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Insurance - Relief from Forfeiture

Kozel v. The Personal Insurance Company (Ont CA, 2014)

In this case the court engaged in an extended discussion of the law of relief from forfeiture in an insurance context. It considered the interaction between the two statutory relief from forfeiture provisions contained in the Insurance Act [s.129] and the Courts of Justice Act (CJA) [s.98]. It concluded that the general relief from forfeiture provision in the CJA continued to have application to insurance cases in some situations:
(2) Relief from forfeiture

[28] 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.

[29] The remedy of relief against forfeiture is equitable in nature and purely discretionary: Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 CanLII 100 (SCC), [1994] 2 S.C.R. 490, at p. 504. Its origin and purpose was briefly reviewed by Doherty J.A. in Ontario (Attorney General) v. 8477 Darlington Crescent, 2011 ONCA 363 (CanLII), 2011 ONCA 363, 333 D.L.R. (4th) 326, at paras. 86-87:
Courts of equity have always had the power to relieve against the forfeiture of property consequent upon a breach of contract. That power is now expressed in various statutes dealing with specific kinds of contracts (e.g., contracts of insurance, leases) and has been given more general expression in s. 98 of the [CJA]. … The power is predicated on the existence of circumstances in which enforcing a contractual right of forfeiture, although consistent with the terms of the contract, visits an inequitable consequence on the party that breached the contract. Relief from forfeiture is particularly appropriate where the interests of the party seeking enforcement by forfeiture can be fully vindicated without resort to forfeiture. Relief from forfeiture is granted sparingly and the party seeking the relief bears the onus of making the case for it. [Citations omitted.]
[30] In insurance cases, the purpose of the remedy “is to prevent hardship to beneficiaries where there has been a failure to comply with a condition for receipt of insurance proceeds and where leniency in respect of strict compliance with the condition will not result in prejudice to the insurer”: Falk Bros. Industries Ltd. v. Elance Steel Fabricating Co., 1989 CanLII 38 (SCC), [1989] 2 S.C.R. 778, at p. 783.

[31] 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, at p. 504.

[32] This appeal considers statutory provisions found in s. 98 of the CJA and s. 129 of the Insurance Act. Under s. 98, “A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.” In contrast to this broad language, s. 129 provides:
Where there has been imperfect compliance with a statutory condition as to the proof of loss to be given by the insured or other matter or thing required to be done or omitted by the insured with respect to the loss and a consequent forfeiture or avoidance of the insurance in whole or in part and the court considers it inequitable that the insurance should be forfeited or avoided on that ground, the court may relieve against the forfeiture or avoidance on such terms as it considers just. [Emphasis added.]
[33] In Stuart v. Hutchins 1998 CanLII 7163 (ON CA), (1998), 40 O.R. (3d) 321 (C.A.), this court addressed the scope of both of these statutory provisions. Citing Falk Bros., Moldaver J.A. (as he then was) explained, at pp. 327-28, that where an insured’s breach constitutes imperfect compliance with a policy term, relief under s. 129 remains available. However, a breach that consists of non-compliance with a condition precedent to coverage forecloses the availability of relief against forfeiture under s. 129. Without deciding whether s. 98 could be invoked in the circumstances of the case, Moldaver J.A. rejected, at p. 333, the possibility of its application on the same grounds: namely, that even if s. 98 was available, its reach could not extend beyond that of s. 129 to relieve against forfeiture in the case of a breach amounting to non-compliance with a condition precedent to coverage.

[34] Courts have interpreted Stuart as having decided that s. 98 has no application to instances of non-compliance with a condition precedent.[1] Indeed, in this case, the application judge based his holding that s. 98 relief was not available solely on the fact that the respondent’s breach here is one of non-compliance with a condition precedent to coverage. At para. 43 of his reasons, he noted that Stuart is authority for the principle that relief cannot be granted under the powers conferred by s. 98 for a breach of a fundamental term or condition precedent of a contract.

[35] The respondent properly concedes that s. 129 of the Insurance Act cannot provide relief here. That provision does not give judges a broad discretion to "grant relief from forfeiture" generally where the conditions of an insurance policy are breached. Rather, the court's power under s. 129 is a narrow one pertaining only to those policy conditions – statutory or contractual – that relate to proof of loss. It does not apply generally to all policy conditions: Williams v. York Fire & Casualty Insurance Co., 2007 ONCA 479 (CanLII), 2007 ONCA 479, at paras. 33 and 35.

[36] The respondent argues that this might be the appropriate case in which to grant relief under s. 98 of the CJA. She argues that holding for the insurance company would expose her personal assets and allow the company to enjoy a large and unwarranted windfall.

[37] The brief submissions made by the appellant on the merits of the application of s. 98 were specific: authorization to drive is a condition precedent to coverage. That is, as the law is currently drafted, statutory condition 4(1) is a fundamental provision of an automobile insurance contract. And, until the legislature says otherwise, this court cannot grant relief against forfeiture. There was no explanation as to why statutory condition 4(1) is “fundamental”, nor was this court directed to any authorities in support of this argument.

[38] In light of this and the current state of the law described above in Stuart and Williams, I propose to examine whether the breach here – the failure to hold a valid driver’s license, in violation of statutory condition 4(1) – constitutes imperfect compliance with a policy term, rather than non-compliance with a condition precedent, and whether the respondent may be entitled to relief under s. 98.

[39] There are two threshold questions to resolve before undertaking the three-part analysis in Saskatchewan River Bungalows to determine whether the court should exercise its discretion to grant relief from forfeiture. First, does the breach in this case constitute imperfect compliance with a policy term or non-compliance with a condition precedent to coverage? Second, is relief available under s. 98 of the CJA despite the existence of a specific relief against forfeiture provision in the Insurance Act?

(a) Does the breach here constitute imperfect compliance with a policy term or non-compliance with a condition precedent to coverage?

[40] The difference between imperfect compliance and non-compliance is crucial for the purposes of the relief against forfeiture analysis. If the respondent’s breach of statutory condition is 4(1) is imperfect compliance with a policy term, relief against forfeiture under s. 98 of the CJA is available. If, however, the breach amounts to non-compliance with a condition precedent, the court cannot award relief under s. 98: Stuart, at p. 333.

[41] As McLachlin J. (as she then was) explained in Falk Bros., at p. 784, the distinction between imperfect compliance and non-compliance “is akin to the distinction between breach of a term of the contract and breach of a condition precedent.” However, in the context of relief from forfeiture, the imperfect compliance/non-compliance analysis does not engage with the contracts jurisprudence on conditions precedent. Rather, the focus is on whether the breach of the term is serious or substantial. Where the term is incidental, its breach is deemed to be imperfect compliance; where the provision is fundamental or integral, its breach is cast as non-compliance with a condition precedent.

[42] In Falk Bros., the issue was whether the claimant’s failure to give notice of his claim to the insurer within the prescribed period precluded an award of relief against forfeiture under s. 109 of the Saskatchewan Insurance Act, R.S.S. 1978, c. S-26. Reviewing the case law, McLachlin J. observed, at pp. 784-85, that the failure to give timely notice of a claim has been viewed as imperfect compliance, while failure to institute an action within the prescribed time period has been viewed as non-compliance, or breach of a condition precedent.

[43] McLachlin J. concluded that a failure to give notice of a claim within the relevant period is imperfect compliance, firstly because it is a “less serious breach” than failing to bring an action in a timely manner, and secondly because it pertains to proof of loss. In my view, this second reason has no application to our case, because unlike s. 109 of the Saskatchewan Insurance Act, s. 98 of the CJA does not limit relief to cases of imperfect compliance with a condition as to the proof of loss.

[44] Likewise, in Stuart, the import of the relevant contract provision – and accordingly, the scale of the breach – was an important factor in determining whether the breach constituted imperfect compliance or non-compliance with a condition precedent. At p. 332, Moldaver J.A. held that the failure of the broker to report the claim within the policy period amounted to non-compliance with a condition precedent to coverage, rather than imperfect compliance with a term of the policy. He stressed the conceptual difference between “occurrence” policies and “claims-made and reported” policies. In these latter policies, the notice provision is “integral”.

[45] Finally, this court addressed the imperfect compliance/non-compliance distinction in Canadian Newspapers Co. v. Kansa General Insurance Co. 1996 CanLII 2482 (ON CA), (1996),30 O.R. (3d) 257. In that case, a newspaper publisher entered into a corporate insurance policy with the insurer, which provided, among other things, that the publisher had a duty to co-operate with the insurer. This court held that the publisher could not succeed on its claim for relief against forfeiture because its breach of the duty of co-operation was “substantial”. In doing so, Weiler J.A. made the following observations, at p. 281:
In Travellers Indemnity Co. v. Sumner Co. [(1960), 27 D.L.R. (2d) 562 (N.B. C.A.)], the court held that, although a breach of the insured's duty of co-operation could qualify as imperfect compliance, an insurer could deny coverage or refuse to defend if the lack of co-operation was “substantial”. West J.A. held, at p. 565, that “[n]o inconsequential or trifling breach of such obligation should serve to exonerate the insurer from his contractual liabilities under the policy.” The liability in that case arose out of a motor vehicle accident. The breach complained of by the insurer was the insured's failure to promptly notify the insurer of a drink the insured had taken shortly before the accident. The insured informed the insurer of this drink before he was examined for discovery and, at trial, the judge found that the insured was not intoxicated at the time of the accident. The court of appeal held that this inconsequential breach should not serve to allow the insurer to refuse to indemnify the insured.

The breach complained of in the present appeal is a “substantial” breach of the insured's duty of co-operation and of the insurer's right to defend the action. [The publisher] failed to report on the progress of the litigation, to convey offers to settle, to inform [the insurer] of the theory of the defence and to advise that the action had proceeded to trial until after the trial had begun. This breach is more than mere “imperfect compliance,” it is a substantial breach of the policy and on this basis alone [the publisher] is not entitled to claim relief from forfeiture.
[46] In Colliers McClocklin Real Estate Corp. v. Lloyd’s Underwriters, 2004 SKCA 66 (CanLII), 2004 SKCA 66, 10 C.C.L.I. (4th) 1, at para. 28, the Saskatchewan Court of Appeal followed Canadian Newspapers, emphasizing that the proper inquiry is whether the relevant contract provision is a fundamental term, and whether its breach is a fundamental breach.

[47] In light of the above, my view is that in this case, the respondent’s breach of statutory condition 4(1) is not non-compliance with a condition precedent. There are no grounds to believe that 4(1) is a fundamental term or that the respondent’s breach of it was of a fundamental nature. While the provision is a condition in name, the appellant pointed to no language in the contract stressing that the insurance coverage was conditioned on the claimant being authorized to drive. This fact renders our case different than the facts in Stuart, where plain language in the contract identified the relevant contractual term as a condition precedent. Neither was the respondent’s breach here a fundamental one. Had the respondent’s violation of statutory condition 4(1) been more substantial – for example, if she had been drinking heavily prior to driving – she may have been barred from obtaining relief from forfeiture. This case, however, involves a relatively minor breach.

[48] Going forward, this court’s strict holding in Stuart should be applied narrowly. In Marche v. Halifax Insurance Co., 2005 SCC 6 (CanLII), 2005 SCC 6, [2005] 1 S.C.R. 47, the Supreme Court decided that s. 171 of the Nova Scotia Insurance Act, R.S.N.S. 1989, c. 231, which states that a policy condition is not binding on the insured if a court finds it “unjust or unreasonable”, extends to statutory conditions. Citing the decision in Falk Bros., McLachlin C.J. reasoned that s. 171’s remedial purpose warranted this broad interpretation.

[49] Plainly, Marche addressed the interpretation of a different statute, and its holding is not controlling of the case before us. Nonetheless, Marche’s broad interpretive approach indicates that courts should give remedial provisions like s. 98 a wide scope to provide relief where the result would be otherwise inequitable or unjust.

[50] In light of Marche, I believe the decision in Stuart should be given a narrow application. A court should find that an insured’s breach constitutes noncompliance with a condition precedent only in rare cases where the breach is substantial and prejudices the insurer. In all other instances, the breach will be deemed imperfect compliance, and relief against forfeiture will be available.

[51] This holding does not upset the balance in the existing relief against forfeiture jurisprudence, because an insured must still make three showings – that his or her conduct was reasonable, that the breach was not grave, and that there is a disparity between the value of the property forfeited and the damage caused by the breach – in order to prevail.

(b) Is relief available under s. 98 in insurance cases?

[52] The remaining question of law is whether the relief against forfeiture provision in s. 98 of the CJA applies to contracts regulated by the Insurance Act. There is little jurisprudence on this issue, and it appears to be unsettled as to whether the relief provision in s. 98 is operative in the insurance realm, given the existence of s. 129 of the Insurance Act. In my view, it is.

[53] The Supreme Court addressed equitable jurisdiction in the insurance context in Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., supra. The Court rejected the appellant’s argument that Alberta’s Insurance Act, R.S.A. 1980, c. I-5 occupied the field of equitable relief and precluded application of the Judicature Act, R.S.A. 1980, c. J-1 (the equivalent of the CJA) to life insurance contracts. The Court explained at p. 505 that the Insurance Act “does not ‘codify’ the whole law of insurance”; rather, “it merely imposes minimum standards on the industry.”

[54] It is worth repeating that courts are to interpret relief from forfeiture provisions broadly. In Falk Bros., McLachlin J. noted at pp. 782-83, that:
The first consideration is that s. 109 is a remedial section and as such should be given an appropriately broad interpretation. In Minto Construction Ltd. v. Gerling Global General Insurance Co. (1978), 86 D.L.R. (3d) 147, citing Canadian Equipment Sales & Service Co. v. Continental Insurance Co. (1975), 59 D.L.R. (3d) 333 (Ont. C.A.), MacKinnon J.A. noted at p. 151 that the equivalent Ontario “section is ‘an ameliorating clause’, and [that] it should be given a fair, large and liberal interpretation”.
[55] While these comments relate to relief from forfeiture provisions in Saskatchewan and Ontario’s provincial insurance statutes, s. 98 is no different in that it too is a remedial section and merits a correspondingly broad interpretation.

[56] I endorse the view expressed by Brown J. in Sage v. Peel Mutual Insurance Co. (2005), 32 C.C.L.I. (4th) 110 (Ont. S.C.), a case discussed by the application judge. In Sage, the court granted relief under s. 98 to the plaintiffs who were denied coverage after failing to pay an insurance premium prior to an automobile accident. While recognizing that Saskatchewan River left the issue open, Brown J. stated, at p. 118:
In these limited circumstances I am satisfied that the general provisions of s. 98 of the [CJA] can provide the statutory basis for granting relief from forfeiture notwithstanding there is a specific relief from forfeiture provision in the Insurance Act.
[57] Like Brown J., I would hold that the relief from forfeiture provision in s. 98 of the CJA applies to contracts regulated by the Insurance Act. This holding is consistent with the Supreme Court’s finding in Saskatchewan River Bungalows that an insurance statute does not occupy the field of equitable relief, and that statutory standards operate as a floor, rather than a ceiling, for the insurance industry.

[58] As the application judge explained, s. 129 of the Insurance Act is restricted to instances of imperfect compliance with terms of a policy after a loss has occurred; it has no application to cases where the breach occurred before the loss. As a consequence, a person who loses coverage because he or she was driving with an expired license, or because he or she failed to make a premium payment, see Sage, cannot rely on s. 129 for relief. That s. 129 leaves individuals like these – who have acted in good faith and whose breaches are relatively minor – without a remedy gives force to the argument that s. 98 should be operative in insurance cases. Thus, in the absence of clear legislative intent indicating that s. 129 of the Insurance Act applies to the exclusion of s. 98 of the CJA, I would hold that the latter provision is available as an avenue of relief for contracts governed by the Insurance Act.
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