The Superior Court has released a decision dealing with the priority pecking order under section 277 of the Insurance Act. That section determines the order in which third party liability insurers have to respond to tort claims arising from a motor vehicle accident. Unlike other cases, this one turned on deciding who the lessee of the vehicle was: The employee who leased it for a business trip or his employer who would reimburse him for the rental.
Before we get into this new decision, it is important to understand how section 277 applies when the target defendant’s vehicle is leased. Section 277 (1.1) provides:
277. (1.1) Despite subsection (1), if an automobile is leased, the following rules apply to determine the order in which the third party liability provisions of any available motor vehicle liability policies shall respond in respect of liability arising from or occurring in connection with the ownership or, directly or indirectly, with the use or operation of the automobile on or after the day this subsection comes into force:
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.
(4) In this section,
“lessee” means, 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.
To summarize, the priority pecking order for leased vehicles works like this:
- The lessee’s insurer is first
- The driver’s insurer is second
- The owner’s insurer is third
Now let’s get to this new case.
In Intact v. American Home, a man named Mr. Ashrafi worked for a company named Colt Engineering. As part of his job, he rented a vehicle from Budget Car Rental. He drove the rented vehicle on February 4, 2008, and it collided with another vehicle injuring the passenger in that vehicle, who sued Mr. Ashrafi.
At the time of the accident, Intact insured Ashrafi for his personal vehicles. American Home insured Colt Engineering under a CGL policy that provided automobile accident coverage if an employee is involved in motor vehicle accident in the course of his or her employment.
The narrow issue in this Application was to decide who the lessee of the rented vehicle was: Ashrafi or Colt. As noted above, if Ashrafi was the lessee his policy would be the first to respond (also the second because he was the driver). If Colt was the lessee, its policy with American Home would respond first up to its limits. Ashrafi’s policy with Intact (insurer of the driver) would then follow.
Intact submitted that Ashrafi was not the “lessee” because the genuine lessee was Colt Engineering on whose behalf Ashrafi was engaged on business when he signed the contract with Budget Car Rental and from which he would be and from which he was in fact reimbursed for the expense of renting the car.
It was common ground that Ashrafi was working when his rented vehicle was involved in an accident with another vehicle. The facts were that Ashrafi came to Toronto for business purposes. He rented a 2008 Jeep from Budget Car Rental using a personal credit card provided to him by Colt Engineering for which he was reimbursed for the rental expense. The car rental agreement with Budget Car Rental was signed by Ashrafi. He used a personal American Express Credit that had been purchased for him by Colt Engineering. Ashrafi was entitled to use the credit card for business and personal expenses. Under Colt Engineering’s corporate policy Ashrafi was responsible for his credit card charges, but he was entitled to be reimbursed for his business expenses.
Essentially, Intact argued that Colt was the de facto lessee of the renatl vehicle.
Justice Perell dismissed Intact’s argument and found that at the time of the accident, Ashrafi was the lessee. He stated:
As a matter of first impression, I agree with American Home’s argument. I see no unfairness in a straightforward interpretation of the section, and I see no reason to give s. 277 a reading that would introduce the concept of “de facto lessee” and encourage factual and legal disputes between insurers about how employment law, agency law, corporate law, partnership law, and the law of contract might apply to cast doubt on who is a lessee under s. 277 of the Insurance Act.
Who is the lessee can be tested and determined by asking the following question: Who can the lessor (Budget Car Rental) sue to enforce the car rental contract? In the case at bar, the answer to this question is Mr. Ashrafi. In the case at bar, the privity of contract was between Budget Car Rental and Mr. Ashrafi. This is not a case where Colt Engineering signed a car rental contract; this is a case where Mr. Ashrafi signed a car rental contact. As it happens, Mr. Ashrafi is entitled to be reimbursed for the rental expense by Colt Engineering but that is a matter between him and Colt Engineering. There is no privity of contract between Budget Car Rental and Colt Engineering.
As far as we know this is the first decision under section 277 of the Insurance Act that deals with the definition of “lessee” under that section.
See Intact Insurance Company of Canada v. American Home Assurance Company of Canada, 2013 ONSC 2372 (CanLII)