The Court may refuse to apply an insurance policy provision where it would lead to an unjust result in the circumstances, per s. 545(1) of the Insurance Act or pursuant to the Court’s ability to relieve against forfeiture, per the Judicature Act, s. 10.
Funk v. Wawanesa Mutual Insurance Company, 2017 ABQB 308, per Simpson, J. [4239]
I. FACTS AND ISSUES
The insured Funk was seriously injured in a single vehicle accident on May 20, 2008. He was driving in his own lane on a two-lane highway in the dark where there were no street lights. When he saw an approaching vehicle by virtue of its headlights start to come toward him, he turned right, went into the ditch and struck a field approach, causing his vehicle to roll over. He suffered serious injury, including a spinal cord injury. The other vehicle left the scene.
Funk retained counsel and made a claim against the Motor Vehicle Accident Claims Fund. The Fund paid him out the statutory limit of $200,000. The Plaintiff considered that his claim was worth a million dollars and, accordingly, claimed against his insurer Wawanesa, under his SEF 44 Endorsement for the balance. Section 2 of the Endorsement provided that “the Insurer shall indemnify each allegeable claimant to the amount to each allegeable claimant is entitled to recover from an inadequately insured motorist.” The term “inadequately insured motorist” was defined in section 1 of the Endorsement to mean “the driver or owner of an uninsured automobile or unidentified automobile as defined in the ‘Uninsured Automobile Coverage’ of the Policy.”
Section B of the standard auto policy, dealing with Accident Benefits, define the term “unidentified automobile” in subsection 3 as follows:
(3) An unidentified automobile under this subsection means an automobile which causes bodily injury or death to an insured person arising out of physical contact of such automobile with the automobile of which the insured person is an occupant at the time of the accident, provided
(a) the identity of either the owner or driver of such automobile cannot be ascertained... (emphasis added by the Court)
Wawanesa applied for summary judgement on the basis that the insured was not entitled to coverage because the uninsured motorist coverage was only triggered if there was physical contact between the insured’s vehicle and the unidentified driver’s vehicle and there had been no such contact in this case.
II. HELD: For the insured; summary dismissal application dismissed and declaration issued that the insured was entitled to coverage.
1. The Court rejected the insured’s argument that there is an ambiguity in the Endorsement because the definition of “unidentified vehicle” in the Endorsement was not the same as that set out in the standard auto policy. The uninsured motorist coverage in the SPF No. 1 required physical contact between the vehicles, whereas no such physical contact was required under the SEF 44. The Court held that there was no ambiguity because the Endorsement incorporated by reference by definition of “unidentified automobile” from the policy and the wording of the policy requiring physical contact was unambiguous:
[39] “Unidentified automobile” has no definition in the Endorsement. Rather, the Endorsement incorporates by reference the definition in the Standard Policy. Consequently, the definition in the Endorsement cannot be ambiguous. The definition in the Endorsement is identical to the one in the Standard Policy.
[40] The Standard Policy states that an “unidentified automobile” means an automobile which causes bodily injury or death to an insured person arising out of physical contact of such automobile with the automobile of which the insured person is an occupant at the time of the accident. (emphasis added by the Court)
[41] The words “physical contact” can only refer to a situation where the unidentified automobile and the one occupied by the insured must, during their encounter, touch one another.
[42] Thus, Mr. Funk’s interpretation of those words is incorrect because his interpretive approach takes the evidentiary requirement of corroboration of physical contact, as required under clauses C and D of the Endorsement, and incorporates it, wrongly, as part of the definition of “uninsured automobile,” specified in the Standard Policy. That use of clauses C and D makes no sense because D(ii) refers to physical evidence indicating the involvement of an unidentified automobile.
[43] In other words, Mr. Funk’s interpretation conflates the issue of entitlement to coverage with the separate issue of the evidence required to establish his claim for coverage. Clauses C and D describe a standard of proof for the physical contact required in the definition of an unidentified automobile. They do not form part of the definition.
. . .
[46] In the present matter, only one definition exists. There is no ambiguity reading the contract as a whole. The Standard Policy sets out the definition, and the Endorsement incorporates that definition by reference.
[47] The words “physical contact” requires just that – touching of surfaces – between the two vehicles.
2. The Court passed on potential application of section 545 (1) of the Insurance Act, R.S.A. 2000, c. I-3, which provides that “[i]f a contract contains a [term, the term,] is not binding on the insured if it is held to be unjust or unreasonable by the Court before which a question relating to it is tried.”
(a) The Court held that s. 545 (1) permits a Court to relieve an insured from a binding policy term (statutory or contractual) if the court finds the application of the term unreasonable in the circumstances:
[50] On its face, this section permits the Court to relieve an individual from a binding contractual term if the Court finds the term unreasonable.
[51] A similar provision in the Nova Scotia Insurance Act, RSNS 1989, c 231, was analyzed in Marche v. Halifax Insurance Co, 2005 SCC 6 (CanLII), [2005] 1 SCR 47 (Marche).
[52] Marche dealt with the statutory insurance condition requiring an insured to inform the insurer of a material change to the risk, which the insurer argued was created by leaving the insured property vacant. The insured had not informed the insurer of the vacancy, a vacancy that was uneventful. The property was destroyed by fire after a tenant had moved in and the insurer sought to invalidate coverage because of the earlier failure to inform. At paras 10-12, McLachlin CJ framed the issues as:
For others, the question is whether s. 171 [i.e. the similar provision to Alberta’s 545] applies not only to delete conditions that are unreasonable on their face (should there be any), but also to relieve against the results of applying conditions that, in the particular circumstances of the case, are unreasonable in their application or draconian in their consequences. Framed in these terms, the question takes on an entirely different complexion – which I find more attractive because it avoids an inequitable result otherwise inescapable.
The wording of s. 171 permits the issue to be characterized either way, but the second, in my view, better corresponds with the remedial objectives of the provision.
It follows that the essential question is whether s. 171 applies to statutory conditions that are unreasonable or unjust in their application. For the reasons that follow, I conclude that it does. (emphasis added by the Court)
[53] The Supreme Court confirmed that s. 171 was intended to provide relief from unjust conditions and should be interpreted broadly to apply to both statutory and contractual provisions; and further, that a condition may be reasonable on its face and unjust in the particular circumstances. It upheld the trial judge’s conclusion that the Court should relieve against any injustice.
[54] Given the intention of parties to this type of insurance coverage, which is to compensate the insured person injured as a result of an incident involving an unidentified automobile, it seems unreasonable to enforce a term of the contract that demands physical contact between the insured motor vehicle and the unidentified automobile, notwithstanding the existence of physical evidence corroborating the fact that the relevant incident occurred as a result of the insured’s defensive driving action directed at avoiding physical contact with another vehicle.
(b) The Court held that applying the “physical contact” requirement of the definition of “unidentified driver” would generate an unreasonable outcome:
[56] The effect of applying the “physical contact” portion of the definition in Mr. Funk’s insurance policy generates an unreasonable outcome, where the insured who avoids physical contact in order to prevent an accident would have no coverage under the Endorsement, but the insured who takes no evasive action and physically contacts the unidentified vehicle has coverage.
3. However, the Court held that s. 545 of the Insurance Act was not applicable because it came into effect after the accident and the Court held that it did not have retrospective effect.
(a) The Court held that there is a presumption against applying a statutory provision retrospectively when to do so would affect the substantive issues implicating vested rights of the parties, without a clear legislative intention to the contrary: Gustavson Drilling (1964) Ltd. v. Minister of National Revenue, [1977] 1 SCR 271, at pages 279-282.
(b) The Court held that Funk’s substantive right (the cause of action against his insurer) crystalized at the time of the rollover, and so did the insurer’s substantive rights. The Court held that since insurers at the time of the accident would have calculated premiums based on the previous law, this was a good illustration of why such a section should not be applied retrospectively:
[68] Mr. Funk’s substantive rights under the Endorsement crystallized at the time of the rollover; so did Wawanesa’s substantive rights. Those rights vested at the time of the rollover on May 20, 2008, and s. 545(1) cannot be retroactively applied to interfere with them. The similar provision in the old s. 552 was only applicable – on the day of Mr. Funk’s rollover – to contracts of fire insurance and fire insurance policies.
[69] The Supreme Court in [Angus v. Sun Alliance Insurance Co. [1988] 2 SCR 256] at para 28, sets out the policy reasons for not applying statutes retrospectively:
This case is a good illustration of the policy reasons why statutes should not be given retrospective operation in the absence of an intention to do so that is either expressed in, or is necessarily implied by the statute. Substantial rights of insurance companies are affected by the decision of Galligan J. The reasoning regarding limitations Acts applies a fortiori to the situation of the insurance companies. Insurance companies calculate their premiums according to known risk factors. When the rates for the contract in question here were calculated, it was known that this particular risk – a suit in tort by Diane Angus against her husband – was precluded by s. 7. The insurance company relied upon that knowledge in setting its rates. A retrospective change to that circumstance should not lightly be implied. In [Martin v. Perrie, 1986 CanLII 73 (SCC), [1986] 1 SCR 41], this Court held that the change of a limitation period for medical malpractice actions (from one year from the date of the Act to one year from the date of discovery of the damage) could not be given retrospective effect since physicians could have relied on the older provision to order their affairs (e.g., by destroying records) in such a way that they would be prejudiced by the change. The analogy here, in my view, is clear.
[70] Accordingly, although the plain reading of the definition of an “unidentified automobile” in the Endorsement risks encouraging unreasonable conduct, s. 545(1) of the Insurance Act cannot assist Mr. Funk in this case because it came into effect (under Part 5, Subpart 1 – General Insurance Provisions) after Mr. Funk’s right to claim indemnity under the Endorsement arose.
(c) The Court held that a similar provision that was in affect at the time of the rollover (allowing the Court to refuse to apply a contractual condition or to do so would be unjust), only applied to fire insurance policies under that Insurance Act, it was not available to assist Funk.
4. However, the Court concluded that the application of the contractual provision in this case would be contrary to public policy and courts can refuse to enforce a contractual term that would be against public policy, such as by influencing an insured to commit a tort:
[73] Notwithstanding the fact that s. 545 was not available to Mr. Funk at the time of the rollover, this Court is persuaded that the requirement of “physical contact” in the Endorsement would have resulted in the commission of a tortious act by the insured contrary to public policy. Rather than encouraging defensive driving on the part of the insured in order to avoid a collision, the provision of the Endorsement requires “physical contact” with the other automobile, creating a situation which obliges Mr. Funk to somehow make physical contact with the other automobile in order to benefit from insurance coverage by Wawanesa.
[74] Applying the “physical contact” portion of the definition in Mr. Funk’s insurance policy would produce a result at odds with public policy. Effectively, the insured who avoids physical contact has no coverage under the Endorsement, but the insured who takes no evasive action and physically contacts the unidentified vehicle has coverage.
[75] Courts have generally refused to enforce the term of a contract that would make the insured commit a tortious act: Brazier v. Columbia Fishing Resort Group Corp (1997), 1997 CanLII 434 (BC SC), 33 BCLR (3d) 293 at paras 16-17. . .
[76] On balance, the desirability of enforcing the contractual term and the requirement of “physical contact” in the Endorsement is outweighed by the need to encourage or facilitate conduct that is not contrary to public policy. That is, the promotion of defensive driving on the part of the insured in a manner that avoids collision is more beneficial to the society than encouraging the insured to collide with another automobile in order to benefit from insurance coverage.
[77] The common definition of an “unidentified automobile” in the Endorsement and the Standard Policy produces in these circumstances a strange result. Including the requirement of “physical contact” – between the unidentified automobile and the insured who avoided contact – leaves the insured with no opportunity to access coverage, as intended by the insuring agreement, even though the insured can produce the otherwise required corroborating evidence supporting his allegations. This seems to encourage or facilitate conduct contrary to public policy: i.e. a collision provides coverage, but avoiding a collision does not.
[78] Following this to its logical result leaves the insurer in a most desirable position. If an insured deliberately makes contact he risks losing coverage for his deliberate act. If he avoids contact he loses coverage for driving defensively. Having found no legal equivalent to more eloquently state it, the position of the insurer is, “heads I win, tails you lose”.
[79] Consequently, I find that the enforcement of the “physical contact” term in the Endorsement will tend to lead to a result contrary to public policy; and as such should not be enforced: Brazier at paras 16-17.
5. The Court also held that it could exercise its jurisdiction to relieve against forfeiture pursuant to section 10 of the Judicature Act to relieve the insured Funk of the “physical contact” requirement in the policy:
[81] Relief against penalties and forfeitures is an established equitable doctrine or rule of equity. This Court is statutorily empowered “to relieve against all penalties and forfeitures and, in granting relief, to impose any terms as to costs, expenses, damages, compensation and all other matters that the Court sees fit”: Judicature Act, s. 10.
[82] Relief from forfeiture simply refers to the power of a court to protect a person against the loss of an interest or a right because of a failure to perform a covenant or condition in an agreement or contract: Kozel v. Personal Insurance Co, 2014 ONCA 130 (CanLII) at para 28, 119 OR (3d) 55 (Kozel). In the present matter, Mr. Funk runs the risk of losing his insurance coverage interest because of his failure to make physical contact with the unidentified automobile that he claims caused the injuries he suffered from the rollover, as required by the Endorsement.
[83] Relief from forfeiture is available in an insurance context: Mohr v. Paul Revere Life Insurance Co (1999), 11 CCLI (3d) 249 at paras 39-41, 44, 1999 CanLII 5415 (BC SC), 1999 CanLII 5415 (BCSC).
[84] The Supreme Court directs that in exercising its discretion to grant relief from forfeiture, a court must consider three factors: (i) the conduct of the applicant, (ii) the gravity of the breach, and (iii) the disparity between the value of the property forfeited and the damage caused by the breach: Saskatchewan River Bungalows Ltd v. Maritime Life Assurance Co, 1994 CanLII 100 (SCC), [1994] 2 SCR 490 at para 32, 115 DLR (4th) 478 (WL) (Saskatchewan Bungalows); Kozel at para 31. On the existing record there are no arguments or evidence from parties as to the reasonableness or otherwise of Mr. Funk’s conduct; although it seems to me that, if proven, a defensive driving maneuver seeking to avoid collision would be characterized as reasonable conduct. While the issue of unpaid premiums does not appear relevant in the present matter, the value of Mr. Funk’s loss of insurance coverage is potentially of a significant magnitude where his defensive driving is considered a breach of his insurance policy.
. . .
[86] The decision to exercise the Court’s equitable jurisdiction to relieve Mr. Funk from forfeiting his insurance coverage is informed by the Court’s refusal to enforce a contractual term that would lead to a result contrary to public policy, not by sympathy.
[87] In addition, although I have concluded earlier that s. 545 was not operative at the time of Mr. Funk’s rollover and cannot be applied retroactively, I note that it is now applicable to every contract [of insurance] made in Alberta other than a contract of (a) life insurance, (b) accident and sickness insurance, or (c) reinsurance: Ibid, s. 513. Thus, the current application of s. 545 to contracts of automobile insurance precludes the notion that the exercise of the Court’s equitable jurisdiction in the circumstances of Mr. Funk’s matter might potentially open the floodgates, because it is a rare occasion where a contract produces a result which is contrary to public policy.
III. COMMENTARY:
Pursuant to this decision, in any given automobile situation, the Court has the discretion to refuse to enforce a policy term against an insured where that would be “unjust or unreasonable” in the eyes of the Court pursuant to s. 545, where it is contrary to public policy or by granting relief against forfeiture. Note that the Court is not granted the right to refuse to enforce a policy provision that works against the insurer under s. 545, given that s. 545 expressly grants the power to refuse to enforce a provision against and insured. Quere whether or not the Court has the power to refuse to enforce a provision against an insurer if applying it would be contrary to public policy.