guardian Insurance Co. of Canada, the Supreme Court of Canada in 2003, in the context of the insurance legislation in B.C., held that the limitation period prescribed by the statutory condition would only apply if the statutory condition was contained in a fire — i.e. not a multi-risk — policy.

Recent amendments to s. 22 of Ontario’s new act have added another dimension to the question of when limitation periods contained in statutory conditions will apply. A personal insurance contact, typically created “for personal, family or household purposes” (and therefore not a “business agreement”) would attract a limitation period of no less than two years pursuant to the amended s. 22; in contrast, the parties to a commercial insurance contract could agree to a shorter limitation period.

It therefore appears the principles articulated in K.P. Holdings may conflict with s. 22 of the new act in circumstances in which the parties are not “consumers,” and in situations in which the policy was issued after Oct. 19, 2006. (There was no ability to vary the limitation period in policies that were created during the period of Jan. 1, 2004 to Oct. 19, 2006.)

Transition Provisions: Breathing New Life into Old Claims

Most of the judicial debate arising from the new act revolves around s. 24, which contains transition provisions. The purpose of the transition provisions is to preserve former limitation periods in circumstances in which the act or omission at the centre of the litigation was discovered before the new act came into effect.

Section 24(2) provides: “This section applies to claims based on acts or omissions that took place before the effective date [Jan. 1, 2004] and in respect of which no proceeding has been commenced before the effective date.” In Pepper v. Zellers Inc., the Ontario Court of Appeal ruled in 2006 that if the act or omission took place prior to Jan. 1, 2004, and no proceeding “with respect to this incident” was commenced before Jan. 1, 2004, then the transition provisions would apply.

Section 24(3) provides: “If the former limitation period expired before the effective date, no proceeding shall be commenced in respect of the claim.” In Philion (Litigation Guardian of) v. Lemieux Estate, the Court of Appeal in 2007 held that the “former limitation period” did not stand alone, but was as modified by s. 47 of the Limitations Act; the limitation period did not begin to run until a minor reached the age of majority.

The principle of discoverability is incorporated into s. 24(5) of the new act. Basically, if the former limitation period did not expire before the effective date — and if a limitation period under the new act applied in situations in which the claim was based on an act or omission that took place on or after the effective date — the following rules apply:

“1. If the claim was not discovered before the effective date, this [new] act applies as if the act or omission had taken place on the effective date.

“2. If the claim was discovered before the effective date, the former limitation period applies.”

Section 5 of the new act, which sets out the discoverability principle, provides that the clock will start to run when either the “person with the claim” first discovered the claim, or when a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have discovered the claim. There is a debatable presumption that the person with the claim discovered the claim on the date of loss.

The act does not define “person with the claim,” which has led to debate as to whether, under the former limitations regime, a litigation guardian could be a person with the claim for the purposes of the transition provisions. In St. Jean (Litigation guardian of) v. Cheung, [2007], Ontario Superior Court Justice John Murray responded by extinguishing rights of a person with a disability — rights that existed prior to the new act coming into force. Mew believes St. Jean contains glaring errors, was wrongly decided, and should be overturned on the pending appeal.

Time’s Up: Claims for Contribution and Indemnity

Contribution is a doctrine that arises when an insured has insurance with more than one insurer covering same risk and same interest. In this scenario, either one of the two insurers is liable for 100%; then it’s up to one insurer to seek contribution from the other. The new act has significantly changed this area of law.

Prior to the new act, an alleged wrongdoer could seek contribution and indemnity any time up to a year after the settlement or judgment. Presumably, the rationale was that the cause of action for contribution and indemnity would not arise until liability had been determined.

The new act has considerably shortened the limitation period. Section 4 of the new act provides a basic limitation period of two years from the day on which the claim was discovered. Section 18 modifies the discoverability rule in s. 5 as it applies to claims for contribution and indemnity. Section 18(1) provides that for the purpose of the presumption prescribed by s. 5(2) — i.e. the claim is discovered on the date of loss — and the accrual of the ultimate limitation period, time respecting a claim for contribution and indemnity of one alleged wrongdoer against another will start to run from the day on which the first alleged wrongdoer was served with the statement of claim, whether the claim arises in tort or otherwise.

This section raises two issues.

First, the term “first alleged wrongdoer” is not defined.

Second, this section potentially creates procedural problems because plaintiffs don’t have to file affidavits of service for the statement of claim. As a result, the defendant’s insurer cannot always rely on the date the defendant says he or she was served; the plaintiff’s lawyer will often need to be contacted to ascertain the dates of service.

The overall result of the application of s. 18 is that an alleged wrongdoer has two years from the date he or she “discovered” the “claim” to commence a proceeding.

Mew has this warning for lawyers who are handling claims on behalf of defendants or subsequent parties: they must immediately consider the possibility that potential claims for contribution or indemnity exist. (Negligence claims are already rolling in to Law Pro, Mew noted.)

Has the “Special Circumstances” Test Finally Been Laid to Rest?

Under the former limitations regime, a plaintiff who failed to add a party as a defendant to an existing proceeding within the limitation period could seek leave to add the party if there was no prejudice to the adverse party and there were “special circumstances.” This involved an exercise of the court’s discretion.

Section 21(1) of the new act removed the potential for relief based on special circumstances. Despite the explicit wording, however, some courts have ignored the provision and considered or granted relief based on “special circumstances.”

Section 21 of the new act does not appear to prevent a plaintiff or a new cause of action from being added after the expiry of a limitation period.

The Ultimate Limitation Period: Is it Long Enough?

Section 15 of the new act provides that “no proceeding shall be commenced in respect of any claim after the 15th anniversary of the day on which the act or omission on which the claim is based took place,” even if the claim is not barred by s.4. The Ontario Court of Appeal in 2007 addressed the issue of the ultimate limitation period in York Condominium Corporation No 382 v. Jay-M Holdings Limited. The alleged negligence occurred in February 1978, but the claim was not discovered until May of 2004. The claim would not have been statute-barred by s. 4 of the new act because it was commenced in June of 2005, within the two-year limitation period; nevertheless, the motions judge found it was statute barred on the basis of section 15. The Court of Appeal, in allowing the appeal, concluded the transition provisions postponed the commencement of the ultimate limitation period to Jan. 1, 2004. The court adopted a statutory interpretation that it felt best fulfilled the objects of the legislation; it thereby construed the new act to avoid any inconsistency between its different provisions, and interpreted it liberally in favour of the individual whose right to sue for compensation was in issue. (Leave to appeal to the Supreme Court has been refused.)

Mew noted that while the result of Jay-M Holdings appears to be fair and based on sound principles, as time goes by, the extension of the ultimate limitation period based on this principle will decrease until the limitation period will be no more than 15 years from the date of the act or omission, irrespective of when the claim was discovered. Litigation arising from the application of the transition provisions will diminish over time, as the provisions become progressively redundant.