July 8, 2019 by Greg Meckbach
If your client ships goods to someone who turns out to be a fraudster and never gets paid as a result, is this covered by all-risks commercial insurance?
Lloyd’s Underwriters tried to argue one such loss is excluded, but the Ontario Superior Court of Justice disagreed.
In Heart Zap Services Inc. v. Lloyd’s Underwriters, released June 28, Justice Patrick Flynn ruled that Lloyd’s cannot deny a claim from Heart Zap, a North Bay firm that sells heart defibrillator units to hospitals.
In 2016, Heart Zap got an order for 25 defibrillator units worth $37,120.50. The order was from someone purporting to be a doctor at Ottawa General Hospital. Heart Zap shipped the goods and invoice to the Brampton address from which the order originated. Heart Zap did not get paid, so Heart Zap mailed a second invoice. Once Heart Zap realized the order was fake, the North Bay police were called. Neither the fraudster nor the defibrillator units shipped to Brampton were ever found.
Heart Zap’s commercial property policy with Lloyd’s covers “all risks of direct physical loss of or damage to the property insured.” It includes merchandise for sale.
Heart Zap’s claim was denied, so Heart Zap took Lloyd’s to court.
In his June 28 ruling, Justice Flynn granted Heart Zap’s request for summary judgement in its favour. As a result, Lloyd’s must pay Heart Zap the $37,120.50 to cover the loss of the defibrillators and $7,500 to cover Heart Zap’s legal costs.
Lloyd made three arguments, all of which were rejected by Justice Flynn.
The insurer argued the items were not lost from an insured location. Heart Zap’s proof of loss indicated the goods were lost at the Brampton address, which is not insured under the policy, where the goods were lost, Lloyd’s argued.
Justice Flynn countered that Heart Zap changed its proof of loss form to say the loss really occurred at the client’s North Bay location and the loss was due to fraud.
“The location of the loss is not affected by any misnomer in the Proof of Loss,” Justice Flynn wrote. “The location of a loss from fraud or theft is suffered not where the fraudsters are, it is the location from which the goods are taken. “
The insurer also argued that the policy does not cover goods that the client voluntarily turns over to a fraudster.
Its third argument was that the loss falls under an exclusion for “property on loan or on rental or sold by the insured under conditional sale, instalment payment or other deferred payment plan, from the time of leaving the Insured’s custody.”
In Heart Zap’s case, the fake order from the Brampton address for the Ottawa hospital was a conditional sale, Lloyd’s argued. This is because payment was deferred 30 days from either delivery or invoice.
But Justice Flynn argued that if a vendor’s consent to sell its product was obtained by fraud, then there is actually no sale – and therefore no conditional sale.
In arguing that the policy does not cover goods that the client voluntarily turns over to a fraudster, Lloyd’s cited 6916643 Canada inc. c. Intact, compagnie d’assurances, released in 2015 by the Quebec Small Claims Court. In that case, a client shipped goods and received a fraudulent cheque. The Quebec court ruled that the property lost by the client is not the insured goods but rather the payment for selling property.
Heart Zap cited a different case involving a fraudulent cheque. That was was Joe Ng Engineering Ltd. v. Gerling Global General Insurance Co., released in 1997 by the Ontario Superior Court of Justice. In Joe Ng Engineering, Justice Paul Philp ruled against the insurer.
While there could be a conflict between the Quebec and Ontario rulings, a Quebec small claims case has “no jurisprudential significance” in Ontario while the law in Ontario was “well-stated” in the Joe Ng Engineering ruling, Justice Flynn ruled in Heart Zap.
In Joe Ng Engineering, Gerling Global argued that the client’s loss was “not a direct physical loss of stock but rather an economic loss resulting from the forged cheque not passing through the bank. ” But Justice Philp found the Joe Engineering’s loss should be covered because the firm lost merchandise obtained without its consent. While the client agreed to hand over goods for payment, the fraudster did not intend to pay, Justice Philp reasoned.
In 1995, a man made an order by phone for about $18,000 worth of computer memory chips from Joe Ng Engineering in Hamilton. The vendor insisted on getting a certified cheque because it was from a first-time buyer.
The purported buyer sent the certified cheque in a taxi to Joe Ng Engineering’s Hamilton store. The taxi driver dropped off the certified cheque to Joe Ng Engineering and picked up the computer chips. Joe Ng Engineering Engineering then deposited the cheque to its bank account. Three days later, the bank called and said the cheque was forged. The police were called. The police were able to interview the cab driver because a worker with Joe Ng Engineering wrote down the licence plate number of the cab. But the police were not able to get enough information to catch the fraudster.
In denying the claim, the insurer assumed there was a valid transfer of goods to the purported buyer.
“No sale took place even though physical transfer of the goods was effected,” Justice Philp wrote. Therefore the fraudster obtained the merchandise “without colour of right” and therefore the loss was covered because it was theft.