Staying on the Road

In CU’s article “The Politics of Leasing” from the March 2005 issue, Glenn McGillivray dealt with the challenges faced by automobile leasing companies and their insurers in light of recent precedent setting settlements. While the CFLA and others step up lobbying efforts in the hopes of obtaining an amendment to the Highway Traffic Act, car rental companies face the devastating results of recent Ontario court decisions that radically expand the potential liability of their insurers and reinsurers.

The ability to rent a vehicle for a short period of time is a necessity for many Canadian consumers. Drivers who cannot afford an automobile, or are trying to save wear and tear on their family vehicle, depend on being able to rent a car for a reasonable amount of money. Most individuals renting a car understand that as part of the rental charge, there will be some amount paid for additional insurance. Because many consumers do not own their own personal automobile, it is essential that the rental car company provide the statutory minimum limits of insurance for them. At the same time, most car owners renting a vehicle believe that they have liability coverage under their personal automobile policy as well.

When a car is rented, however, the consumer agrees to restrictions on the use of the vehicle. The rental company makes it clear that the car must not be loaned to an under-aged or unlicensed driver. It is understood that the vehicle will be returned on time. If the renter does not bring it back, it will be considered to be a stolen vehicle. The vehicle will not be driven while under the influence of alcohol or drugs and cannot be used for illegal purposes or to transport dangerous goods. Prohibited use of the vehicle exposes the rental company and its insurers to a completely different risk than is provided for by the minimal amounts charged for both the car rental and insurance.

LEGAL TUG

Over the past 30 years, the courts across Canada have engaged in a great deal of “social engineering” in car rental cases. They have treated the reasonable restrictions in car rental contracts as an attempt to contract out of the statutory obligations placed on automobile insurers under provincial insurance legislation.

The first blow to the rights of rental companies came when the Ontario legislature eliminated “statutory condition No. 2” of the Insurance Act in 1972. This condition prohibited the use of the automobile while the driver was “impaired by alcohol or drugs”. The courts reasoned that the removal of this statutory condition eliminated the right of action against an insured for causing personal injury while impaired. This in turn had the effect of knocking out the contractual agreement not to drive a rental car while under the influence.

With the exception of collision damage, the courts have been reluctant to enforce any avenue of recovery that appears to offend the common law prohibition on subrogation against a named insured. A car rental company is also permitted to enforce any deductibles for property damage contained in the rental agreement.

Pursuant to Section 192 of the Highway Traffic Act, R.S.O. 1990, c. H.8, however, a car rental company, as owner of the at-fault vehicle involved in a collision, is considered to be vicariously liable. The one exception to the “absolute liability” provisions of the Insurance Act is an instance where a vehicle is stolen. If the car has clearly been taken without the owner’s knowledge or consent, there would be no liability to third-parties, and no bar on subrogation against the person responsible. Rental car companies have attempted to argue that when a vehicle is being driven by an unauthorized driver or in violation of the rental agreement, it is effectively being operated without their consent.

However, the courts have repeatedly rejected this argument. A number of cases have held that if the renter is in “lawful possession” of the vehicle, his consent to the operation of the vehicle by an unauthorized driver will be deemed to be the consent of the owner, despite the breach of the rental agreement.

The judiciary has also held that rental car companies cannot avoid absolute liability in instances where a rental vehicle is not returned on time. Even where the renter has absconded with the vehicle, and would be guilty of theft under the criminal code, the courts have held that conversion of the vehicle does not amount to a vitiation of consent.

These decisions have all recognized that the purpose of the Highway Traffic Act was to protect the public by imposing upon the owner of the vehicle (the car rental company) the responsibility for the careful management of the vehicle and the responsibility of assuming the risk of those to whom the owner entrusts the vehicle. At the same time, they have the effect of putting the insurers on the hook for almost any breach of the rental agreement, no matter how outrageous.

FIRST LOSS

The Ontario legislature has recognized, however, that under certain circumstances, an insured may be covered under multiple insurance policies for liability arising out of an auto accident. It enacted section 277 of the Insurance Act to deal with this situation and to determine the order in which the policies will be called upon to pay the damages.

Section 277 distinguishes between the “first loss insurance” (also known as “primary insurance”) and “excess insurance”. First loss insurance is the first layer of insurance to apply. Excess insurance only applies once the first loss insurance is exhausted. Pursuant to the act, the owner’s policy is designated to be “first loss” coverage. Any other insurance available to respond to the claims would be secondary insurance only. Although the rental car policy and the driver’s personal auto policy are both “owner’s policies”, they are not necessarily both “first loss” insurance under Section 277. There is a second element in determining whether a policy is first loss insurance. In addition to being an owner’s policy, it must also insure the vehicle involved in the accident.

If there are two policies potentially available to the renter, the critical question for insurers is whether or not they can pursue this individual (or their personal automobile insurer) for the damages paid out to third-parties who are killed or injured by the prohibited operation of the rental vehicle.

In the 1996 decision Re Fireman’s Fund Insurance Co. vs. Dominion of Canada, the Ontario Court General Division held that the insurer of a rental company could recover from a driver’s own policy for contractual obligations arising from a violation of the rental contract. This required the court to find that there was a right of recovery from the insured in contract that overruled the common law bar against subrogation and a secondary finding that the driver’s policy was liable to respond to the claim against the driver for breach of the rental contract.

The most recent case to deal with this issue, however, is the decision of Justice Pitt in Avis Rent A Car System Inc. vs. Certas Direct Insurance Co. This application dealt with the aftermath of an accident caused by a gentleman named Vig. While he was at fault for the plaintiff’s catastrophic damages, there was no violation of the rental agreement. Vig rented a van from Avis while on business for his employer. On the rental form, he specifically declined to purchase excess liability insurance. The clear intention of the rental agreement was that the Avis policy would provide only statutory minimum limits, at which point Vig’s own auto insurance (Certas) was to provide excess coverage.

Avis argued that pursuant to the clear terms of the rental agreement, Vig had agreed to indemnify Avis for any loss above these limits. The Avis insurers relied on the doctrine of “equitable subrogation” to claim over against the Certas policy. Avis had three separate liability policies: a $200,000 liability policy from CNA, an $800,000 excess liability policy (also from CNA), and a $25 million umbrella policy from Illinois National. Avis indemnified CNA for any amounts payable under the CNA policies pursuant to an indemnity agreement.

Avis argued that the CNA primary policy and the Certas policy were both “owner’s policies” and that Vig’s personal policy should have to respond before the Illinois National excess policy. While the Court recognized the “difficulty” posed by Vig’s rejection of the Avis offer of additional insurance, it ruled that as an “unnamed insured”, Vig could not be excluded from coverage under the Avis excess policies without specifically signing a waiver to that effect.

Justice Pitt found that there was no judicial authority for the contention that the Illinois National umbrella policy was excess insurance for Avis only, as opposed to an owner’s policy. He found that the Illinois National umbrella policy represented additional insurance on top of Avis’ underlying insurance. Once the underlying insurance was exhausted (the two CNA policies), the umbrella policy was required to respond as an “additional owner’s policy”. Consequently, he found that the three policies of insurance (two CNA policies and the Illinois National policy) were all “owner’s policies” and therefore first loss insurance.

In addition, the Court held that the liability insurance available under the Certas policy was not intended to indemnify Vig for the contractual liability he had knowingly assumed under the rental agreement. Accordingly, Avis could not recover the monies paid in settlement back from Certas. This case has now been heard by the Court of Appeal and a decision is expected in the immediate future. If the decision is upheld, the impact on car rental companies and their insurers will be profound.

BEYOND INTENT

While the courts have upheld the right of consenting adults to enter into other binding contracts, they have essentially emasculated the standard car rental contract in common use across Canada. With the recent decision in Certas, the courts have gone beyond tampering with the agreement itself and reallocated the insurance risk in a way that neither the rental company, the consumer – nor their respective insurers – ever intended.

Insurers have long assumed that the driver’s policy would provide excess indemnity coverage over the statutory minimum limits provided by the car rental company. In instances where the individual renting an automobile has breached the terms of the rental agreement, fairness dictates that there should also be a right to claim back against the personal auto policy as well.

The effect of these decisions is to create a windfall for the personal auto insurers. These carriers escape liability for third-party damages, even though the consumer has paid a premium for the coverage. On the other hand, excess insurers and car rental companies will have to respond to catastrophic third-party losses up to their limits of coverage, although they received no premiums or rental fees for the millions in additional coverage. The end result will likely be dramatic cost increases to the consumer for future car rentals.

One alternative solution would be a simple amendment to the Insurance Act to allow an allocation of risk between the insurers for the car rental companies and the personal lines underwriters. There is currently a provision for such loss transfer involving certain classes of automobiles (large commercial vehicles and motorcycles) in Section 275 of the Insurance Act. A minor amendment would provide for some form of loss transfer in car rental cases.

An exponential increase in the cost of renting an automobile is a solution that would not play well for either the insurance industry or consumers. While awaiting the decision of the Court of Appeal and future direction from the legislature, it would be worthwhile for both stakeholders to attempt to come up with a solution that will fairly allocate the risk and ensure that both the cost of automobile insurance and car rentals remain stable.