Canadian Underwriter


May 31, 2011   by Don McGarvey and Anthony Espejo

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In a recent Alberta Court of Queen’s Bench decision, the interplay between policy provisions that stipulate a limitation date for the commencement of an action on the policy and legislated limitation dates was recently examined, leading to a result that will be of interest across the country.

In Schroeder Transport v. Lloyd’s Underwriters, Justice June Ross was called upon to consider whether a contractual limitation period in an insurance policy was paramount to a conflicting limitation period in the Limitations Act, R.S.A. 2000, c. L-12 (the Act).

The facts

In Schroeder Transport, a truck driver for the plaintiff company was transporting electrical cable from Quebec to Alberta. During this trip, he stopped at a truck stop to shower and eat. The driver locked the doors of the truck and left the keys under the floor mat in the cab. When the driver returned, the truck, trailers and cargo were gone. The insurer denied coverage relying on exclusions contained in the policy.

The loss occurred on Mar. 1, 2006. The insurer denied coverage on Apr. 28, 2006. The plaintiff’s Statement of Claim was filed on Apr. 25, 2008, which was more than two years from the date of loss, but less than two years from the denial of coverage by the insurer.

The policy contained a condition that required any action against the insurer for coverage be commenced within 24 months of the date of “discovery by the Insured of the occurrence which gives rise to the loss . . . “.

This is to be contrasted with s. 3(1) of the Act, which requires an action to have been commenced within two years of the date the insured knew or ought to have known that the conduct attributable to the insurer (the denial), occurred that warranted bringing a proceeding.

To further complicate matters, the Court was also required to consider s. 7(2) of the Act, which states that “an agreement that purports to provide for the reduction of a limitation period provided by this Act is not valid.”

In attempting to demonstrate it commenced its action for a declaration of coverage in time, the plaintiff argued the claim was brought within the limitation period as specified by the Act. The Court reviewed case law as well as the Alberta Law Reform Institute’s Final Report No. 90, Limitations Act: Standardizing Limitation Periods for Actions on Insurance Contracts (August 2003), which expressed a firm view that this limitation period would run from the date coverage was denied.

The plaintiff argued that s. 7(2) of the Act operated to remove this condition. The defendant argued that s. 7(2) does not apply in this case because this section was not in force when the loss occurred. The Court noted that while s. 7(2) was not in force when the loss occurred, it was in force when the defendant denied coverage and when the plaintiff’s action was commenced. Therefore, it was a “legal situation that was ongoing at the time the Limitations Act was being modified, so that this was not a situation of retroactive effect, but immediate effect . . .”

Ross stated at paragraph 43: “The interpretation of the Plaintiff and the Alberta Law Reform Institute best reflects the language of s. 3(1), and means that the limitation period runs from the date that the insured knew or ought to have known that coverage was denied.” Hence, the plaintiff’s claim was not statute-barred.

The Court stated that the limitation period commences from the date the insured knew or ought to have known that coverage was denied. At paragraph 13, the Court accepted the plaintiff had made a similar claim under a previous insurance policy with identical wording in 2005. In that action the defendant denied the claim, nonetheless, the suit was eventually settled.

It was open for the defendant to argue the plaintiff “ought to have known” coverage was denied the instant the Proof of Loss was filed (Mar. 2, 2006) based on prior experience in a seemingly analogous situation. Had the limitation clock started running from that time, the plaintiff’s action would have been statute-barred.

Implications and observations

This decision will serve as a precedent for the proposition that the term “injury,” under s. 3(1) of the Act, refers to when the insurer denies coverage not when the initial loss occurred.

Further, this case suggests a policy of insurance that has any provision which might affect limitation periods, as set out in the Act, may be held to violate s. 7(2) of the Act (depending on the dates involved) and any such limitation clause as set out in the contract of insurance may be invalid.

This decision should not be blindly applied in every case where there is a limitation issue. For example, in the context of fire insurance, under the Insurance Act, R.S.A. c. I-3, Part 5, Subpart 3, Statutory Condition 14 provides: “Every action or proceeding against the insurer for the recovery of any claim under or by virtue of this contract shall be absolutely barred unless commenced within one year next after the loss or damage occurs.” This wording is different from that of s. 3(1) of the Limitations Act, whereby injury was taken to mean the date when the claim was denied. The above decision can likely be distinguished in the context of a fire insurance policy, where the clock begins to run from the occurrence of a loss or damage.

However, if Schroeder Transport is indicative of a trend that our courts are willing and likely to accept the recommendations of the Alberta Law Reform Institute, then it should be noted that the Institute’s recommendations in Final Report No. 90 were as follows:
1. The limitation periods for actions on all types of insurance contracts should be standardized;
2. Insurance contracts should be subject to the limitation periods in the Limitations Act;
3. The limitation periods for all insurance should be centralized in the Limitations Act; and,
4. Limitation periods for actions against insurers should commence in accordance with s. 3 of the Limitations Act.

In its report, the Institute stated, ” . . . different limitation periods for each type of peril creates confusion . . . This confusion would be minimized if the limitation periods for actions on all types of insurance policies were standardized. Standardizing the limitation periods is a rational reform as there are no principled reasons for having different limitation periods for different types of insurance.”

The above rationale echoes the sentiment expressed by Madame Chief Justice McLachlin in the Supreme Court of Canada decision of KP Pacific Holdings Ltd. v. Guardian Insurance Co. of Canada. In that decision, the Court made reference to the insurance statutes in Canada and how they are outdated. She called upon the legislatures to revisit the provisions, but commented that in the meantime, resolution of these issues will fall to the courts.1 Whether this means that courts will be attracted to the rationale of the Institute’s recommendations remains to be seen but it certainly appears to be trending in that direction.

Don McGarvey is a partner with McLennan Ross LLP practicing commercial litigation and commercial insurance. Anthony Espejo is an articling student with McLennan Ross LLP.  McLennan Ross LLP is a member of the ARC Group Canada Inc.  

1. See para 5.

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