Case Comment: Stroszyn v. Mitsui Sumitomo Insurance. Dolden Wallace Folick goes viral on December 1, 2013

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1 Insurance Journal November 12, 2013 Volume 1, Issue 6 Editor Keoni Norgren Damages in Secondary Market Class Actions An Insurer Friendly Decision from the Ontario Bench In this Issue Case Comment: Stroszyn v. Mitsui Sumitomo Insurance Dolden Wallace Folick goes viral on December 1, 2013 Damages in Secondary Market Class Actions An Insurer Friendly Decision from the Ontario Bench By Mikel Pearce The plaintiff s bar in Ontario is maturing in its combined use of the Class Proceedings Act, and the secondary market liability provisions in Part XXIII.1 of the Ontario Securities Act. As a result, plaintiffs are constantly attempting to expand the amount of damages that may be available to them in secondary market litigation. However, Mr. Justice Perell, in his decision in Frank v. Farlie, Turner & Co., LLC (2012), 113 O.R. (3d) 25 (S.C.), has significantly limited the availability of punitive damages in secondary market litigation based on Part XXIII.1. To put this in context and address the issue as it affects Directors and Officers and their insurers, punitive damages are generally insurable in Ontario (and, in fact, in most of Canada). In addition, most Directors and Officers liability policies provide, or at least offer, coverage for punitive damages by including punitive or exemplary damages in the definition of Loss, while adding an if insurable in the jurisdiction caveat. Directors and Officers of publicly traded companies are well advised to ensure that the D&O policy in place covers Securities Claims which arise as a result of the fluctuations in an insured entity s stock price, as a result of alleged material nondisclosure, or otherwise. Given the soft market in Directors and Officers

2 Insurance Journal Insurance, this coverage is widely available for most publicly traded companies, and this has been the case for some time. While the advent of secondary market liability has greatly increased the level of exposure for companies and D&O insurers, Mr. Justice Perrell s decision at least indicates that the statutory caps on liability which the legislature saw fit to include in Part XXIII.1 will not be circumvented by plaintiffs who claim punitive damages in addition to the available statutory remedies. Mr. Justice Perrell states as follows in his decision, in this regard (in paragraphs 86 and 87): the argument that persuades me is the officers and directors argument that it is plain and obvious that a claim for punitive damages supported only by the predicate wrongdoing of a breach of Part XXIII.1 of the Ontario Securities Act is inconsistent with the scheme of Part XXIII.1, which carefully calibrates and achieves a balance between compensation for a director's or officer's contraventions of the Act and discouraging persons from becoming officers and directors. [87] I agree that allowing a claim for punitive damages would circumvent the policies of Part XXIII.1 of the Act of having caps on the quantum of purely compensatory damages and lifting those caps in exceptional circumstances. (emphasis added) While the decision was initially appealed, the appeal has now been abandoned. While a Court of Appeal decision in this regard would give insurers, underwriters and claims handlers more certainty, at the very least Mr. Justice Perell has given the insurance industry some comfort that at least the statutory caps on damages will not be circumvented by plaintiffs who claim punitive damages in secondary market claims. While this may be cold comfort to some, it is certainly better than no comfort at all!

3 - 2 - Case Comment: Stroszyn v. Mitsui Sumitomo Insurance 2013 BCSC 1639 By Diana Dorey Under British Columbia s Motor Vehicle Act (the Act ), an owner of a motor vehicle is vicariously liable for the damages caused by the negligence of another driver while operating the owner s vehicle with their consent. In this way, the Act makes owners liable based on the common law principles of agency, and as such, the owner and the driver are jointly and severally liable to an injured plaintiff. However, the Act provides an exemption, and does not impose liability on the owner of a vehicle, when that vehicle was sold under a conditional sale contract. This of course begs the question, what is a conditional sale contract? A conditional sale contract is usually structured as an installment based contract whereby ownership of a vehicle does not transfer from the seller to the buyer, until all of the payments for the vehicle are made. In this case, section 86 (3) of the Act deems the buyer to be the owner of the vehicle, and exempts the seller from the imposition of vicarious liability, even though a seller may still technically own the vehicle because title has not yet passed to the buyer. Further, in the 1996 case of Schoenbach v. Truong 19 B.C.L.R. (3d) 313, the British Columbia Court of Appeal interpreted this statutory exemption to apply to vehicles leased under a financing arrangement, which gave the option to purchase the vehicle at the end of the lease. In Schoenbach, the Court construed the definition of conditional sale to include a lease with a purchase option and imported the definition of conditional sale found in the Sale of Goods on Condition Act ( SGCA ) for this purpose. Although the SGCA had been repealed and replaced with the Personal Property Security Act in 1990, the definition of conditional sale in the repealed statute was still applied to construe the meaning of a conditional sale contract in section 86(3)

4 - 3 - of the Act. As a result of the Schoenbach decision, automobile lessors enjoyed protection from vicarious liability under section 86(3) of the Act. Throughout the 1990s and 2000s the lease with purchase option was a popular and successful form of leasing product as it allowed consumers to acquire new vehicles more frequently. However, in 2005, the British Columbia Court of Appeal was asked to revisit Schoenbach in Yeung v. Au 2006 BCCA 217, and overturned it and held that the exemption in section 86(3) of the Act does not extend to leases with an option to purchase. The Court held at para. 41 [a]lthough it may be true that this interpretation treats some forms of financing arrangements differently than others, that would appear to be the choice the Legislature made. It chose to exempt situations involving true conditional sale agreements under which the purchaser will inevitably become the owner on completion of his or her obligations under the contract. Other forms of chattel financing do not come within the exemption and remain subject to the vicarious liability principle imposed by s. 86(1). As a result of the Yeung decision, automobile lessors lost the protection of section 86(3). Automobile lessors and their excess insurers were thus exposed to significant risk in major loss or catastrophic personal injury claims since vicarious liability was unlimited. These claims can and do involve settlement demands and awards which exceed the primary or third party liability limits on the leased vehicles. In fact, in the Yeung case, Ms. Yeung s damages were assessed at $5.8 million dollars excluding tax gross up and management fees and were well in excess of the vehicle s $2 million limits (See Yeung v. Au, 2007 BCSC 175). In response to the Yeung decision, on November 8, 2007, the British Columbia Legislature amended the Motor Vehicle Act and the Insurance (Vehicle) Act to limit

5 - 4 - the vicarious liability of the lessor of an automobile that is leased or rented to $1 million dollars. This cap extended to long term lessors and short term car rental companies. These changes are found in section 86(1.2) and (1.3) of the Motor Vehicle Act and section 82.1 of the Insurance (Vehicle) Act. Section 86(1.2) of the Motor Vehicle Act provides: (1.2) In the case of a motor vehicle that is in the possession of its lessee, in an action to recover for loss or damage to persons or property arising out of the use or operation of the motor vehicle on a highway, a person driving or operating the motor vehicle who acquired possession of the motor vehicle with the consent, express or implied, of its lessor is deemed to be the agent or servant of, and employed as such by, that lessor and to be driving or operating the motor vehicle in the course of his or her employment with that lessor. (1.3) The liability under subsection (1.2) of a lessor is subject to the applicable limit established under section 82.1 of the Insurance (Vehicle) Act. Section 82.1 of the Insurance (Vehicle) Act contains the cap on lessor liability and provides: (1) In an action to recover for loss or damage to persons or property arising out of the use or operation of a leased motor vehicle on a highway in British Columbia, the maximum amount for which the lessor of the motor vehicle is liable, in that lessor's capacity as lessor of the motor vehicle, in respect of any one incident is the amount determined under subsection (2). (2) The maximum amount for the purposes of subsection (1) is the greatest of the following amounts: (a) $1,000,000;

6 - 5 - (b) the amount established, or determined in the manner prescribed, by regulation; (c) the amount of third party liability insurance coverage required by law to be carried in respect of the motor vehicle. (3) Subsection (1) does not apply: (a) in respect of amounts payable by a lessor other than by reason of vicarious liability imposed under section 86 of the Motor Vehicle Act, or (b) to prescribed lessors or motor vehicles, or prescribed classes of lessors or motor vehicles. The recent judgment of the British Columbia Supreme Court in Stroszyn v. Mitsui Sumitomo Insurance Company is the first decision to interpret this vicarious liability cap. The facts of this case are relatively straight forward. The plaintiff, Edward Stroczyn, sustained serious injuries in a motor vehicle accident involving a leased vehicle. He brought an action against the lessee, the driver, and Honda Canada. Mr. Stroczyn s damages were fixed by agreement at $1.6 million dollars. By further agreement, Mr. Stroczyn was paid the sum of $1 million, which was the limit of the ICBC policy on the leased vehicle involved in the accident. This left the remainder of the award, $600,000, to be dealt with by way of a petition between the Plaintiff and Mitsui Sumitomo, the lessor s excess insurer. Under the terms of the vehicle lease, the lessee was required to obtain and maintain, inter alia, collision, theft, and liability insurance on the vehicle with a minimum coverage of $1 million dollars per claim. The lease required the lessee to name Honda Canada Finance Inc. ( Honda Canada ) as an additional insured and loss payee. The lessee maintained third party liability coverage from ICBC. Honda Canada also maintained a policy of excess insurance issued by Mitsui Sumitomo with a policy limit of $9 million dollars.

7 - 6 - Based on the wording of section 82.1 of the Insurance (Vehicle) Act, Mitsui Sumitomo argued that the lessor s obligation was satisfied because the common law principles of joint liability dictate that a payment by or on behalf of one jointly liable party, such as ICBC, discharges the liability of all other jointly liable parties, such as the lessor, to the extent of such payment. That argument was rejected. Justice Bowden instead held that the $1 million payment by ICBC did not reduce Honda Canada s vicarious liability cap to zero. In the course of his reasons, Justice Bowden considered the Ontario legislation which caps lessor vicarious liability and provides that the liability of a lessor is reduced by an amount paid by a lessee or driver under another policy of insurance. He then compared the Ontario provision to s of the Insurance (Vehicle) Act noting that s contains the cap but not the priority payment feature and observed that the... legislators did not follow the wording of the Ontario legislation. Justice Bowden went on to hold that: [35] In my view, the payment of $1,000,000 on behalf of the lessee does not reduce the liability of Honda Canada to zero. It is simply a payment by one joint tortfeasor towards the total liability of the jointly liable parties. By virtue of s. 86(1.2) of the MVA, both the driver, Mr. Chen, and Honda Canada are jointly liable for the damages of $1,600,000. Pursuant to s. 82.1, Honda Canada s portion of that liability cannot exceed $1,000,000. Of the total liability, $1,000,000 has been discharged by ICBC on behalf of the lessee, but Honda Canada remains liable as a joint tortfeasor, for $600,000. [36] This result is consistent with the plain meaning of s of the I(V)A which limits the liability of Honda Canada to $1,000,000. Its portion of the joint liability will not

8 - 7 - exceed $1,000,000. In my view, the combined effect of s. 86(1.2) of the MVA and s of the I(V)A is to expose a lessor, like Honda Canada, to liability as a jointfeasor, of $1,000,000, but no more. Thus, in this case, if the driver/lessee had no insurance coverage, the lessor would be liable for the amount of $1,000,000. On the other hand, if the insurance coverage of the driver/lessee resulted in a payment of $1,600,000, then no amount would be payable by the lessor, Honda Canada. Based on this ruling, if the damages award exceeds the automobile limits, then a claimant can look to the lessor to pay the difference up to the $1 million cap even though the lessor is jointly named as an insured on the vehicle s primary insurance policy. decision. Unlike Ontario, the British Columbia Legislature made a policy decision not to include statutory language that expressly provides for the deduction of other insurance from the $1 million cap. Justice Bowden s reasoning in Stroczyn is consistent with the statutory wording of the B.C. Act. The Stroczyn decision is currently under appeal. If the appeal is unsuccessful, it will then be up the Province to decide whether it is in the public interest to amend the cap to provide for the deduction of other insurance. Until then, a plaintiff is in a better position to recover if the vehicle involved in a motor vehicle accident is leased or rented as opposed to owned. The cap on damages, is a significant improvement for automobile lessors, renters, and their excess insurers in British Columbia from the prior regime of unlimited liability following the Yeung

9 - 8 - Dolden Wallace Folick goes viral on December 1, 2013 Dolden Wallace Folick is pleased to announce its social media launch. On December 1, 2013, all Dolden Wallace Folick lawyers will have LinkedIn profiles and Dolden Wallace Folick s Twitter feeds and Facebook profile will go public. Please add our lawyers to your contacts on LinkedIn, follow our tweets and find our Facebook profile on or after December 1, 2013 for regular updates on: (a) Recent decisions in insurance law; (b) comments and opinions on the effect of recent insurance law decisions; (c) results of decisions involving Dolden Wallace Folick lawyers; (d) insurance law seminars attended and presented by our lawyers; (e) insurance law articles, papers and books reviewed or authored by Dolden Wallace Folick lawyers; (f) charity and other community events hosted or attended by our lawyers; and (g) noteworthy and interesting updates in the world of insurance law. We look forward to welcoming you to our social media family!

10 - 9 - Vancouver, BC Editor Keoni Norgren, Tel: knorgren@dolden.com Please contact the editor if you would like others in your organization to receive this publication. Contributing Authors Mikel Pearce, Tel: Diana Dorey, Tel: ddorey@dolden.com Tenth Floor Dunsmuir Street Vancouver, B.C. Canada / V6C 3K4 Telephone (604) Fax: (604) info@dolden.com Toronto, ON Bay Street Toronto, Ont. Canada / M5H 4B2 Telephone (416) Fax: (416) info@dolden.com Kelowna, BC Richter Street Kelowna, B.C. Canada / V1W 4V5 Telephone (250) Fax (250) info@dolden.com Vancouver Toronto Kelowna