Absence of Statutory Warning turns Victory for the Vehicle Leasing Industry into Loss for the Insurer

May 2015 | Jonathan Hodes

In the province of British Columbia, vehicle owners, including leasing and rental companies, are vicariously liable for the negligence of permissive drivers of their vehicles.  Damages recoverable against lessors, however, are capped by statute at CDN $1 million (a provision commonly known as the “Lessor Damages Cap”).

Since the Lessor Damages Cap was introduced, there has been some controversy over whether it was intended to apply to amounts in excess of any damages collectible from others, or to include payments made by other jointly and severally liable parties.  The implications were significant, as vehicle leasing companies, unlike most individual drivers, generally have deep pockets, and can face significant exposure arising from actions of persons over whom they have no control.

In the case of Stroszyn v. Mitsui Sumitomo Insurance Company Limited[1], the British Columbia Court of Appeal resolved the controversy in favour of the leasing companies.  At the same time, however, it sent a message to the insurance industry concerning the importance of compliance with statutory language requirements, by refusing to enforce the excess insurer’s exclusion for drivers of leased vehicles, which was otherwise valid.

In Stroszyn, the plaintiff had been injured when he was struck by a vehicle driven by Jason Chen.  The Chen vehicle had been leased from the insured, Honda Finance Inc., by Mary Chen.  All three entities were sued, and damages were agreed to at $1.6 million, with a further agreement that the liability of Honda and its insurer would be subsequently dealt with by application to the court.

The vehicle in question had been insured by the Insurance Corporation of British Columbia (“ICBC”) to a limit of $1 million.  Mary Chen and Honda were named insureds under the policy, and Jason Chen was covered as a family member of Mary Chen.  Coverage was not in issue in respect of the ICBC policy.

Honda was also covered by an excess policy, with a limit of $9 million.  The policy expressly excluded lessees and drivers of leased vehicles.

ICBC paid its limit of $1 million, and the court was asked to address two issues in relation to the outstanding $600,000:

  1. whether Honda was liable for the outstanding settlement amount after ICBC’s limit had been paid.  Honda’s position was that the $1 million, paid by ICBC, had discharged its maximum exposure under the Lessor Damages Cap; and
  2. whether Jason Chen, whose liability was not limited by statute, was an unnamed insured under Honda’s excess policy notwithstanding the exclusionary language.  Such a result would require Honda’s excess insurer to pay the additional $600,000, regardless of Honda’s liability for that amount.

On the first issue, the court at first instance held that the Lessor Damages Cap applied only to damages in excess of the monies paid by ICBC, such that Honda was found liable for the $600,000 in excess of ICBC’s limit.

On the second issue, the court held that the exclusion for lessees and drivers was valid, and that Jason Chen was not an insured under the Honda policy.  Both parties appealed.

The Court of Appeal reversed on both issues.  On the lessor damages issue, the court held that where parties are jointly and severally liable for damages, any payment made by an insurer reduces the liability of each responsible party to the full extent of the payment, leaving the tortfeasors jointly liable for the balance.  Thus, where $1 million is paid pursuant to a lessee’s primary automobile policy, the liability of both the lessee and the jointly liable lessor would be reduced by that amount.  As such, the lessor’s maximum exposure under the Lessor Damages Cap would be discharged, and any excess liability would remain only with the other jointly liable parties.  The court noted that this would be an appropriate result in cases where the liability of the lessor was entirely vicarious, and there was no basis for apportionment or severance of liability.

The court, however, specifically left open the issue of whether the same rule would apply where the lessor was not named as an insured under the lessee’s policy (as is common in other jurisdictions).

In respect of the excess coverage issue, the insurer had filed a Power of Attorney and Undertaking with the Canadian Council of Insurance Regulators, which precluded it from raising any defence that would not have been available if the policy had been issued in British Columbia.  This was significant because in British Columbia, an excess auto insurer is permitted to write excess coverage only on the same terms for the same insureds as the underlying policy, except that it may “prohibit a specified person or class of persons from using or operating the vehicle” if the policy includes the following words in a “prominent place”, and in “conspicuous lettering”:

This policy contains prohibitions relating to persons or classes of persons, exclusions of risks or limits of coverage that are not in the insurance it extends.

While the exclusionary language in the Honda policy was itself permitted, the court based its decision on the fact that the words of warning, required by the legislation, did not appear on the policy.  The insurer argued that the policy was not purchased by Jason Chen, who had never seen the wording, and the words were therefore immaterial.  The court disagreed, holding that the words were designed to protect all insureds, named and unnamed, whether or not the wording had been brought to their attention.  The court interpreted the statute, strictly, and held that the exclusions were invalid.  Consequently, Jason Chen was covered as an unnamed insured, as he was by the underlying primary policy.

While the lower court’s decision was reversed in relation to both Honda’s liability and Jason Chen’s coverage, the result after appeal remained the same for Honda’s insurer:  it would still have to pay $600,000, which was the amount outstanding on the settlement of the plaintiff’s claim.  The only difference was that the money would be paid on behalf of Jason Chen instead of Honda, thereby eliminating any potential subrogation rights against him.

The Stroszyn case is significant in two respects:  First, it settles the question of whether the Lessor Damages Cap includes payments made by the lessee’s primary insurer.  While the mandatory minimum automobile liability coverage in British Columbia is $200,000, vehicle leasing contracts typically require the lessee to purchase at least $1 million in coverage.  Therefore, Stroszyn represents a fortuitous result for companies leasing vehicles in British Columbia, whose own coverage or self-insured retention will now rarely come into play.

Second, the decision highlights the importance of insurers’ compliance with statutory requirements in every jurisdiction in which they provide coverage.  Had the policy contained the required warning to insureds, in addition to the otherwise valid exclusions, the Court of Appeal’s ruling on lessor damages would have saved the underwriters $600,000.

A link to the Stroszyn decision can be found at http://courts.gov.bc.ca/jdb-txt/CA/14/04/2014BCCA0431.htm. Readers with questions concerning this decision, or BC insurance issues generally should feel free to contact Jonathan Hodes at jhodes@millerthomson.com or +1 604 643 1256.

[1]           2014 BCCA 431.

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