Substance over Convenience

The Court of Appeal for Ontario’s recent decision, Zurich Insurance Company v. Chubb Insurance Company of Canada, addresses important questions of insurance law that will have implications beyond the specific facts of the case. Most notably, the case considered the breadth of Ontario’s “pay first, dispute later” regime for insurance.

The decision demonstrates the importance of substance over convenience in determining what contracts fall within the ambit of this regime. It also presents risk mitigation opportunities for insurance companies, though such opportunities must be approached with caution.

The deference the majority suggested should be accorded to an arbitrator’s decision may also affect future practice in this area. The division among Court of Appeal judges demonstrates the difficult nature of these issues, and the possible need for clarification in the future.

THE FACTS

Ontario’s “pay first, dispute later” regime for motor vehicle insurance requires that the first insurer who receives an application under the Statutory Accident Benefits Schedule pay said statutory accident benefits (SABS) if there is a non-random nexus or connection between the claimant and the insurer. If that insurer believes that another insurer should be responsible for payment of the SABS, the first insurer must nonetheless pay them, but give notice within 90 days to the other insurer, and follow a statutory scheme of arbitration to determine which insurer should pay the SABS.

In Zurich v. Chubb, Sukhvinder Singh rented a vehicle from Wheels 4 Rent. Chubb Insurance Company of Canada issued an accident policy to Wheels 4 Rent and Zurich Insurance Company issued a policy insuring the vehicle.

Chubb’s policy was limited, providing “optional death and dismemberment insurance to Wheels 4 Rent customers, and extended to death or dismemberment unrelated to a motor vehicle accident, provided it occurred during the rental period,” the decision notes. Singh did not purchase Chubb’s optional insurance.

After an accident, Singh submitted a claim for SABS to Chubb. Chubb refused to pay. Zurich began paying the SABS, but shortly thereafter, Chubb and Zurich agreed to submit their dispute to arbitration, with the arbitration agreement stating, among other things, that the arbitrator was to determine whether or not Chubb is an “insurer” under Section 268 of Ontario’s Insurance Act and Ontario Regulation 283/95, and whether or not Chubb was responsible for indemnifying Zurich for any amounts.

The arbitrator concluded Chubb was not a “motor vehicle liability insurer.” On appeal to Ontario’s Superior Court of Justice, this finding was set aside.

THE DECISION

Justice Gladys Pardu (Justice Sarah Pepall concurring) agreed with the arbitrator that Chubb was not a “motor vehicle liability insurer” on these facts. Justice Pardu accordingly found that the “pay first, dispute later” regime imposed pursuant to Section 268 of the Insurance Act was inapplicable. She reasoned:

[21] The content of “motor vehicle liability policies” is highly regulated. These policies must provide for payment of SABS, and a statutory minimum amount of liability coverage. The Chubb policy has none of these characteristics.

[22] The rationale [of the legislation] would not be furthered by requiring insurers other than “motor vehicle liability insurer[s]” to respond to a claim for SABS. An insurer providing fire or life insurance or some group or accident or disability insurance not having the features of a “motor vehicle liability policy” may have no expertise in adjusting these claims, and should not be expected to respond to them where it has not issued a motor vehicle liability policy even if there is a nexus or relationship between the claimant and such insurer.

[23] The priority and dispute resolution regime established under O. Reg. 283/95 applies to “disputes as to which insurer is required to pay benefits under s. 268 of the Insurance Act.” [emphasis added by Justice Pardu]

[24] Section 268 says every contract “evidenced by a motor vehicle liability policy” shall be deemed to provide for SABS. These benefits are not incorporated into insurance policies which are not motor vehicle liability policies and those insurers may have no expertise in adjusting these claims.

[25] All of the cases cited in which an analysis is made to ascertain whether there was a sufficient nexus between the claimant and the first insurer to review an application for SABS are premised on there having been an actual or purported motor vehicle liability policy in place at some time. [emphasis added by Gelowitz and Kennedy]

[27] Ms. Singh’s choice to send her application to Chubb was not random or arbitrary, but was based on the optional coverage provided to Wheels 4 Rent customers. Nonetheless, Chubb was not required to respond as it was not a “motor vehicle liability insurer,” nor had it held out or represented to have ever provided such coverage at any relevant time.

Justice Russell Juriansz dissented. Justice Juriansz would have applied the “nexus” test.

For him, the fact that Chubb regularly provided motor vehicle insurance coverage placed it within the ambit of the rule. He expected that future adjudicators “would have difficulty reconciling the conclusion that the plain meaning of the Regulation excludes ‘non-motor vehicle liability insurers’ [a term he had difficulty understanding] with the proposition that the pay first obligation will continue to apply in cases where there is no actual coverage, but only ‘purported’ or ‘represented’ coverage.”

Justice Juriansz continued:

[37] In the earlier cases, the rationale for applying the Regulation in cases of “purported” or “represented” coverage was that the applicant chose the insurance company based on a non-arbitrary belief that the insurance company provided coverage on the relevant vehicle. This is the crux of the nexus test. If the claimant’s non-arbitrary but mistaken belief is a basis for requiring the insurance company to pay benefits in cases of “purported” or “represented” coverage, I see no reason to treat claimants differently if their non-arbitrary beliefs are based on information other than a false representation. In my view, it would be best to allow adjudicators to continue to consider whether there is some connection between the parties as set out in the familiar and established nexus test. …

[40] The overriding public policy of the Regulation is to provide timely delivery of benefits to all persons injured in car accidents in Ontario, despite the inconvenience to insurance companies who must provide benefits immediately and seek reimbursement from the correct insurance company later. …

THE IMPLICATIONS

The first and most obvious implication of the decision is the holding that the “pay first, dispute later” regime in Ontario insurance law is confined to “motor vehicle liability insurers.”

From the perspective of insurance companies, this is a triumph of substance. Chubb, on the facts of this case, was not in the business of insuring individuals in Singh’s situation, and the legislature clearly contemplated that the obligation to “pay first, dispute later” would only apply to insurers whose policies contemplated the payment of SABS, which Chubb’s did not.

The primary advantage of obligating such insurers to nonetheless “pay first, dispute later” is predictability and convenience for consumers, as highlighted by Justice Juriansz’s dissent. The majority encourages consumers to understand the policies under which they are insured.

Second, the decision should be noted for what it did not decide. It did not hold that the “nexus” test was to be jettisoned – rather, it is only relevant if a claimant seeks SABS from an insurance company that is, indeed, a mot
or vehicle liability insurer.

Future cases will need to be monitored to determine whether and how insurance companies are found to be “motor vehicle liability insurers” on the facts of particular cases. In deciding whether or not to pay SABS in a particular case, insurance companies will need to make decisions carefully.

Given the large number of insurance policyholders and the commonality between insurance policies, class proceedings are not an academic concern should insurance companies be alleged to make a habit of improperly refusing to pay SABS.

Third, the case considers the intersection of arbitrators’ decisions and the courts. In this case, a right of appeal existed pursuant to the arbitration agreement between Zurich and Chubb.

The most important element of the case – whether Chubb was a motor vehicle liability insurer within the meaning of the statute and regulations – was reviewed on the correctness standard.

Justice Pardu found that the arbitrator’s decision was correct. However, a deferential attitude is nonetheless implicit in her decision, as she held that “whether there was a sufficient nexus between Chubb and the claimant is a question of mixed fact and law reviewable on the standard of reasonableness.”

The standard of review analysis was based on the specific arbitration agreement at issue. Such agreements should be considered carefully as insurers make more frequent use of arbitration as a preferable vehicle, occasionally (as in this case) imposed by statute, to resolve disputes more efficiently than the courts.

CONCLUSION

Zurich v. Chubb is an important case in Ontario insurance law that clarifies the need to establish that an insurer is, indeed, a “motor vehicle liability insurer” before it can have duties under Ontario’s “pay first, dispute later” system.

Though the precedential value of the case outside that context remains uncertain, its impact may be broader – the full impact of the decision may require future assessment.