Canadian Underwriter

How Ontario direct compensation-property damage affects temporary loaner vehicles

November 17, 2021   by Greg Meckbach

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An Ontario insurer that wrote optional collision coverage for a client is not on the hook for damage to a loaner vehicle borrowed by that client while that client’s own vehicle was in for repair, a judge wrote in a ruling overturning a small claims trial decision.

In 2017, Thane Fitzgerald brought his own vehicle in, for repairs, to a Volkswagen dealership. While waiting for his own vehicle, he got a free “loaner,” provided by Owasco Canadian Car & Camper Rental.

The loaner – insured through the Lloyd’s market – was damaged during the loan. The accident was not Fitzgerald’s fault.

But Fitzgerald had signed a contract in which he agreed to return the loaner, to Owaso, in the same condition it had been in when he received it. He also agreed to pay Owasco for any damages the loaner suffered while in Fitzgerald’s possession, “whether or not due to [his] fault.”

Owasco claimed the damage to its own vehicle was about $5,600. There was a $25,000 deductible on its policy with Lloyd’s. Fitzgerald had insurance on his own vehicle through Coachman.

Owasco sued Coachman (a Saskatchewan Government Insurance subsidiary that writes Ontario auto) and Fitzgerald in small claims court, which originally decided in favour of Owasco.

But the small claims trial ruling was reversed on appeal in Owasco Canadian Car & Camper Rental Ltd. v. Fitzgerald et al., released Nov. 10, 2021 by the Ontario Superior Court of Justice.

In the 2021 ruling, Justice Jonathan Dawe awarded Coachman and Fitzgerald $6,500 in costs.

The judge in the original small claims trial cited A Plus Car & Truck Rental v. Pun, released in 1999 by the Divisional Court.

But Justice Dawe noted, in his 2021 ruling in Owasco, that the 1999 A Plus ruling was over an accident that occurred before 1996.

One point of contention – in both the A Plus case from the 1990s and the recent Owasco case – was the interpretation of Section 263 of the Ontario Insurance Act. That law spells out the process of getting direct compensation-property damage coverage in accidents involving two or more insured automobiles.

In 1996, the Ontario legislature added 263(5) to the Insurance Act, which stipulates the following: “An insured has no right of action against a person under an agreement, other than a contract of automobile insurance, in respect of damages to the insured’s automobile or its contents or loss of use, except to the extent that the person is at fault or negligent in respect of those damages or that loss.”

In the 1990s – before Section 263 (5) came into force – the courts generally said that Section 263 is not intended to deprive a vehicle owner of the right to sue, for damage to that vehicle, under a contract that the owner signed with the driver.

“The s. 263 Direct Compensation – Property Damage scheme requires Owasco to look to its own insurer for compensation. Owasco is unable to do so only because it chose to purchase insurance that has a very high deductible, presumably so that it could pay a smaller premium. Owasco must now live with the consequences of its choice,” wrote Justice Dawe.

But Owasco argued that section 263 (5) does not apply to damage to a “temporary substitute automobile” that is also insured under the renter’s own insurance policy.

This, Owasco said, is because optional collision coverage (which Fitzgerald had with Coachman) includes damage to temporary substitute automobiles.

Owasco further argued that section 7.4.3 of the standard Ontario Automobile Policy Owner’s Policy​ (OAP-1) means that the provincial government had intended that people who rent or borrow a temporary substitute automobile could enter into a contract agreeing to reimburse the owner for any damage, regardless of their own fault.

Section 7.4.3. reads:

If you or anyone else drives a temporary substitute automobile (described in Section 2), you may be responsible for any damage to it as a result of liability imposed by law or agreed to by you or the driver. In that case, we will pay for direct damage for which you or the driver are legally responsible, minus the deductible for that peril under this policy.

Owasco also pointed to 236 (6) of the Insurance act which reads: “This section does not affect an insured’s right to recover in respect of any physical damage coverage in respect of the insured automobile.”

But Justice Dawe found that section 263(6) “merely clarifies that insured persons who have purchased optional collision coverage are not barred by s. 263 from making claims under this coverage. The subsection does not say that s. 263 becomes entirely inapplicable when such a claim is or can be made.”

Section 7.4.3 only says that insured persons who drive a temporary substitute automobile “may be responsible for any damage to it” that they have agreed to pay for, wrote Justice Dawe.

“It does not say that they necessarily will be responsible for this damage. Indeed, s. 7.4.3 goes on to explain that the insurer will only pay for damages ‘for which you or the driver are legally responsible.’”

In situations where s. 263(5)(a.1) of the Insurance Act limits or eliminates the owner’s right of action under an agreement with the insured person, the insured person will no longer be “legally responsible” to pay for some or all of the damage, Justice Dawe wrote.

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