What to Expect of the Courts

The Ontario Court of Appeal appears prepared to consider whether or not the doctrine of reasonable expectations should be extended to unambiguous policy wording, based on the court’s comments in two recent decisions.

Up until this point, generally when interpreting policy language, the approach of the Canadian courts has been:

* to interpret insuring agreements broadly and exclusion clauses narrowly;

* when there is ambiguity in the policy wording, interpret the wording in favour of the insured by application of the contra proferentem principle (this legal principle of contract interpretation states that when there is any ambiguity in the wording of a contract, it should be read against the party that wrote it) ; and

* when ambiguity still remains, interpret the language by divining the reasonable expectations of the parties which, most often, are those of the insured.

THE CHILTON ROAD MAP

In the Court of Appeal’s 1997 decision in Chilton v. Co-operators General Insurance Co., the court considered the possibility of applying the reasonable expectations doctrine even when the policy wording is unambiguous. In the circumstances of that case, the court found the wording was clear and so the doctrine didn’t need to be extended.

In Chilton, the court observed that some U.S. courts have more broadly applied the principle of honouring reasonable expectations. The principle’s broader application has been used to justify decisions granting coverage to policyholders, even though the policy language was not ambiguous and seemed to deny coverage. The court also noted that this broader application of the principle is controversial in the United States. Quoting from an American text, the court listed the following justifications for extending the principle to unambiguous wording:

* insurance policies are typically long, complicated documents that insurers know policyholders will not even read, let alone study carefully;

* insurers’ marketing approaches ordinarily do not even allow a purchaser to examine a copy of the policy until after the contract has been concluded;

* in some cases, protecting reasonable expectations is appropriate because allowing an insurer to enforce the limitations or restrictions in the policy would be unconscionable or unfair;

* expectations created by an insurer’s marketing practices should be protected; and

* expectations resulting from the insurer’s characterization of the insurance coverage warrant protection in some circumstances.

On the other hand, the principle’s broader application has been criticized on the grounds that it:

* is too imprecise to result in predictable court decisions;

* undermines the role of adhering to the express words of the contract;

* precludes insurers from relying on the written terms of their policies, and

* permits recovery by insureds who do not read their policies despite clear and unambiguous policy language.

No Canadian appellate court has yet to embrace the broader application of the principle, the Ontario Court of Appeal noted. It went on to say that, given the clarity of the automobile policy wording being addressed in Chilton, it was not necessary to decide the reach of the reasonable expectations doctrine in that case.

Nevertheless, Ontario Court of Appeal Justice John I. Laskin did provide the following road map for its possible use. “In considering whether to apply the reasonable expectations principle to cases in which there is no ambiguity in the policy, first the court should consider whether a reasonable insured could have expected coverage,” Laskin wrote. “An arguable case for coverage may exist, for example, if the policy is difficult to read or understand and if the insurer, either by its marketing practices or by giving its policy a misleading name, created or contributed to a reasonable expectation of coverage.

“Coverage may also be warranted where the insurer’s interpretation of the relevant policy provision would virtually negate the coverage the insured expected by paying a premium. In these circumstances, the court may be justified in looking beyond the words of the contract and holding the insurer responsible for the insured’s reasonable expectation of coverage.”

Recently, the Ontario Court of Appeal has had occasion to comment further upon this issue.

EXPECTATIONS IN POLOWIN

In Polowin v. Royal & SunAlliance Insurance Co, the court once again made reference to the reasonable expectations doctrine. Polowin focused on the court’s earlier decision on the application of deductibles upon payment of motor vehicle property damage claims under automobile insurance policies.

In dealing with the interpretation of the deductible provision, at Paragraphs 79-80, the court stated in Polowin that the meaning of the deductible provision should be considered in light of the principles for interpreting insurance policies – including interpreting the scope of coverage to give effect to the reasonable expectations of the parties. Again the court observed that the application of this doctrine in Canada has been limited to resolving coverage disputes where the policy is ambiguous, citing the Chilton decision and the Supreme Court of Canada’s judgment in Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co..

Writing for the court in Polowin, Justice Laskin said: “I do not consider the interpretation of [the deductible provision] or the application of a deductible in total loss cases to be ambiguous. Nonetheless, and without deciding whether the reasonable expectations principle should have a wider reach in Canada [emphasis added], I think that I can safely say it is always desirable when the court’s interpretation accords with the parties’ reasonable expectations. That is undoubtedly the case here.”

Laskin went on to say that “deductibles are a well-understood and well-accepted feature of automobile insurance policies. A reasonable insured would fully expect the insurer to apply a deductible in total loss cases, including in those cases where the insurer acquires the salvage. A reasonable insured would not expect to receive more than he or she bargained for.”

EXPECTATIONS IN FRESH PRODUCE

Most recently, the issue again arose in the Ontario Court of Appeal’s 2005 decision in Fresh Taste Produce Ltd. v. Sovereign General Insurance Co.

In Fresh Taste Produce, the issue before the court was whether the motions judge had erred in failing to grant an adjournment to permit the appellant to introduce evidence as to the reasonable expectations of the parties, and also whether the lower court’s interpretation of the exclusion clauses in an all-risk policy was correct. The Court of Appeal found the appellant did not show the refusal to grant an adjournment would likely have affected the result.

In so doing, the court noted in Paragraphs 7-8 of its reasons that its decision in Chilton recognized the doctrine of reasonable expectations – and that it usually applies when a court is required to construe an ambiguity. The court also referenced the discussion in Chilton about the potential broader application of the reasonable expectations doctrine. The judicial panel in Fresh Produce described the Chilton court’s discussion of the reasonable expectations doctrine as follows: “At that time, [Justice] Laskin recognized that the doctrine of reasonable expectations applies primarily when the court is required to construe an ambiguity in a provision of the contract,” the court wrote. “He noted that some courts in the United States have given the principle a broader meaning and have applied it in cases where the policy appeared to unfairly deny coverage to the insured. He added, however, that in Canada no appellat e court had yet embraced the broader application of the principle, although he went on to state there might be some instances where a broader application of the principle might be appropriate.”

In Fresh Produce, the Appeal Court held it had “no basis for saying that this is the kind of case warranting a broader application of the doctrine of reasonable expectations [as] the appellant did not put forward the proposed affidavit he would have filed had an adjournment been granted.”

WAITING FOR THE RIGHT FACTS?

Given the Court of Appeal’s recent observations about and characterizations of the reasonable expectations doctrine – including in what circumstances, and on what basis it might be applied – it appears the Court of Appeal is anticipating (or one might even go so far as to say encouraging) the receipt of an appropriate case in which it may directly deal with whether or not the doctrine of reasonable expectations should be extended to the interpretation of unambiguous policy language.

It appears that both insurers and insureds should consider this issue when addressing matters of policy coverage and should stay tuned for future developments in the Court of Appeal.

Michael S. Teitelbaum is a Senior Partner at Hughes Amys LLP in Toronto. His practice concentrates on civil litigation with particular emphasis on insurance coverage and policy interpretation on behalf of both insurers and insureds, professional liability, governmental liability, products liability, and environmental law. He is certified by the Law Society as a Specialist in Civil Litigation. His firm is a member of The ARC Group Canada Inc., a network of independent law firms across Canada focusing on the areas of insurance law and risk management. A version of this article previously appeared in LexisNexis Canada Inc.’s Canadian Journal of Insurance Law, of which Michael is the General Editor.