In this issue:
1. Firm and Industry News
2. Undertaking to Provide Insurance in Contracts
3. Marine Insurance - Onus on Insurer to Prove Fortuity
4. Small Vessel Compliance Program
5. Direct Compensation for Vehicle Property Damage
1. Firm and Industry News
- November 27th, Toronto - Canadian Board
of Marine Underwriters Annual Meeting and Dinner.
- November 28th, Toronto - Commons Institute
Conference on Aviation Issues.
- November 29th, Toronto - Toronto Transportation
Club Annual Dinner
- December 7th, Montreal - Grunt Club Annual
- January 17, 2013 Toronto - Fernandes Hearn
Annual Maritime and Transportation Law Seminar
Gordon Hearn and David Huard will be
representing the firm at the Transportation Law Institute being
held in Nashville, Tennessee on November 9, 2012.
Gordon Hearn will be presenting a paper on
"The Identity Theft of Cargo: Reducing Losses and the Allocation
of Liability by the Courts" at the Canadian Board of Marine
Underwriters Annual Conference in Toronto on November 27, 2012.
Rui Fernandes will be a presenting a paper
on "Environmental Concerns in the Aftermath of an Accident"
at the Commons Institute Conference on Aviation Issues on November
28th in Toronto.
Promised to Include Us In Your Insurance
But You Didn't":
A Model for the Award of Damages to a Contracting Party Left Without
Indemnity provisions in contracts are common, where
one party agrees to make the other "whole" should some
legal claim or event come to pass. They often incorporate or are
accompanied by an undertaking by the party providing the indemnity
to extend that party's liability insurance over to and for the benefit
of the other party, who would then become an "additional insured"
on the former's policy. In many cases, however, this obligation
to provide coverage is not satisfied, and, as a result, the other
party is left without recourse to the insurance policy in the event
of a legal claim asserted against it by a third party. Named as
a defendant in a law suit, the party who should have named as an
insured will then have to fund the costs of its defence and "dig
into its own pocket" to pay a settlement or a judgment that
might otherwise have been funded by the insurance company.
What relief is available to the "aggrieved party"
who is faced with a lawsuit and who finds out that it does not have
the insurance protection that it thought it had? The recent Ontario
Court of Appeal case of Papapetrou v. 1054422 Ontario Limited
et al (*1) illustrates how this scenario may translate into
a claim for monetary damages against the party who failed to place
the insurance. The amount of the damages to be paid can, however,
be a tricky "case by case" quantification depending on
the scope of the "lost insurance" relative to the nature
of the claims and the issues raised in the lawsuit that has to be
defended. One complication may be the fact that perhaps only some of the claims or allegations raised by a plaintiff would have come
within the scope of the insurance policy.
Maria Papapetrou commenced a lawsuit for injuries
allegedly resulting from a slip and fall on black ice that had accumulated
on stairs at the entrance of a building known as the Galleria. She
sued the owner of the building and the manager, collectively known
as "The Cora Group", and Collingwood Landscape Inc. ("Collingwood"),
which had been contracted by The Cora Group to provide winter maintenance
and snow removal services for the Galleria.
Ms. Papapetrou's claim alleged the standard allegations
against those responsible for or in possession of the property -
alleging that the defendants failed to prevent the accumulation
of ice and to maintain the property in safe condition for visitors
and so on. Ms. Papapetrou also cited ss. 3 and 4 of the Occupier's
Liability Act (*2), which prescribes as follows:
3(1) An occupier of premises owes a duty to take
such care as in all the circumstances of the case is reasonable
to see that persons entering on the premises, and the property
brought on the premises by those persons are reasonably safe while
on the premises.
(2) The duty of care provided for in subsection
(1) applies whether the danger is caused by the condition of the
premises or by an activity carried on on the premises.
(3) The duty of care provided for in subsection
(1) applies except in so far as the occupier of the premises is
free to and does restrict, modify or exclude the occupier's duty.
4(1) The duty of care provided for in subsection
3(1) does not apply in respect of risks willingly assumed by the
person who enters on the premises, but in that case the occupier
owes a duty of care to the person to not create a danger with
the deliberate intent of doing harm or damage to the person or
his or her property and to not act with reckless disregard of
the presence of the person or his or her property.
Under the terms of the service contract, Collingwood
assumed certain obligations and agreed to indemnify The Cora Group
The Contractor assumes sole responsibility for
all persons engaged or employed in respect of the Work and shall
take all reasonable and necessary precautions to protect persons
and property from injury or damage. The Owner shall not be
responsible in any way for any injury to or the death of the Contractor's
or to any other person
in any way resulting
from any act or omission of the Contractor
shall indemnify and save harmless the Owner
claims, losses, liabilities, demands, suits and expenses from
whatever source, nature and kind in any manner based upon,
incidental to or arising out of the performance or non-performance
of the contract by the Contractor.
Portions of the above contract clause are in italics
so as to emphasize the key wordings taken into consideration by
the Court of Appeal in its analysis and disposition of the case,
which is discussed below.
Collingwood also agreed in the contract to obtain
comprehensive general liability insurance "covering its
liability and that of its employees, agents and representatives
for bodily injury
for a minimum of $2,000,000" and
to "include the [The Cora Group] as an additional insured" on the policy. Contrary to this obligation, Collingwood instead
obtained an insurance policy with $1 million of coverage and it
failed to name The Cora Group as an additional insured.
The Cora Group "Wants Out"
The Cora Group brought a motion for summary judgment
in Ms. Papapetrou's action, asking that Collingwood assume The Cora
Group's defence of the claim, citing the insurance obligation and
the indemnity provisions in the contract. Collingwood opposed this
application on the basis that the plaintiff's claims against The
Cora Group extended beyond allegations relating only to the "icy
stairs" and therefore beyond the contract and Collingwood's
scope of involvement.
The judge hearing the motion for summary judgment
ordered that Collingwood assume the defence of the action on behalf
of The Cora Group and indemnify The Cora Group with respect to any
damages awarded to the plaintiff. While agreeing with Collingwood's
argument that some of the allegations of negligence "fell within
the general occupiers' liability basket", the judge concluded
those allegations were still linked to the essential negligence
alleged as pertaining to the failure to address the icy conditions
causing the fall. Having regard to the nature of the claim and noting
the contract language requiring Collingwood to "assume sole
responsibility to protect persons from injury" and also
to "indemnify and save harmless the owner
all claims" Her Honour held that Collingwood was obligated
to defend the action for The Cora Group and to indemnify The Cora
Group for Ms. Papapetrou's claims.
Collingwood appealed this decision to the Ontario
Court of Appeal.
At the Court of Appeal
Collingwood raised two issues on the appeal:
1. The judge erred in ordering it to indemnify The
Cora Group at this stage of the action; and
2. The judge erred in ordering that Collingwood assume the defence
of The Cora Group, there being no contractual duty to defend.
The Cora Group conceded that the order that Collingwood
indemnify it with respect to any damages awarded to the plaintiff
in the main action was premature as no evidence was led on the motion
for summary judgment touching on the matters of liability and damages
(i.e. How could an order issue that "A" indemnify "B"
if it had not yet been determined if "B" was liable, thereby
triggering "A"'s obligation to indemnify?). Collingwood's
obligation to indemnify was not absolute, but was, rather, limited
to claims "based upon, incidental to or arising out of Collingwood's
performance or non-performance of the contract." As no
evidence concerning the issues of liability or damages was led on
the motion for summary judgment, the Court of Appeal confirmed that
it was premature for the trial judge to have dealt with the indemnity
The Tricky Part: Issue #2 and What to do With the
Fact that The Cora Group was Paying for its Own Defence?
As to the second issue, Collingwood argued on the
appeal that the contract does not say Collingwood must defend actions
brought against The Cora Group, or, even if there was a duty for
it to defend the action for The Cora Group, Collingwood asserted
that such defence should extend only to claims arising out
of Collingwood's performance or non-performance of the contract.
The Court of Appeal drew a contrast between the notion
of Collingwood having to "defend" The Cora Group as distinct
from being liable to it for an award for damages respecting the
costs borne by the latter in defending the action. Holding that
the motion judge erred in ordering Collingwood to assume the defence
of The Cora Group, the Court of Appeal found Collingwood liable
for the cost of The Cora Group's defence of the action, with the
exception of any costs incurred exclusively to defend claims that
did not arise from Collingwood's performance or non-performance
of the contract. Looked at another way, these damages equate to
the cost of the defence that Collingwood's insurer would have been
obliged to provide for The Cora Group had Collingwood fulfilled
its contractual obligation.
But what should the amount of such damages be for
The Cora Group's costs? Would it be "dollar for dollar"
as incurred (or to still be incurred) by The Cora Group in its defence?
The Court of Appeal did not have the usual direct means of looking
at the language of a policy to determine the scope of the defence
obligation as would have been owing to The Cora Group as there had
been no "additional named insured" endorsement added to
the policy. It was, therefore, necessary for the Court of Appeal
to analyze the insurance obligation and the indemnity provision
in the contract. Collingwood was to obtain comprehensive general
liability insurance to insure against bodily injury; however, the
scope of its obligation to indemnify was limited to "claims
based upon, incidental to or arising out of the performance or non-performance
of the contract by the Contractor." Accordingly the quantum
of damages to be paid would be the amount that The Cora Group had
to pay to defend claims for bodily injury arising out of the manner
that Collingwood performed or failed to perform the contract. These
costs included all costs for The Cora Group's defence of the action,
save for any costs incurred exclusively to defend claims that did
not arise from Collingwood's performance or non-performance of the
service contract. The Court reasoned that this outcome is corroborated
by the well established principle that an insurer's obligation to
defend is limited to defending claims that - if proven true - would
fall within coverage under the policy. (*3)
The Court of Appeal did not agree with the motions
judge's ruling that all of the claims in the action could be characterized
generally as claims in negligence for failing to maintain an ice-free
pedestrian stairway, with the result that all claims in the action
would have been captured under the insurer's duty to defend. The
Court of Appeal set forth a more nuanced approach to be taken in
the analysis. In order to determine whether an insurer's duty to
defend arises in relation to the claims raised in a particular action,
the court is required to assess the substance or the "true
nature" of each claim contained within the pleadings to see
if it fits within the scope of coverage. (*3) This assessment must
be made substantially on the facts as stated in the pleadings themselves;
however, extrinsic evidence may sometimes be considered, including
when such evidence has been referred to in the pleadings. Pleadings
may therefore include both covered and uncovered claims. If there
is any possibility that any of the claims are captured by a policy
of insurance, then that insurer has a duty to defend those claims.
In this case, the coverage would be limited to matters
pertaining to Collingwood's performance or non-performance of the
contract. The Court of Appeal found that the "true nature"
of the claims were best classified as allegations pertaining to:
i) negligent maintenance due to Collingwood's performance
or non-performance of the service contract (which may include
claims under the Occupiers' Liability Act with regard to
obligations delegated to Collingwood);
ii) negligent conduct on the part of The Cora Group
extending beyond Collingwood's obligations under the contract,
iii) a statutory cause of action under the Occupiers'
Liability Act extending beyond those obligations delegated
to Collingwood under the contract. The Court of Appeal noted that
the duty to defend extends only to the first category of claims.
The Court of Appeal noted that when an action includes
both covered and uncovered claims, an insurer may nonetheless be
obliged by the terms of the policy to pay all costs of defending
the action save for those costs incurred exclusively to defend uncovered
The Court of Appeal drew on its 2008 decision in Hanis
v. Teevan (*6) as further support for the outcome in this case.
In that case, the Court addressed the question of the apportionment
of defence costs when an action raises both covered and uncovered
claims and costs incurred in respect of the defence to the former
also aid in the defence of the latter. Unless the precise language
of the insurance contract provides otherwise, the insurer would
be responsible for all costs associated with the defence of the
covered claims notwithstanding that such costs might have a common
element with or benefit the insured in respect of defences to claims
not covered by the policy.
In this case, there was nothing in the contract that
would indicate any intention that the coverage that was to have
been placed by Collingwood would exempt such 'mixed' claims as coming
within the obligation to defend. Accordingly, Collingwood was liable
for The Cora Group's defence costs other than those clearly and
exclusively pertaining to item ii) and iii) above.
The Difference Between "Assuming" a Defence
and Liability for Damages for Defence Costs: Avoiding a Conflict
Collingwood also argued that that it should not be
liable for damages as its insurer was already effectively defending
The Cora Group and paying for counsel to defend Collingwood against
the claims arising from the performance of the service contract.
The Court of Appeal disagreed. The Court stated that it would be
inappropriate for Collingwood to assume The Cora Group's defence;
that is, it would not be appropriate for one lawyer to represent
both Collingwood and The Cora Group. The proper remedy was
an award of damages based on The Cora Group having to pay its own
lawyer to defend its interests. Where, as here, distinct claims
were made against a service provider (Collingwood) and a property
owner (The Cora Group), the ability of a single counsel to defend
both claims was hampered by an inherent conflict of interest. While
Collingwood and The Cora Group would have the same agenda in many
respects in the overall defence of the action, these interests were
not totally aligned. Collingwood might, for example, benefit by
a finding that The Cora Group was liable to the plaintiff for damages
arising from the claims captured under items ii) and iii) above,
then falling outside of what would have been covered by the insurance
policy. Thus, there is an apparent, if not real, conflict in the
conduct of the defence as Collingwood could benefit to the detriment
of The Cora Group depending on how liability would be assessed on
the plaintiff's claims at the end of the day. This conflict was
exacerbated by the fact that both Collingwood and The Cora Group
had cross-claimed against each other - each having an interest in
blaming the other for what had happened.
In the circumstances, this conflict was best dealt
with by The Cora Group continuing to retain its own independent
counsel in respect of all allegations advanced by the plaintiff
in the action. The Court noted that Collingwood's obligation to
pay (at least in part) for two defence counsel was a necessary consequence
of Collingwood's breach of its contractual obligation to place insurance.
Accordingly, the Court of Appeal allowed the appeal
and set aside the motion judge's order, substituting an order that
Collingwood pay for The Cora Group's defence of the action save
for any costs incurred exclusively to defend claims that did not
arise from Collingwood's performance or non-performance of the contract.
*1 (2012) 111 O.R. (3d) 532 (C.A.)
*2 R.S.O. 1990, c.O.2
*3 Non-Marine Underwriters, Lloyds of London v. Scalera,
 1 S.C.R. 551 at paras. 74-76 and Nichols v. American Home
Assurance Co.  1. S.C.R. 801 at pp. 810-812.
*4 Monenco Ltd. v. Commonwealth Insurance Co.  2 S.C.R.
699 at para. 28-35
*5 Unger (Litigation Guardian of) v. Unger (2003) 68 O.R.
(3d) 257 (C.A.) at para. 10
*6 (2008) 92 O.R. (3d) 594 (C.A.)
3. Marine Insurance - Insurers must prove lack
of fortuity when relying on exclusions
Feuiltault Solution Systems Inc. v. Zurich Canada 2012 FCA 215
In our April 2011 Newsletter, Rui Fernandes reviewed
the decision of the Federal Court of Canada in Feuiltault Solution
Systems Inc. v. Zurich Canada 2011 FC 260. Justice Gauthier
had reviewed the provisions of an "all risks" marine policy
in the determination of whether damages to a book-binding machine
shipped from Canada to Germany were covered under that policy. The
court found for the defending insurer on the basis that the plaintiff
insured had not proven that the loss was caused by a fortuity and,
further, that the exclusion for insufficiency or unsuitability of
packing also relieved the defending insurer of liability.
On January 17, 2012, the Federal Court of Appeal heard
the appeal of the insured, Feuiltault Solutions Systems Inc. See Feuiltault Solution Systems Inc. v. Zurich Canada 2012 FCA
There were two issues raised on appeal: (1) which
party bears the onus of showing fortuity or lack thereof regarding
the cause of the loss; and (2) whether the exclusion with respect
to packing applied.
The Federal Court of Appeal's Reasons for Judgment
as provided by Pelletier J.A. for the court came to the same ultimate
conclusion, but through a different route reminding insurers and
insureds and their counsel alike as to the proper onus in such coverage
Feuiltault Solution Systems Inc. sued its marine insurers,
Zurich Canada under an all risk policy (Institute Cargo Clauses
A) for damage to book-binding machines shipped to Germany in three
separate containers in May 2005. The trial judge accepted that the
goods were received in good order, the machines had been trucked
to the Port of Montreal and that the sea journey had been uneventful
with no ingress of either fresh or sea water (as opposed to humid
air) inside the containers.
Upon arrival at destination, however, the machines
were variously rusted and ultimately declared a total loss. Regarding
the proximate cause of the loss, Zurich's expert, Captain Mel Fernandes,
testified that the corrosion had resulted from a heavy condensation
within the containers during transit and that the most likely source
of that condensation was the high moisture content in the heat pressure
treated lumber, a clearly unsuitable choice. Further, the expert
opined that the steel machines were insufficiently packed before
transit by Feuiltault having been left unwrapped in a container
full of wood that had not been kiln-dried and with no use of desiccants.
The trial judge accepted the expert's evidence.
Ultimately, the main issue for the trial judge was
whether or not Feuiltault had met its burden of proving that the
loss occurred through a fortuity, whatever that fortuity might be.
The second issue was whether Zurich had established that the proximate
cause of the loss was the insufficient or unsuitable packing of
the cargo inside the containers and thus excluding the loss per
paragraph 4.3 of the Institute Cargo Clauses A, incorporated by
reference into the Zurich policy.
The trial judge found that Feuiltault had not established
by preponderance of proof that any fortuitous event or anything
of an accidental nature had occurred during the insured transit.
Further, the trial judge found that in respect of the packing and
preparation of the machinery loaded by Feuiltault inside the three
containers, that such packing was insufficient. The case was dismissed.
Issue No. 1: Which party bears the burden of proving
a fortuity or lack thereof?
On this first issue, the Federal Court of Appeal found
that the Federal Court at trial had erred in law in the imposition
on the insured of the burden of proving that the loss in question
was caused by a fortuity. By doing so, the contract between Feuiltault
and Zurich, its insurer, had been given no effect.
The Court of Appeal reviewed the trial judge's review
of the law noting the reference to British and Foreign Marine
Insurance Co. v Gaunt,  2 AC 41 (HL) ("Gaunt")
including the famous passage by Lord Sumner therefrom:
There are, of course, limits to "all risks".
There are risks and risks insured against. Accordingly the expression
does not cover inherent vice or mere wear and tear or British
capture. It covers a risk, not a certainty; it is something, which
happens to the subject-matter from without, not the natural behaviour
of that subject-matter, being what it is, in the circumstances
under which it is carried.
The Court of Appeal noted the trial judge's conclusion
arising from her interpretation of the passage in Gaunt that,
in order to succeed, the insured must establish on a balance
of probabilities that the loss was due to a fortuity, being an external
accidental cause. The trial judge had found that the insured did
not show that the loss was caused by a fortuity on all the evidence
The Court of Appeal disagreed with this interpretation
finding that, "where the insurer has contractually excluded
non-fortuitous losses, the onus of proving lack of fortuity with
respect to those losses falls on the insurer."
Pelletier, J.A. at paragraphs 21 and 22 in the Reasons
went on to further quote from Lord Sumner in the Gaunt decision
as reproduced above.
The roots of the issue with respect to fortuity
raised by this appeal lies in the passage that immediately follows
the one quoted above:
Finally, the description "all risks"
does not alter the general law; only risks are covered which
it is lawful to cover, and the onus of proof remains where it
would have been on a policy against ordinary sea perils. I think,
however, that the quasi-universality of the description does
affect the onus of proof in one way. The claimant insured against
and averring a loss by fire must prove loss by fire, which involves
proving that it is not something else. When he avers loss by
some risk coming within "all risks", as used in this
policy, he need only give evidence reasonably showing that the
loss was due to a casualty, not to a certainty, or to inherent
vice or to wear and tear.
Gaunt, cited above, at 455.
Two propositions emerge from these passages. The
first is that the insured has the onus of showing that the loss
was due to a fortuity or a casualty. The second is that inherent
vice is not a fortuity. These two propositions must be considered
together with another legal proposition, namely that the insurer
has the burden of proving the exclusions upon which he relies
when denying coverage:
A long standing line of authorities require an
insurer, seeking solace in an exclusion from otherwise unlimited
liability, to show that the exclusion applies.
Continental Insurance Co. v. Dalton Cartage
Co., 1982 CanLII 13 (SCC),  1 S.C.R. 164 [Dalton
The Court of Appeal went on to state that the question
of onus was important where the insurer excludes non-fortuitous
losses, such as losses caused by inherent vice. The proposition
that an insured under an all risks policy must show (even if only
by inference) that the loss was caused by a fortuity is in conflict
with the proposition that the insurer must prove the application
of an exclusion (including that relating to non-fortuitous losses)
upon which it intends to rely to deny coverage.
The Court of Appeal reminds us at paragraph 26 of
the Reasons that any policy must be read as a whole to give effect
to all terms of the contract. In essence the Court of Appeal states
that, where the scope of coverage is to be determined solely on
the scope of the insuring agreement, then the insured must show
his loss if fortuitous as per Gaunt. But where the question
of coverage depends upon both the insuring agreement and the exclusions
and where the insurer has specifically excluded non-fortuitous losses,
especially inherent vice, the insurer must be taken to have accepted
the burden of proving lack of fortuity.
To find otherwise would require the insured to prove
that the loss was due to a fortuity and render the exclusion of
non-fortuitous losses superfluous. If the insured can prove that
the subject loss was caused by a fortuity, the exclusions then cannot
apply and, if he cannot so prove and his claim fails, then the exclusions
will never arise.
To avoid this result, Pelletier J.A. states at paragraph
The only way to give both the insuring agreement
and the exclusions their proper scope is to hold that the insured
under an all-risks policy needs only show that the cargo was in
good condition when the insurance attached and that the goods
were damaged while the insurance was in force. It is for the
insurer who wishes to deny coverage to prove that the exclusion
with respect to inherent vice or other non-fortuitous loss applies.
Pelletier J.A. went on to comment on the "unqualified
application" of the principles set out in Gaunt, in Nelson Marketing International Inc. v. Royal & SunAlliance
Insurance Co. of Canada, 2006 BCCA 327,  B.C.J. No. 1454.
In that case, the British Columbia Court of Appeal had found that,
had the insured been able to prove that the environmental conditions
of the holds of subject vessels been out of the ordinary, it would
have successfully proven a fortuity and brought the claim within
coverage. At paragraph 32 of the Reasons, Pelletier J.A. comments
that proofs of such a fortuity would render the exclusion for inherent
vice superfluous thereby relieving the insurer of the burden to
prove the application of the exclusion.
His Lordship then concluded at paragraph 33,
I am therefore of the view that, in order to give
full effect to the terms of the policy in this case, it is
necessary to treat the exclusions for non-fortuitous losses (inherent
vice, wear and tear, deliberate acts of the insured) as an undertaking
by the insurer to assume the burden of proving that the loss was
not fortuitous, thereby relieving the insured of the obligation
to do so. (emphasis added)
The Court of Appeal then found that the Federal Court
erred in law in imposing on the insured the burden of proving that
the loss was caused by a fortuity thereby failing to give effect
to the contract between insured and insurer.
The insurer had not defended on the basis of a lack
of a non-fortuitous loss and so the court did not have to consider
whether the insurer had met the burden of proving same. However,
there remained to be determined whether the insurer could still
successfully deny coverage based on the application of the exclusion
regarding unsuitable or insufficient packing.
Issue No. 2: Did the exclusion regarding insufficient
or unsuitability of packing apply?
The policy contained the following exclusion:
4.3 Loss, damage or expense caused by insufficiency
or unsuitability of packing or preparation of the subject matter
insured (for the purpose of this Clause 4.3 "packing"
shall be deemed to include stowage in a container or lift van
but only when such stowage is carried out prior to attachment
of this insurance or by the Assured or their servants).
The Court of Appeal confirmed the lack of case law
in the area. Applying Helicopter Resources Pty Ltd v. Sun Alliance
Australia Ltd. (The Icebird), (1991) 312 LMLN (Supreme Court
of Victoria) at 31, Pelletier J.A. stated that the exclusion applies
to the "steps taken by the insured to protect the cargo from
ordinary incidents of carriage, including stowing cargo in a container
and taking steps to immobilize it in the container. By necessary
implication, I also understand this exclusion to refer to the suitability
of the materials used by the insured for those purposes."
For the exclusion to apply, the packing was required
to have taken place at the insured's premises and prior to the attachment
of the insurance. Further, the loss or damage had been caused by
the insufficiency or unsuitability of the packing. In this case,
the trial judge had found that the rusting had been caused by the
high moisture content of the pressure treated wood used in the containers
and such wood (as a packing material) was unsuitable and the cause
of the loss. The failure to protectively wrap the machines contributed
to the loss and also satisfied the requirements of the exclusion.
The Court of Appeal concluded that the application
of the exclusion was consistent with the general purpose of marine
insurance to indemnify against risks of a marine voyage and not
to guarantee the skill and workmanship of the insured in the preparation
of the cargo for the voyage.
While the result in this case was the same for these
parties upon appeal, the approach confirmed by the Federal Court
of Appeal is that burden of showing a non-fortuity will be on the
insurer when reliance upon an exclusion is sought in order to deny
Kim E. Stoll
4. Small Vessel Compliance Program - Non Pleasure
The Small Vessel Compliance Program (SVCP)(*1) is
for vessels that:
- measure between 0 and 15 gross tonnage
- carry between 0 and 12 passengers
- is not a pleasure craft
This includes workboats and government vessels.
The SVCP does not currently enroll fishing
vessels or human-powered vessels.
If you own or operate a small vessel in Canada, there
are safety and environmental requirements in the Canada Shipping
Act, 2001 (CSA 2001) that apply to you and your veseel. The
SVCP is not mandatory, but meeting these requirements is.
The federal government set out the objective and strategy
of the program on its introduction.
Objective of the Program: To support safety in the
small vessel community by increasing understanding of and compliance
with legal requirements
Strategy of the Program:
- Provide guidance and easy-to-use tools for small
- Help small vessel owners/operators understand and
meet all of their obligations under the Canada Shipping Act, 2001
- Monitor the compliance of small vessel operations
The program is a practical response to the large number
of small commercial vessels in existence, the concern for safety
which has been paramount since the occurrence of a number of small
vessel incidents involving passengers (for example, two children
drowning on the vessel "True North II"), and the lack
of government resources (inspectors) to effectively enforce the
compliance with the legislation that exists.
The program has its origins in the July 2007 Canada
Shipping Act 2001 changes to the Voyage classes for small commercial
craft. Where there used to be ten voyage class definitions, there
are now just four: Sheltered Waters Voyage; Near Coastal Voyage,
Class 1; Near Coastal Voyage, Class 2; and Unlimited Voyage.
In April 2010 the government continued its legislative
changes for small commercial craft with changes in construction
requirements. A vessel built, imported or converted to commercial
use prior to April 29 2010 was required to meet the non-pleasure
craft requirements of the 2004 edition of the Construction Standards
for Small Vessels (TP 1332), or, as applicable, the alternatives
set out for vessels built before April 2005 in the Small Vessel
Regulations. A vessel built, imported or converted to
commercial use after April 29 2010 is now required to meet the non-pleasure
craft construction requirements of the Small Vessel Regulations and the 2010 edition of the Construction Standards for Small
Vessels (TP 1332).
For vessels more than 6 metres long, the requirements
for pleasure craft and non-pleasure vessels are not the same. Vessel
owners and operators must be aware that if they intend to use
a vessel that is more than 6 metres long that was built to the pleasure
craft requirements, it may have to meet additional construction
requirements before they can use it commercially.
Depending on the type and the use of the vessel, these
may include such things as a stability assessment, bilge pumping
arrangements and additional fire safety equipment.
Commercial vessels must be designed, built and equipped
to operate safely in their area of operation and must be operated
in a way that respects their design limitations. This means the
owner and operator must know both the vessel and the area where
it is operate in.
The requirements for crewing, construction and equipment
may change from one voyage class to another. Voyage classes are
defined in the Interpretation section of the Vessel Certificates
Regulations and are mainly based on distance from shore and,
in some cases, nearest place of refuge. The following is a short
description the each class.
Sheltered Waters Voyage - a voyage that is
in Canada on a lake or a river above tidal waters, where a vessel
can never be further than 1 nautical mile from the shore, or that
is on the waters listed in Schedules 1 and 2 of the Vessel Certificates
Near Coastal Voyage, Class 2 - a voyage, other
than a Sheltered Waters Voyage, during which the vessel is always
within 25 nautical miles from shore in coastal waters of Canada,
the United States (except Hawaii) or Saint Pierre and Miquelon,
and within 100 nautical miles from a place of refuge.
Near Coastal Voyage, Class 1 - a voyage that is not a Sheltered
Waters Voyage or a Near Coastal Voyage, Class 2; that is between
places in Canada, the United States (except Hawaii), Saint Pierre
and Miquelon, the West Indies, Mexico, Central America or the northeast
coast of South America; and during which the vessel is always north
of latitude 6°N, and within 200 nautical miles from shore or
above the continental shelf.
Unlimited Voyage - a voyage that is not a Sheltered
Waters Voyage or a Near Coastal Voyage.
Owners and operators must also respect any additional
restrictions/requirements noted on the Notice of Inspection,
if one has been issued to the vessel. Such restrictions are based
on an assessment of the vessel's design, the crew's qualifications
and the equipment carried on board. The Notice of Inspection may
also define limits for the area the vessel can operate in or set
environmental conditions (e.g., wave height and wind speed) and
other voyage restrictions.
The Small Vessel Regulations contain safety
requirements for five categories of vessels. Which requirements
apply depends on the vessel's purpose (what it is used for).
Table 1 indicates which parts of the Small Vessel
Regulations apply to each category. Requirements of other regulations,
such as the Collision Regulations, also apply to small vessels.
The Small Vessel Compliance Program is presently undergoing
an assessment to determine if it has been effective in increasing
compliance. Owners and operators have concurrently seen a stronger
determination by Transport Canada inspectors to have boat owners
fully comply with regulations. "You must comply" attitude
is across all regions.
As reported in our February 2012 Newsletter on March
1st, 2012 the Canadian Federal Government introduced its discussion
paper on the proposed regulations respecting compulsory insurance
for ships carrying passengers. The objective of the regulations
is described as:
[T]o ensure that marine carriers engaged in domestic
carriage of passengers in Canada maintain insurance to cover their
liability to those passengers. Such regulations, governing various
forms of compulsory insurance, are the norm in other modes of
transport (air, rail, and road) and marine passengers should expect
to find the same safeguards in the marine mode.
As with the introduction of the SVCP, the initiative
has its origins in an accident which occurred on June 16, 2000.
The tour boat "True North II" sank in 15 metres of water
in Georgian Bay resulting in the drowning of two teenage children.
The inquest found that the owner-operator was not insured and recommended
compulsory insurance for commercial vessels carrying passengers.
Following the incident, the Minister of Transport made a commitment
in 2001 to the House of Commons Standing Committee on Transport
and Government Operations to enact regulations requiring compulsory
insurance for ships carrying passengers.
The latest information from Transport Canada is that
the legislation will come into force in the early spring of 2013.
*1 This article has borrowed heavily from
publication TP 14070E(2010).
5. COURT OF APPEAL FOR ONTARIO REAFFIRMS PRINCIPLES
REGARDING DIRECT COMPENSATION FOR VEHICLE PROPERTY DAMAGE
In Siena-Foods Limited v. Old Republic Insurance
Company of Canada (*1), the Court of Appeal for Ontario recently
reaffirmed the principles regarding direct compensation for property
damage under section 263 of the Insurance Act regarding a
vehicle lessee's claim under the lessor's insurance policy with
Old Republic Insurance Company of Canada.
Section 263 of the Insurance Act states that
an insured has recourse against its insurer and not against the
at-fault driver for claims of property damage to the insured's automobile
or contents in respect of an accident involving two or more insured
automobiles. The insurer cannot subrogate against the at-fault driver.
The enactment of this section was intended to reduce transaction
costs of subrogation claims between insurers.
Siena-Foods Limited rented a tractor and trailer from
Ryder Truck Rental Canada Ltd. on May 21, 2009 to transport a food
packaging machine. As part of this rental agreement, Siena-Foods
and Ryder Truck signed an agreement that contained a provision for
liability insurance, but excluded coverage for damage to Siena-Foods'
property. The rental agreement also contained a representation from
Siena-Foods that the cargo to be carried was produce, which was
obviously not the case.
On May 29, the tractor-trailer carrying the food packaging
machine collided with another truck (which was considered at fault)
in Durham, Ontario. Siena-Foods' machine was damaged as a result
of the collision. Siena-Foods sought payment for the damaged food
packaging machine from Ryder Truck's insurance company, Old Republic.
Old Republic denied coverage and brought a motion
before Justice Roberts, posing three questions of law:
1. Is Old Republic the "insurer" of
Siena-Foods for the purposes of s. 263(2) of the Insurance Act?
2. If Old Republic is Siena-Foods' insurer for
the purposes of s. 263(2), do the terms and conditions in the
rental agreement between Siena-Foods and Ryder Truck limit Siena-Foods'
3. If Siena-Foods misrepresented to Ryder Truck
the type of cargo it was carrying, does this impact its recovery
from Old Republic under s. 263(2) of the Insurance Act? (*2).
Justice Roberts ruled, as follows, in relation to
these three issues:
1. Old Republic was not an insurer for the purposes
of s. 263;
2. That the terms and conditions of the rental agreement limit
Siena-Foods' recovery; and
3. Siena-Foods misrepresentation of the type of cargo carried
does impact its recovery under s. 263.
On appeal, the motion judge's was overturned.
With respect to the first issue, the Court of Appeal
held that the proper regime was that under section 263 of the Insurance
Act (dealing with direct compensation for property damage) and
not section 247 (governing third party liability coverage), because
Siena-Foods' claim was for damage to its own property which was
clearly not a third party liability claim. As per section 263, Ryder
Truck was entitled to claim for damage to the tractor-trailer and
contents from its insurer Old Republic, and, as per the terms of
its policy with Old Republic, it had also extended this coverage
to lessees (in this case, Siena-Foods).
The court referred to two prior decisions to summarize
the history of the enactment of section 263:
In Clarendon National Insurance v. Candow,
2007 ONCA 680, 87 O.R. (3d) 728, at para. 7, Juriansz J.A. explained
the direct compensation scheme in s. 263:
Section 263 of the Insurance Act replaced the
tort system that resolved automobile damage claims prior to
its enactment. In the new statutory scheme, insureds can no
longer sue the tortfeasor driver whose negligence has caused
damage to their cars. Rather, their own liability insurer pays
for the damage, to the extent that they were not at fault, under
the third party liability section of their motor vehicle liability
policies. Insureds can recover the at-fault portion of their
damage by purchasing collision coverage. Insurers have no right
of subrogation for payments to their own insureds, but, on the
other hand, do not have to pay the subrogated claims previously
brought by other insurers in the tort system. The result is
that the statutory regime eliminates the transactions costs
that were inherent in the tort system. (*3)
And further, it quoted from Justice Sharpe in McCourt
Cartage Ltd. (c.o.b. Laser Transport) v. Fleming Estate (Litigation
Administrator of) (1997), 35 OR (3d) 795 (Gen. Div.):
Before the enactment of s. 263, the common law tort
regime applied to property damage claims. The result was that
where an insured had purchased collision damage cover, and where
the accident was caused at least in part by the fault of another
driver, two insurers became involved. The insured would claim
against his own insurer under the collision coverage, and that
insurer would assert a subrogated claim against the insurer of
the other driver to the extent of the other driver's fault. The
intended effect of s. 263 was to remove the insured's right to
sue for property damage and to confer the right to claim such
losses not caused by the fault of the insured against one's own
insurer. In the words of Somers J. in 583809 Ontario Ltd. v.
Kay,  O.J. No. 1626, the section was intended
"to bring to an end claims which were really
made by one insurance company against another in the names of
their respective insureds strictly for the property damage that
had occurred in an accident."
See also Bassie v. Warren J. Brown Bituminous
Paving Co.,  I.L.R. 2357, adopting Allan O'Donnell, Automobile Insurance in Ontario (1991), at p. 51:
"... under the new system with the exceptions
outlined below [none of which apply here],subrogation has been
abolished. Thus, we have a "knock for knock" system
whereby each insurer absorbs most of its policyholders' property
damage claims without attempting to recover same from the insurers
of tortfeasors causing such claims." (*4).
The provision in section 6.1 of the standard form
Ontario Automobile Policy reflects the provision of section 263
in the Act. The Court of Appeal held that Old Republic is Siena-Foods'
insurer for the purposes of Siena-Foods' property damage claim,
in accordance with a basic application of section 263 of the Insurance Act. (*5).
With respect to the second issue, the Court of Appeal
reversed the motion judge and held that the rental agreement between
Ryder Truck and Siena-Foods did not affect Old Republic's obligation
to indemnify Siena-Foods. Old Republic was "not a party to
the rental agreement, and the rental agreement [was] not part of
the automobile insurance policy between Ryder [Truck] and Old Republic".
Finally, the Court of Appeal considered the third
issue of whether Siena-Foods' misrepresentation that the cargo contents
were produce affected Siena-Foods' recovery rights against Old Republic.
The Court of Appeal concluded that this misrepresentation did not
affect its entitlement to recovery. First, under section 264 of
the Insurance Act, Siena-Foods is treated as a third party
which results in it recovering from Old Republic even though it
was not a party to the insurance contract between Old Republic and
Ryder Truck. Therefore, Siena-Foods' right to recover under section
263 is "unaffected" by any misrepresentation. (*7). Second,
for Old Republic to terminate coverage vis-à-vis Siena-Foods,
it was required to do so in accordance with the Insurance Act,
the statutory conditions, and the Compulsory Automobile Insurance
Act, which required, at a minimum, notice before termination.
Siena-Foods' appeal was therefore allowed and the
motion judge's order against it regarding the three stated questions
of law was set aside.
*1 2012 ONCA 583.
*2 Ibid., at para. 2.
*3 Ibid. at para. 22.
*4 Ibid. at para. 23.
*5 Ibid. at para. 26.
*6 Ibid. at para. 29.
*7 Ibid. at para. 32.
*8 Ibid. at para. 33.
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