Carscallen Blog

Insurance Law case addresses primary insurer dispute

Posted by Carscallen LLP on Nov 20, 2020 2:10:10 PM

Written by Susanna Gafarova and Urvil Thakor

The Alberta Court of Appeal (“CA”) recently released reasons for judgment in the case of Tokio Marine & Nichido Insurance Company v. Security National Insurance Company (“Tokio Marine”)[1] that will have serious implications for insurance companies of owners of courtesy or loaner cars provided to customers by car dealerships for personal injury claims arising from accidents caused by the customer.

In Tokio Marine, the CA was tasked with determining who is the primary insurer for an accident involving a driver who was loaned a courtesy car at no cost by a car dealership, and who allegedly collided with a skateboarder while operating the courtesy car. The competing insurance policies were the policy belonging to the owner of the vehicle being serviced and the policy belonging to the owner of the courtesy car.

In this case, the driver (“Driver”) drove a car belonging to her friend (“Friend”) to the dealership (“Dealership”) to be serviced. While servicing the vehicle, the Dealership loaned the courtesy car (“Courtesy Car”) to the Driver for free. The Loaner Vehicle Agreement (“Loaner Agreement”) for the Courtesy Car was between the Driver and the Dealership, and the Courtesy Car was being driven by the Driver when she allegedly collided with the skateboarder (“Plaintiff”). The Courtesy Car, however, was owned by Honda Finance Inc. (“CC Owner”), and leased to Honda Canada Inc., who in turn leased the Courtesy Car to the Dealership.

The Plaintiff sued the Driver, the CC Owner and the Dealership for personal injuries suffered in the alleged accident. The main legal issue for the CA in Tokio Marine was to determine which insurance company was the primary (first-loss) insurer: (1) the insurance company of the CC Owner (Tokio Marine), or (2) the insurance company of the Friend (Security National). Under the Insurance Act,[3] the primary insurer is obligated to defend and indemnify the insured for claims arising from accidents they are involved in.[3]

 
History of the claim

Tokio Marine, as the insurance company of the CC Owner, originally sought a declaration in the Court of Queen’s Bench (“QB”) under s. 578 of the Insurance Act that Security National, as the insurance company of the Friend, was the primary insurer and therefore responsible for defending the claim.

The application was denied by Master Birkett in QB, holding that Tokio Marine, the insurer of the Courtesy Car, was responsible for defending and indemnifying the claim. Master Birkett’s decision rested on the facts that the Courtesy Car was lent to the Driver at no charge, and that the Dealership was not in the business of renting vehicles in its ordinary course of business. The relevant provision of the Miscellaneous Insurance Provisions Regulation[4] applies only to rental car companies that lease vehicles in the ordinary course of business.

Tokio Marine appealed the Master’s decision to QB Justice, where Justice Fraser dismissed the appeal holding that Security National was not responsible for defending the claim.

Tokio National further appealed Justice Fraser’s Order to a three-judge panel of the CA consisting of Justice Wakeling, Justice Crighton, and Chief Justice Fraser. The CA panel released three reasons for judgment dismissing the appeal. Although the individual reasons of the three CA justices each rely on slightly differing legal analysis, the panel unanimously came to the same holding in dismissing the appeal and finding that the insurance company of the Friend (Security National) was not the primary insurer.

The CA reasons, particularly the reasons of Justice Wakeling and Chief Justice Fraser, provide a useful summary and explanation of two concepts in insurance law:

  • the “priority flip” of determining first-loss insurance in the case of vicarious liability for the negligence (torts) of rental or lease car drivers under insurance law; and
  • the “temporary substitute automobile” when a vehicle is driven by someone with the consent of the insured.
Priority Flip

Justice Wakeling’s reasons canvass the history and context of the priority flip in insurance law, whereby the primary vicarious liability of an automobile owner’s insurance company “flips” in the case of rented or leased vehicles. As a result of the priority flip being enacted statutorily in Alberta under the Miscellaneous Provisions Regulation[5] (“Miscellaneous Regulation”), the general statutory rule under the Insurance Act[6] that a vehicle owner’s insurance is first-loss insurance, and a driver’s insurance is excess insurance, is “flipped”.

Consequently, for leased or rented vehicles in Alberta, due to the priority flip, the driver’s insurance is considered first-loss insurance and the vehicle owner’s insurance is considered excess insurance.[7]

However, the CA panel was unanimous in finding there was no priority flip where a courtesy car is provided to a customer for no charge and that Tokio Marine, as insurer of the CC Owner, was the first-loss insurer for the torts of the Driver.

Although the reasoning for this finding differed somewhat amongst the CA panel, relevant findings that the panel relied on in holding that the priority flip did not apply in this case included:

  • The Dealership was not in the car rental or car leasing business - it sells and services automobiles;[8]
  • The Dealership neither rented nor leased the Courtesy Car to the Driver or the Friend.[9] The same was true in respect of the CC Owner (Honda Canada Finance Inc.).[10] As such, neither the Driver nor the Friend was a rentee or lessee;[11]
  • The Courtesy Car was a loaner from the Dealership and was provided to the Driver at no cost;[12]
  • The Loaner Agreement was not a rental or a lease agreement;[13] and
  • The fact that Honda Canada Finance Inc. (as owner of the vehicle) leased the Courtesy Car to Honda Canada Inc. was irrelevant to the determination of whether s. 7(1) of the Miscellaneous Regulation applied here and whether a priority flip existed.[14]
Temporary Substitute Automobile

On the issue of whether the Courtesy Car being driven was considered a “Temporary Substitute Automobile” under Alberta’s Standard Policy Form 1, thus entitling the Driver to insurance coverage under the Friend’s automobile insurance policy with Security National, the CA panel was split.

Justices Wakeling and Crighton both found it was unnecessary to decide whether the vehicle being driven entitled the Driver to insurance coverage under the Friend’s policy.[15] Chief Justice Fraser, however, found that the Courtesy Car did constitute a Temporary Substitute Automobile and that the Driver was entitled to insurance coverage under the Friend’s policy.[16] Despite this finding, Justice Fraser found that Tokio National remained the first-loss insurer and was required to indemnify the claim.

Further Consideration

The Tokio Marine decision left at least one issue unresolved given that Justices Wakeling and Crighton declined to rule on whether the Courtesy Car was or was not a Temporary Substitute Automobile. There is therefore some legal uncertainty in the event that a similar situation arises where the claim is in excess of policy limits provided by the first-loss insurer for the owner of the courtesy vehicle (which the CA found not to be the case in Tokio Marine). It is unclear in such a case if the insurer of the insured driver would be obligated to respond and provide excess insurance coverage. Further judicial consideration of the Temporary Substitute Automobile issue may clarify what happens in such situation.

An interesting point also arises from Chief Justice Fraser’s analysis where she states: “I do not foreclose the possibility of a car dealership electing to rent or lease vehicles to customers while their cars are being serviced. But to engage the priority flip would require entering into a valid rental or lease agreement.”[17]

One potential result of this case’s determination of liability may be that car dealerships decide to rent or lease courtesy cars to customers instead of loaning them to customers at no charge in order to avoid liability for claims arising from an accident involving their customers.

 

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*This update is intended for general information only on the subject matter and is not to be taken as legal advice.

 

[1] Tokio Marine & Nichido Insurance Company v. Security National Insurance Company, 2020 ABCA 402 [Tokio Marine].

[2] The primary insurer must indemnify the insured up to the policy limits. Any damages in excess of the policy limits are paid from other available insurance policies.

[3] RSA 2000 c I-3 [Insurance Act].

[4] Alta Reg 120/2001 [Miscellaneous Regulation].

[5] Miscellaneous Regulation, s. 7(1).

[6] Insurance Act, s. 596(1).

[7] Tokio Marine at paras 12-26, 35-38.

[8] Tokio Marine at paras 44, 156.

[9] Tokio Marine at paras 46, 157, 181, 212, 238-247, 249.

[10] Tokio Marine at para 167.

[11] Tokio Marine at paras 45, 55, 159, 212, 236.

[12] Tokio Marine at paras 47, 55, 158,

[13] Tokio Marine at para 181.

[14] Tokio Marine at paras 56, 234, 250-251.

[15] Tokio Marine at paras 256-257.

[16] Tokio Marine at paras 190, 192, 194-209.

[17] Tokio Marine at para 253.

Topics: Insurance and Tort Liability

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