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February 2007
McIntosh v. Royal & Sun Alliance Insurance
Co. of Canada 2007 FC 23: Pleasure Craft Warranties and Commercial
Purposes Defined
In 2002 Mr. McIntosh purchased a 32 foot cigarette
boat for $290,353. In July 2002 he spoke with his insurance broker
to obtain insurance on the vessel. He indicated at that time that
he was interested in using the vessel for a business involving poker
runs and charters. At the time the broker advised him that getting
commercial coverage was going to be difficult in the market existing
at the time.
Mr. McIntosh testified that he advised his broker
to obtain a pleasure craft policy. He understood that until he had
an actual paying customer he did not need a commercial policy.
On July 18, 2002 he incorporated a company "Offshore
Performance Tours." On July 24, 2002 he opened business bank
account and had business cheques printed. The same summer he placed
a decal of business name on the vessel to attract potential customers,
he printed 100-150 business cards, he entered poker runs to promote
his business and while his friend and brother-in-law took the boat
out on the runs he would stand by the dock and hand out business
cards. He testified that in 2002 he never had a paying customer.
In 2003 Mr. McIntosh created a website for the business,
he took friends out during poker runs to make it look like his business
was more successful than it actually was, he printed and distributed
100-150 postcard flyers which showed the vessel and the price list
for day tours and poker runs and advertised the business in power
boating magazines. He testified that he never took out paying customers.
The Royal & Sun Alliance policy of insurance issued
in 2002, under the heading "WARRANTIES", stated:
"In order to keep this policy in effect you
must make, and must keep, certain promises. These are know as
warranties. If any of these promises are violated, coverage will
be suspended from the time of such violation. "
"The following warranties apply to this insurance: The vessel
will be used solely for Private Pleasure Purposes. The vessel
will not be chartered or leased or used for any commercial purpose."
"Private Pleasure Purposes" was defined
in the policy meaning that "the insured Vessel is used for
recreational or leisure time activities, and includes entertainment
of business clients provided it is not being chartered or hired"
The Royal changed its policy wording in 2003 and sent
out a tag sheet explaining some of the changes. Under the heading
"WARRANTIES", the policy stated:
"All warranties have been split into two sub-categories,
either Absolute (which apply to the entire policy period) or Suspensive
.... "
"Warranties- Absolute: The following absolute warranties
apply to this insurance. 1.The vessel will be used solely for
Private Pleasure Purposes. The vessel will not be chartered or
leased or used for any commercial purpose....If any of the above
absolute warranties in this section have been breached, [c]overage
will cease immediately and cannot be reinstated once the violation
ends. You will have no coverage from the date of the breach."
"Private Pleasure Purposes" was defined
in this policy as meaning that "the insured Vessel is used
for recreational or leisure time activities." The reference
to the entertainment of business clients being allowed was deleted
from this version of the policy.
The court heard some additional evidence of the activities
prior to the loss. Mr. McIntosh produced banking statements that
showed cash deposits ranging from $100 to $3210 at a branch near
where the vessel was stored near Bancroft. One such deposit was
for $401.25 the exact amount advertised for a charter (including
the taxes). Mr. McIntosh testified that all deposits at the ATM
were in cash. This was considered as odd by the judge as one does
not normally deposit such large amounts of cash or coins in ATM
machines in Brantford when one lives in Windsor.
The boat was stolen in October 2003 and Mr. McIntosh
made a claim against the policy.
A number of issues arose at trial.
1. Did Mr. McIntosh take paying customers on his boat?
2. Did the marketing activities engaged in by Mr. McIntosh and his
brother-in-law amount to use of the boat for a commercial purpose,
thereby breaching the insurance policy?
3. Was Royal liable under the policy?
4. Was the broker liable for Mr. McIntosh's loss? Had the broker
failed to advise Mr. McIntosh about the change in the wording from
one year to the next?
The court found that in fact Mr. McIntosh took out
paying customers. The cash deposits in the ATM were not explained
to the satisfaction of the court. The brother-in-law did not testify
and the court found that the $401.25 deposit was done by the brother-in-law.
There was no explanation to the court why the brother-in-law was
not called to testify. An adverse inference was drawn by the court
for the failure to testify.
In addition the court found that the use of the vessel
was use of a commercial nature. The judge found that:
"It is also not necessary to determine whether
marketing activities, such as the handing out of flyers, and the
creation of a web site - activities that do not actually involve
the use of the boat itself - amount to use of a boat for a commercial
purpose. This is because I am satisfied that, at a minimum, the
activities in issue here involving the actual use of the boat,
including the storing of the boat at a location specifically because
of its proximity to business opportunities, the transporting of
the boat to poker runs in order to promote the business, the participation
in those poker runs for promotional reasons, and the taking of
friends and family on the boat during the poker runs in order
to make the business appear operational, are not recreational
or leisure time activities, and amount to the use of the boat
for a commercial purpose."
The court also found that the broker failed to meet
the standard of care required of reasonably prudent marine insurance
brokers. However, the broker was found not liable because there
was not a causal link between "the broker's" actions and
Mr. McIntosh's loss.
"While the broker unquestionably gave Mr. McIntosh
bad advice, at the end of the day, Mr. McIntosh did not rely on
that advice to his detriment. Rather Mr. McIntosh chose instead
to disregard the broker's advice, in the full knowledge that his
insurance coverage could be affected by his actions."
This decision is important not only for a clear determination
of what pleasure craft warranties mean and how they will be interpreted
and the duties of brokers but it has implications in other areas
of marine law. The Athens Convention (Part 5 of the Marine Liability
Act) governs transportation of passengers by water in Canada. It
applies to "a person carried on board a ship other than a ship
operated for a commercial or public purpose." The words used
in the Convention of "commercial purpose" had not been
subject to judicial interpretation in Canada prior to this decision.
The court in McIntosh states:
"Moreover, I am satisfied that the meaning
of the words 'commercial purpose', as they are used in the insurance
policy in issue here, cannot reasonably bear the interpretation
advanced by Mr. Macaulay, and extends beyond the narrow definition
advanced by him." [of paying customers]
"While the phrase "any commercial purpose" is not
defined in the policy, the ordinary meaning of the term clearly
extends beyond that suggested by Mr. Macaulay. It is not necessary
to try to lay down a global definition as to what will and will
not amount to a commercial purpose, and indeed, the experts struggled
to come up with a clear and all-encompassing definition of the
term. That does not, however, mean that the term is ambiguous.
Rather, it simply reflects the fact that the determination of
whether activities involving the use of a boat amount to use for
a commercial purpose will depend to a large extent on the specific
facts in issue in a given case."
In Canada we have some guidance as to how a court
will approach some very important issues.
Rui Fernandes
[Rui Fernandes and Kim Stoll represented Royal &
Sun Alliance at the hearing]
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