JANUARY 2001

MARINE INSURANCE: NON DISCLOSURE

Two recent decisions of the Ontario Superior Court highlight the law dealing with non-disclosure of material circumstances in insurance involving the transportation of goods. In the first decision, Nuvo Electronics v. London Assurance et. al. Madam Justice MacFarland of the Ontario Superior Court of Justice considered several important issues affecting the Canada Marine Insurance Act and the limitation of liability under the Carriage By Air Act.

On August 10, 1996, Air Canada transported 15 boxes said to contain integrated circuits from San Francisco to the Air Canada terminal in Toronto. Although the shipment was assigned a rack location on August 11, 1996, the shipment was never located. The shipment belonged to the plaintiff Nuvo Electronics which had ordered the cargo from Korea. Nuvo was the insured under an open cargo policy issued by London Assurance on July 26, 1994. At the time the policy was issued, Nuvo did not disclose to its broker Tom Buckley Insurance Brokers Limited, the fact that Nuvo had suffered seven cargo losses of integrated circuits from June 29, to July 26, 1994. Nuvo suffered several more air cargo losses after the London Assurance policy had been issued. This caused the underwriter to send a letter to Nuvo's broker on July 10, 1996, giving notice that pursuant to the cancellation clause of the policy, London Assurance was giving 30 days notice of cancellation of the policy "to be effective August 10, 1996." This notice was faxed on July 10, 1996 to the broker, and an original copy was sent by courier and received the next day by the broker. After the loss of August 10, 1996 shipment, Nuvo presented its claims to both Air Canada and London Assurance. The issues with respect to London Assurance were:

1. Was the policy void ab initio for material misrepresentation?
2. Was the policy in effect as of the time of the shipment from San Francisco to Toronto?

With respect to Air Canada, the issues were:

1. Was the air waybill issued by Air Canada deficient, so as to preclude Air Canada from relying on the limitation of liability under the Warsaw Convention, which is schedule "1" to the Carriage By Air Act?
2. Was there theft or other willful misconduct by the Air Canada employees which would deprive Air Canada of the limitation of liability?

With respect to material non-disclosure, the Court found that London Assurance was never made aware of the seven previous losses. The question was whether those losses having occurred was a "material consideration" for the insurer such that it would be entitled to void the policy. Justice MacFarland rejected the test for materiality set out in the House of Lords case in Pan Atlantic Insurance Co. v. Pine Top Insurance Co., [1995] 1 A.C. 501 (H.L.) which held that:

1. A circumstance may be material even though a full and accurate disclosure of it would not in itself have had a decisive effect on a prudent underwriter's decision whether to accept the risk, and if so, at what premium;
2. If the misrepresentation or non-disclosure of a material fact did not in fact induce the making of the contract, the underwriter is not entitled to rely on it as a ground for avoiding the contract. Justice MacFarland was of the view that the Pine Top decision does not reflect the law of Ontario and is contrary to the provisions of the Marine Insurance Act.

She commented that the House of Lord's definition of materiality flies in the face of the statutory definition. According to Section 21(3) of the Act, a circumstance is material "if it would influence the judgment of a prudent insurer in fixing the premium for determining whether to take the risk." The Court reasoned that the evidence of an independent underwriter at the trial became less significant in the face of the actual underwriter's evidence that even if the information had been disclosed, London would have continued with the risk. On the issue of the cancellation, the Court found that the insurer bears the primary responsibility, when it wishes to cancel its policy, to be specific in terms of the time when the cancellation is to be effective. Since the cancellation notice did not provide for a specific time, the Court observed that it could be interpreted to mean that the coverage would be in force for the entire day of August 10, 1996. In addition, the Court stated that the insurer did not comply with the language of its own policy wording under the statutory conditions which required the notice of cancellation to be given to the insured rather than the broker, and that it be by way of registered mail or personal delivery. [The policy also covered stock and statutory conditions had been attached to the marine cover.]

On the liability of the air carrier, the Court considered articles 6, 8, 9, 11 and 18 of the Warsaw Convention, with respect to the requirements for air waybills. In dispute was whether the air carrier could limit its liability to $25 U.S. per kilo in a situation where the air waybill had not been adequately filled out and thus contravened certain sections of the Warsaw Convention. It is interesting that the Court referred to a decision from the United Kingdom in Corocraft Ltd. v. Pan American Airways Inc. and felt that a Canadian court should interpret articles 8 and 9 in the same way as Courts in England and in the United States. According to the decision of the United States Court of Appeals for the Second Circuit in Brink's Ltd. v. South African Airways, the failure to include the nature of the cargo alone in the air waybill was sufficient to disentitle the carrier to limit its liability. Similarly, Justice MacFarland held that the failure to record whether the weight was in kilograms or pounds when the shipment was accepted by Air Canada was problematic. Justice MacFarland observed that the weight of the shipment is of commercial significance, using the test in the Brink's decision, since the weight is the basis upon which the airline charges for its service, as well as being necessary information for those charged with the responsibility of loading the aircraft in a safe and balanced manner for flight.

On the issue of theft and willful misconduct, Justice MacFarland concluded that the evidence presented at trial was powerfully persuasive that the shipment of highly valuable computer components was either stolen by one or more Air Canada employees, or at the very least with their complicity. The shipment could only have been moved by means of a forklift, and only Air Canada employees had access to those. On the facts, it was more probable than not that the shipment was stolen by an Air Canada employee or employees who had duties in the warehouse such that their activity in relation to the shipment would not be and obviously was not suspect. Thus, such employee was in the course and scope of employment when the theft was committed.

In the result, the plaintiff was entitled to judgment to the equivalent of U.S. $1,403,000.00 as against Air Canada. The case is being appealed.

In the second case, 10137799 Ontario Ltd. v. Ken Line International Ltd. (2000), 21 C.C.L.I (3d) 312 Justice Lamek of the Ontario Superior Court had occasion to consider the Nuvo decision in terms of an insurance broker's duties. The plaintiff owned a shipment of chocolate. The chocolate bars had exceeded the recommended shelf life and melted in Trinidad before delivery to the consignee. The plaintiff sued the freight forwarder and the insurance broker for negligence for failing to arrange appropriate insurance for the shipment. The defendants alleged that the plaintiff failed to disclose facts that were material to the risk: the age of the chocolate. In dismissing the defence the court found that there was no evidence that the policy would not have been issued if the material facts were disclosed to the underwriter. In following Madame Justice MacFarland's decision in Nuvo, Justice Lamek stated: " As I understand it, what MacFarland, J., was saying (and, respectfully, I agree) was that the insurer must show first that it did in fact regard the non-disclosure as material and, second, that a prudent, independent underwriter takes the same view. The defendants did not lead such evidence. In this situation, it might have been appropriate for me to draw an adverse inference from the defendants' failure to call the underwriter as a witness, inferring that the evidence he would have given would not support the defendants' case. Again, I decline to draw such an inference because it is not necessary for me to do so. The mere lack of the underwriter's evidence means that the defendants have failed to carry the burden that is placed upon them." The case is being appealed.

Carriage Contractor Found Responsible for Subcontractor Carrier's Negligence

A carriage contractor was recently found liable under the carriage contract for damages caused by the negligence of the actual carrier it subcontracted to move the shipment. The actual carrier failed to set the trailer's refrigeration unit to the correct temperature. Accordingly, a shipment of frozen meat arrived at destination in a deteriorated condition. After arrival at the destination the consignee agreed to sell the product for salvage prices. The meat was placed in temporary cold storage. On inspection, the salvage buyer insisted on a further reduction in price. The consignee agreed. The carriage contractor alleged that the consignee failed to mitigate its damages. The court found the carriage contractor responsible for the loss and found that the consignee had not failed to mitigate. The consignee notified the driver of the damage to the cargo. The carriage contractor failed to take any steps to find a buyer. See Gallop Logistics Corp. v. Hubbert's Processing and Sales Ltd. (2000), 100 A.C.W.S. (3d) 361.

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