Who is the Lessee? Whoever the Lessor Can Sue to Enforce the Lease – An Update on Insurer Priority of Third Party Claims Involving Lessors

November 27, 2018 | Lyndsay Hone

Who can a lessor sue to enforce a lease? In a recent decision on priority of payment in a motor vehicle tort action, the Ontario Superior Court of Justice resolved the priority dispute by answering this question.

In Aviva Insurance Company v Wawanesa Mutual Insurance Company[1], Aviva brought an application to determine which of the two companies would be the first to pay in a motor vehicle personal injury case.  Mr. Hy Kiet Liu was rear ended by a truck driven by Maroof Mahamood.  Mr. Mahamood was an uninsured driver delivering furniture on behalf of his employer, Fine Furnishings.  Wawanesa insures Fine Furnishings.  The vehicle Mr. Mahamood was driving was rented from New Horizons Car Truck Rentals.  Aviva insures New Horizons.

The Insurance Act, RSO 1990, c I8, was amended in 2006 to “make renters liable for the damages sustained by reason of negligence in the operation of a rented vehicle[2].” The following rules apply to determine the order in which motor vehicle liability policies will respond where a leased vehicle is involved in an accident:

  1. Firstly, insurance available under a contract evidenced by a motor vehicle liability policy under which the lessee of the automobile is entitled to indemnity as an insured named in the contract.
  2. Secondly, insurance available under a contract evidenced by a motor vehicle liability policy under which the driver of the automobile is entitled to indemnity, either as an insured named in the contract, as the spouse of an insured named in the contract who resides with that insured or as a driver named in the contract, is excess to the insurance referred to in paragraph 1.
  3. Thirdly, insurance available under a contract evidenced by a motor vehicle liability policy under which the owner of the automobile is entitled to indemnity as an insured named in the contract is excess to the insurance referred to in paragraphs 1 and 2.[3]

Answering the priority question turned on whether Fine Furnishings was the lessee of the vehicle.  If it was, Fine Furnishings (the Wawanesa policy) would be first payor.  If it was not and Mahamood was the lessee, New Horizons as the owner (the Aviva policy) would be first payor since Mahamood was uninsured. Lessee is defined in the Insurance Act as “in respect of an automobile, a person who is leasing or renting the automobile for any period of time, and “leased” has a corresponding meaning[4].”

Aviva argued that there were relevant facts that made Fine Furnishings the de facto lessee.  Mahamood did not pay for the truck rental, was practicably limited to renting from New Horizons where Fine Furnishings had an account, and could only use the truck for Fine Furnishings deliveries. Aviva delivered an affidavit of a New Horizons representative who believed they were contracting with Fine Furnishings. Fine Furnishings also had an account with New Horizons in respect of leased vehicles.

Despite the factors Aviva pointed out, the court undertook simple statutory and contractual interpretations to resolve the dispute in favour of Wawanesa. Following the reasoning of Justice Perell in Intact Insurance Company of Canada v American Home Assurance Company of Canada[5], the court asked “who can the lessor sue to enforce the rental contract?” The rental agreement identified Mahamood as the renter and the contract was signed by him.  Whoever ultimately paid for the rental was not determinative of who the lessee was. There was “no indication of any involvement of Fine Furnishings aside from their telephone number[6]” on the rental agreement.  Mahamood was the person New Horizons would be required to sue to enforce their contract. Accordingly Mahamood, not Fine Furnishings, was the lessee.

The court in Aviva did not foreclose against a situation where a corporation could rent automobiles and acknowledged this would require an authorized representative to sign the contract.  However, simply renting a vehicle in the course of employment is not sufficient for the employer to be the lessee. The court cautioned that finding otherwise would complicate the simple legislative purpose and encourage litigation on de facto lessees.  The court held “it should only be the exceptional case where it will be necessary to look beyond the four corners of the rental agreement[7].”

It is encouraging that the simple interpretative approach was endorsed.  This allows certainty in interpretation of section 277(1.1) of the Insurance Act.  Companies that lease out vehicles may, and as a result of this decision perhaps will, revise rental agreements to make it clear when an employer is renting the vehicle in question.

[1] 2018 ONSC 5778 [“Aviva”].

[2] Enterprise Rent-a-Car Canada Ltd v Meloche Monnex Financial Services Inc, 2010 ONCA 277 at para 4.

[3] Insurance Act at s 277(1.1).

[4] Ibid at s 277(4).

[5] 2013 ONSC 2372.

[6] Aviva at para 21.

[7] Aviva at para 27.


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