THE INNOCENT CO-INSURED

Transcription

1 Veronica S.C. Rossos

2 2 Veronica S.C. Rossos TABLE OF CONTENTS I. INTRODUCTION... 3 II. DEFINITIONS... 4 III. THE GENERAL PRINCIPLES OF INTERPRETATION OF INSURANCE POLICIES... 4 IV. AND THE SCOTT ANALYSIS... 5 V. CHARLES, A RECENT CANADIAN EXAMPLE... 6 VI. SEPARATION OF INSUREDS CLAUSES IN THE ONTARIO COURT OF APPEAL... 7 VII. LEGISLATIVE INITIATIVES TO ENHANCE THE PROTECTION OF... 8

3 3 Veronica S.C. Rossos I. Introduction Certain policies of homeowners insurance provide coverage for loss or damage to property subject to specific exclusions for losses caused by the "willful or criminal" acts of the insured. While such exclusions will be clear on the face of the policy, the consequences and implications of the exclusion, in so far as coverage goes, may be far broader than the named insured(s) or their insurance brokers may have contemplated. As analysis of the policy language, including the exclusion itself and the applicable definitions should serve to clarify the consequences of any such exclusion in the face of a co-insured s willful, deliberate or criminal act. An analysis of the specific policy language should clarify, to some extent, whether the willful, criminal or intentional act of a co-insured will risk coverage for all insureds contemplated by the policy at risk. The question then arises: how are the interests of multiple insureds covered by the terms of one policy of insurance to be independently protected? Or is that even possible? In 1989 the Supreme Court of Canada held that, in the face of clear policy language, there may be no means of separating the interests of the individual insureds and that, as a result, coverage for all insured may be denied on the basis of the actions of only one contemplated insured. Since 1989 the state of the law in Canada remains largely unchanged 1. For example, in August 2007 the Alberta Court of Queen s Bench determined that a woman whose estranged husband intentionally burned down a home they owned as joint tenants was not entitled to coverage under a policy of insurance. The court found that the husband, who despite their being separated at the date of loss, maintained an insured interest in the property and that, as a result, the policy would not respond to the loss as the husband and wife s interests were joint at the time and his intentional act effected coverage, generally 2. The issue of whether or not a particular policy exclusion will extend to all contemplated insureds in a given fact scenario will turn on the specific language of that policy. An understanding of the wording of the exclusion, who the contemplated "insureds" covered by the policy are, and the applicable definitions is essential in determining how far reaching the exclusion will be in any given circumstance. 1 Scott v. Wawanesa Mutual Insurance Co., [1989] 1 SCR 1445 [hereinafter Scott]. 2 Charles v. Peace Hills General Insurance Co., [2007] AJ No 928 [hereinafter Charles]

4 4 II. Definitions As with all legal analysis, understanding the relevant language is essential. In the context of the innocent co-insured the language that must specifically be considered in the context of the particular policy will include but may not be limited to definitions of the following terms: insured, co-insured, innocent coinsured and insured interest. The following are the definitions of general application that have been adopted for this discussion, it is important to note that the definitions will differ policy to policy: Insured: a person or persons covered by a policy of insurance. That person, or those persons, will either be specifically named in the policy or, though un-named, will be covered either by reference or implication of the policy wording. Co-insured: two or more Insureds, who are covered pursuant to the terms (including reference and implication) of the same policy of insurance. Insured interest: the interest contemplated and covered by a policy of insurance. In the case of co-insureds the insured interest will be either joint or several. In light of these definitions who then is the innocent co-insured? The following definition is suggested for the purpose of this paper: Innocent co-insured: an insured who is "innocent" vis-à-vis his or her co-insured(s) intentional or criminal acts. The innocent co-insured is neither complicit in nor cognizant of those intentional, illegal or willful acts of their co-insured(s) that could result in a denial of coverage. As stated above, it cannot be stressed enough that every contract of insurance must be interpreted in the context of its own language when assessing a coverage issue. That said it is also extremely important to assess every policy of insurance with the general rules of interpretation applicable to insurance contracts in mind. III. The General Principles of Interpretation of Insurance Policies The issue that is paramount to any co-insured that finds him or herself innocent vis-à-vis their co-insured(s) is surely whether an exclusion from coverage contemplated in the policy will extend to all Insureds or simply to that insured who, by his or her willful, intentional or criminal actions, triggered the exclusion.

5 5 If the policy language is clear and unambiguous the exercise of interpretation is not likely to be necessary 3. If, however, there is a conflict as to the interpretation of the policy the following general principles of interpretation of insurance policies will apply: 1. Contra Proferentem rule; 2. Exclusion clauses are to be read narrowly; 3. Any ambiguity in the language of the contract is to be resolved ion the favour of the insured. 4 IV. The Innocent Co-Insured and the Scott Analysis In 1989 the Supreme Court of Canada released its decision in Scott, which remains, to this day, the leading case on innocent co-insureds in Canada. In Scott, the Court was called upon to determine if an innocent coinsured could turn to her insurer for coverage in the face of the intentional act of an (un-named) co-insured. By a slim majority the court held that, as the language in the applicable policy was clear and unambiguous, and as the interests of all insureds contemplated by the policy were joint, coverage could not extend to any of the insureds, whether named or not. Despite several critics calling for the application of the dissent s reasoning, Scott remains relevant in all circumstances where coverage for co-insureds is being analyzed. Briefly, the facts in Scott are summarized as follows: The Scotts owned a home that was insured under a homeowner s policy underwritten by Wawanesa. The homeowner s policy excluded losses that occurred as a result of a willful act of the Insured. In March, 1983, the Scotts home was damaged by fire deliberately set by the Scotts then 15-year-old son. The Scotts sought to recover pursuant to the terms of their policy of insurance, a claim that was denied on the basis that the Scotts son was an insured as contemplated in the definition of Insured, and that the policy barred recovery in the face of an intentional act of any insured. As the insureds interest was jointly held among the insureds, no coverage could extend to any one insured under the policy Insured was defined in the policy as: 3 Scott, supra Note 1. 4 Non-Marine Underwrites, Lloyd s of London v. Scalera, [2000] 1 SCR 551, and Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., [1993] 1 SCR 252.

6 6 (a) INSURED: The unqualified word "Insured" includes (1) the Named Insured, and (2) if residents of his household, his spouse, the relatives of either, and any other person under the age of 21 in the care of an Insured. And, the exclusion stated: This Policy does not insure: (d) loss or damage caused by a criminal or willful act or omission of the Insured or of any person whose property is insured hereunder; The rationale informing the decision is fairly simple where policy language is "clear and unambiguous" it will be interpreted strictly as the policy language will not offend against the general principles of interpretation of insurance policies and will accord with and reflect the expectations of the parties. The majority's reasoning turns on this: that in the face of clear unambiguous policy language courts should not give the policy a meaning other than the obvious, unless that meaning is either: unreasonable or contrary to the intention of the parties. Madame Justice L Hereux-Dubé, in writing for the majority stated: When the wording of a contract is unambiguous, as in my view it is in this case, courts should not give it a meaning different from that which is expressed by its clear terms, unless the contract is unreasonable or has an effect contrary to the intentions of the parties. 5 V. Charles, a Recent Canadian Example As previously mentioned, in 2007 the Alberta Court of Queen's bench applied the Scott analysis in denying coverage to any insureds in Charles. The facts of Charles are briefly that: In 2001, a married couple, Tricia and Robin Charles purchased a home as joint tenants in Redcliffe, Alberta. At or about the same time the Charles purchased a homeowner s policy underwritten by Peace Hills Insurance Company which, subject to certain conditions and exclusions, provided insurance coverage to the Charles home and its contents. The policy, as at the date of loss, contained the following exclusion, that: [No coverage would be provided for losses] resulting from any intentional or criminal act or failure to act by... all persons insured by this policy... even though the intentional or criminal act or failure to act is by only one or more of the other persons insured by the policy. 6 (Emphasis added) Each of Tricia and Robin Charles was a named insured within the meaning of the policy. 5 Scott, at paragraph Charles, supra note 2.

7 7 The policy was renewed as required and was in full force and effect on September 24, 2003 when the couple executed a form of settlement agreement purporting to transfer possession and ownership of the home to Tricia Charles. On September 29, 2003, Tricia Charles contacted her insurance agent to inquire how to remove Robin Charles from the policy in the circumstances. Tricia. Charles was advised by her insurance agent that to remove a named insured from the policy required the delivery of proof that that insured was no longer a joint owner of the property. Until such time as Robin Charles consented to a change in title; or documents were delivered to substantiate that there had been a change in title Robin Charles would remain an insured under the policy. In spite of Tricia Charles' inquiries, the insurer was never asked or authorized to remove Robin Charles as an insured under the policy. On October 18, 2003, the home was destroyed by a fire deemed to have been intentionally set by Robin Charles. While Tricia Charles had no responsibility for the loss; she was unaware of Robin Charles' intention and was not involved in the commission of the act, she was denied coverage for her loss. Tricia Charles argued that her husband no longer had an insurable interest in the home, as evidenced by the un-executed and unfitness separation agreement they had drafted. The Court disagreed, and held that, on the basis that the policy language was clear and unambiguous the Insurer s denial of coverage was appropriate. The Court held that no steps had been taken to sever the jointly held interests of Tricia and Robin Charles and that as a result each was excluded from recovery pursuant to the policy language. While the language of this particular policy was clear, it does seem, at least to a certain extent unfair. How dos an insured guarantee that they will not be left without coverage in the face of the intentional acts of their co-insureds? Could a separation of insureds clause provide the whole answer? VI. Separation of Insureds Clauses in the Ontario Court of Appeal Obviously not all policies of insurance are created equally. In the context of co-insureds, certain policies containing separation of insureds clauses have been judicially considered and appear to afford the insureds, both named and un-named, the type of comfort that is absent in the policies contemplated in each of Scott and Charles. The courts have stated that in policies containing separation of insureds clauses either: 1. create, through the policy language, a several insured interests by separating the insureds, thereby

8 8 protecting them from each other s acts 7 ; or 2. lend an ambiguity to the contract language that, as per the general rules of contractual interpretation, must be read in the insured s favour 8. Godonoaga and Snaak, both cases determined by the Ontario Court of Appeal have considered the effect and application of separation of insureds clauses in circumstances where un-named minor insureds willfully caused losses for which their parents ultimately sought coverage. In Godonoaga the Ontario Court of Appeal found that the separation of insureds clauses in the policies functioned to sever the insureds interests such that coverage for the innocent co-insured would not be affected by the willful acts of the less-than innocent co-insured. In Snaak, the Ontario Court of Appeal held, applying the general principles of interpretation of insurance policies, that the exclusion clause was ambiguous and that such an obvious ambiguity in the wording if the clause had to be resolved in the insureds favour. What is unclear how this would be dealt with in the context of property damage where severing the interests of the co-insureds would be a vastly less tidy exercise. What is clear is that punishing the innocent co-insured for the acts of a co-insured is potentially unfair. VII. Legislative Initiatives to Enhance the Protection of the Innocent Co-insured In March 2007 the BC Ministry of Finance released the Insurance Act Discussion Paper which had as its goal the enhancement of consumer protection under the insurance act and the encouragement of discussion on how consumers could be better protected by their insurance. Among the recommendations in the paper was the recommendation that the Insurance Act, RSBC, c. 226 be amended to require that coverage be extended to the innocent co-insured 9. 7 Godonoaga (Litigation Guardian of) v. Katambakhsh, [2000] OJ No. 2172, [hereinafter Godonoaga]. 8 and Snaak (Litigation Guardian of) v. Dominion of Canada General Insurance Co, [2002] OJ No 1438 [hereinafter Snaak] 9 B. Innocent co-insured: When persons who are jointly insured suffer loss that is caused by the acts of one of them, recovery by the innocent party may be denied. One situation involves a co-owned family home that is damaged due to the acts of an abusive spouse. The problem can also arise where family property is damaged by a child, or where loss to partnership property is caused by the acts of a partner. Typically, homeowners policies exclude loss caused by the intentional or criminal acts of any person insured under the policy. In one case, this type of term was used to deny recovery by the parents whose house was burned down by their 16 year old son, on the basis that the son s personal property was covered by the insurance policy, and therefore the son was an insured.

9 9 While the above recommendation may appeal to our sense of fairness, the practicalities of administering such a requirement could be rather difficult. the question that leaps to mind is how do you separate the interests of insureds such that the co-insured whose intentional or criminal acts caused the loss is not compensated for his or her losses buy virtue of compensating his or her co-insured? The rationale for denying recovery in these circumstances stems from the familiar legal doctrine that prohibits a wrongdoer from profiting as a result of his or her misconduct. In cases where property is jointly owned (or where property is jointly insured), the assumption is that the interests of the insured parties are inseparably connected, so that a loss or gain necessarily affects both. In other words, to allow recovery by the innocent party would indirectly benefit the guilty one. As well, insurers are concerned that allowing recovery by an innocent co-insured might create a loophole. This is because in cases involving arson, the innocent spouse may actually be complicit (although this may be difficult to prove), and, if recovery were allowed, would share in the proceeds of insurance. On the other hand, allowing coverage to be denied can be seen as a punitive approach to persons most in need of support in particular, women and children in abusive relationships. The State of Washington addresses this issue by focusing only on the domestic abuse scenario. It prohibits insurance companies from denying otherwise valid claims on the basis that the loss was caused by an act of domestic abuse by another insured under the policy, so long as the innocent co-insured files a police report, cooperates with the investigation of the domestic violence, and did not participate in causing the loss. In contrast, under Quebec s Civil Code, insurers are obliged to cover any co-insured person, unless they have committed an intentional fault. The other Canadian provinces do not address the problem. Proposal 6: It is proposed that the act be amended to require insurance contracts to maintain coverage of an innocent co-insured.