Bill 18: Are Renters Covered for Vicarious Liability?

The author is grateful to Randy Bundus and Lee Samis for explaining all these changes slowly and with small words.

Many people in Ontario were surprised to learn about the record-breaking, CD$13-million settlement reportedly paid in Dec. 2004 to May Browne, who was paralyzed while an occupant in a single-car accident in 1997. They were even more surprised to learn the insurer for the negligent driver, who had leased the car under a long-term lease agreement, did not pay for a majority of the award. Instead, the insurer of the leasing company, Primus Automotive Financial Services, a subsidiary of Ford Motor Company, paid out a majority of the settlement.

Primus was held liable – and its insurer was required to respond to that liability – because of a legal concept known as ‘vicarious liability.’ Vicarious liability arises when a person has control or responsibility for the actions of someone who negligently causes injury or damage to another; in this example, both the person with control or responsibility and the person who caused injury are held equally liable. In the automobile world, titled owners of motor vehicles are held vicariously liable for anyone who drives their vehicles with their consent. Every car owner in Canada knows that the loan of his or her insurance goes along with the loan of the car. Owners have full control over who they allow to drive their cars and it may be sensible to hold owners to this standard.

However, because leasing companies are the technical owners of the leased cars, they are also held to that standard – even though it is the person who leases the car controlling who drives the car. Leasing companies were therefore in an unfavourable position compared to ‘traditional’ financing arrangements such as with banks.

The vicarious liability problem facing leasing and rental companies is not new or unique to Canada. While the Browne and Primus case may be the largest, it is not the first or only example in Canada. Risk mangers for leasing and rental companies have dealt with this frequently over the years. In New York, Budget-Rent-a-Car faced a US$21-million award for an accident involving one of its rental cars that paralyzed a Wall Street trader.

Last year, the United States government passed a federal ‘highway bill’ dealing with thousands of road projects; it included a clause called a ‘Graves amendment,’ which nullified state vicarious liability laws for rental and leasing companies. On Aug. 10, 2005, vicarious liability for rental and leasing companies in the U.S. essentially became a thing of the past.

A little under a year later, on Mar. 1, 2006, the Ontario government proclaimed Bill 18. The omnibus bill amended a wide range of legislation and included changes affecting leasing and rental situations. The Ontario solution is slightly different than the U.S. approach: the changes address liability claims for bodily injury and death only. There have been no changes to Accident Benefits priority or to how claims for physical damage are handled.

WHAT’S CHANGED: PUZZLE PIECES

Bill 18 made changes to the Compulsory Insurance Act, the Highway Traffic Act, the Insurance Act and the Automobile Rate Stabilization Act. Understanding the overall effect of Bill 18 as it relates to leases and rentals requires putting together its three key changes.

PUZZLE PIECE #1: CAPPED VICARIOUS LIABILITY FOR LEASING/RENTAL COMPANIES

For accidents in Ontario, the Insurance Act now caps the vicarious liability for bodily injury or death claims against leasing and rental companies at CD$1 million, less any coverage that is primary. [The Insurance Act amendment refers to an amount that is greatest of CD$1 million or insurance required by law or an amount prescribed by regulation. Currently, minimum limits are far less than CD$1 million and no regulations have yet been prescribed indicating a higher amount.] This cap does not extend to liability claims for property damage, which is traditionally a much lower exposure than liability for injury or death.

For most leasing or rental companies that can be assured of primary coverage of at least CD$1 million, this reduces their exposure for vicarious liability to zero or worst case at CD$1 million. However, leasing and rental companies may not rush into lower limits. The cap only applies to accidents in Ontario. Leasing and rental companies may still have liability in their own right – for example, arising from negligent maintenance of the vehicle. The rental company’s employee may be the negligent driver. The liability for its own negligence or the negligence of the employee is not capped.

PUZZLE PIECE #2: RENTERS VICARIOUSLY LIABLE

The Highway Traffic Act now defines a ‘lessee’ as a person who leases or rents a motor vehicle or street car for any period of time. Previously, only owners or long-term lessees could be held vicariously liable. All lessees (including renters) are now vicariously liable for the negligent operation of that motor vehicle driven with consent. Unlike the cap enjoyed by the leasing or rental company, the vicarious liability of lessees remains unlimited.

Existing liability insurance will respond to the negligence of the driver, who may in fact find coverage in two places: the “Other Automobile” sections of his or her own OAP1, or under the liability policy of the rental company. However, in cases in which the renter and the driver are not the same person, the renter’s vicarious liability is more controversial and complex. Coverage for vicarious liability exists if the rental qualifies as a temporary substitute; but it is not covered under the “Other Automobile” section, which specifically refers to the rental being driven by the insured. Nor would the rental company’s insurance apply, since it extends only to the rental company and those driving with consent. This new exposure for renters may not be fully or adequately addressed under existing liability policies.

It is unclear what may result from this coverage gap. The liability of the owner, renter and driver are joint and several and it may be imprudent to leave a lessee undefended in a lawsuit irrespective of coverage. [Changes to the Insurance Act ensure lessees, owners and drivers, are protected defendants.] Vicarious liability can only be found if the driver is initially negligent. What is clear is this complexity is an inadvertent and unintended result of the changes and the government is committed to solving any potential problems.

PUZZLE PIECE #3: POLICY PRIORITY CHANGES

If a vehicle has been leased or rented, the order in which the liability policies will respond to a claim for bodily injury or death has changed.

First in line is the motor vehicle liability insurance that is in the name of the lessee. In the case of long-term lease agreements, the lessee is required under the terms of the lease to insure the vehicle under an OAP1 (with appropriate endorsements) citing the lessee as the named insured. This policy is primary first in line coverage – and this is no change from before March 1. What’s new is that a ‘lessee’ now includes anyone who rents for any period of time. This lessee of a rented vehicle may have an OAP1 providing temporary substitute or other automobile coverage. In these cases the lessee’s policy would respond first. Prior to March 1, the insurance of the rental company would have provided primary coverage.

Second in line, and excess to the insurance that comes first, is automobile liability coverage available to the driver. This would include, for example, the “other automobile” or “temporary substitute” coverage that is provided under the OAP1. In many cases involving short-term rentals, the lessee will also be the driver or his or her spouse or same-sex partner, resulting in some overlap in coverage (the policies would not respond twice). This change from the pre-March 1 regime makes the driver’s policy, if it provides coverage, the primary to the rental company’s insurance.

The changes affecting the order policies respond do not create new coverages or insurance obligations. In all cases, the policy responds only if it provides indemnification: if there is no coverage, the next in line policy is called to respond.

Third in line – and excess to both the insurance that comes first and second – is the insurance of the leasing or rental company as the titled owner of the motor vehicle. A popular misconception is that because the vicarious liability of the leasing or rental company is capped, so too is the insurance payout. This is not the case, particularly for rental companies insuring vehicles as required by law under an owner’s form. These policies provide coverage and treat as “insureds” both the named insured and anyone driving the vehicle with consent. The insurance of the rental company is still exposed to excess awards up to its own policy limits in respect of the negligence of the driver if the insurance that is first and second in line is inadequate or non-existent.

Overall, the changes mean that consumers in Ontario will largely be dealing with their own insurers when involved in an accident with a rented or leased car. Rental and leasing companies will enjoy the protection of a cap on vicarious liability for Ontario accidents when considering insurance needs. Rental companies and their insurers will be relieved of the burden of costs for most accidents by being last in line to respond, but still may remain exposed under the terms and conditions of its insurance for the negligence of a driver.