One Year Contractual Limitation Period Overrides Statutory Period

In Ontario under the Limitations Act, 2002, the general limitation period for contracts is two years. The limitation period under the Act in respect of business agreements may be varied or excluded by agreement. A “business agreement” is defined as an agreement made by parties none of whom is a consumer as defined in the Consumer Protection Act, 2002. A recent decision of the Ontario Court of Appeal considered whether a one year limitation period in an insurance policy was a “business agreement” and would be enforced.

In Daverne v. John Switzer Fuels Ltd. 2015 ONCA 919 a fuel oil tank leak caused damages to property owned by Gerald Daverne and Jutta Daverne. McKeown & Wood Limited (“MW”) had sold the tank to the Davernes. MW was insured by Federated Insurance Company of Canada (“Federated”). At issue in the litigation considered by the Court of Appeal was whether the one year limitation period set out in Federated’s insurance policy was enforceable against MW. The judge hearing the original application had found that the clause was not enforceable. The Court of Appeal disagreed.

Firstly, the Court of Appeal found that the standard of review (of the judge’s decision) was correctness. The Court of Appeal reiterated that the correctness standard of review applies on standard form insurance contracts. (*1) The Court of Appeal held that, in the case of insurance policies, which involve the interpretation of similar if not common language and the application of general principles of insurance law, the high degree of generality and precedential value justifies a departure from the reasonableness standard of appellate review set out by the Supreme Court of Canada.

The Court of Appeal had to consider if in fact there was a one year limitation period in the policy, given that the period was set out in a statutory condition.

Section 148 of the Insurance Act, R.S.O. 1990, c. I.8, makes certain statutory conditions part of every fire insurance contract in Ontario. Statutory condition 14 was included in Federated’s policy as clause 14 of the “Basic Policy Statutory Conditions” form that is included in the Basic Policy. It provided:

14. Action: Every action or proceeding against the insurer for the recovery of any claim under or by virtue of this contract is absolutely barred unless commenced within one year next after the loss or damage occurs. [Emphasis added.]

Clause 8 of the “Additional Conditions” of the Basic Policy form also applies:

8. Applicability of Statutory Conditions and Additional Conditions: The Statutory Conditions and Additional conditions apply with respect to all the perils insured by this policy and to the liability coverage, where provided, except where these conditions may be modified or supplemented by riders or endorsements attached. [Emphasis added.]

The Court of Appeal held that Clause 8 applied the contractual limitations period in clause 14 to the other perils insured against in Federated’s policy and to the liability coverage provided by it.

The Court of Appeal then had to deal with the issue as to whether the policy was a business agreement. The Court of Appeal concluded that “It is plain that none of the parties to Federated’s insurance policy is a “consumer”, which is defined in the Consumer Protection Act, 2002 to mean “an individual acting for personal, family or household purposes and does not include a person who is acting for business purposes.” The parties are business entities.” The parties referred to, of course, were Federated and MW. The Court held that clause 14 of the Basic Policy Statutory Conditions, combined with clause 8 of the Additional Conditions, clearly varied the two-year limitation period provided for in the Limitations Act, 2002.

The Appeal Court noted that the judge hearing the original application held that the phrase “loss or damage”, as used in clause 14 and other places in the statutory conditions, is “not readily adaptable to liability insurance coverage where the loss or damage which is the subject of a claim has been suffered by a third party who then seeks compensation from the insured.” The Appeal Court found that the judge erred in rejecting Federated’s argument that its denial of defence coverage to MW could constitute “loss or damage” for the purpose of the limitation period in clause 14 stating:

There is no reason not to apply the basic principle that the insured “suffers a loss from the moment [the insurer] can be said to have failed to satisfy its legal obligation [under the policy of insurance].” Where the benefit of a duty to defend is denied, the insured “suffers a loss ‘caused by’” the insurer’s denial of a defence “the day after the demand … is made” (*2)

The Appeal Court concluded that Clause 8 is clear and unambiguous. It explicitly states that the statutory conditions apply to the liability coverage under the policy. The insurance policy at issue in this case was a business agreement for the purposes of s. 22 of the Limitations Act, 2002, and the one-year contractual limitation period was enforceable by Federated against MW.

Endnotes

(*1) The Court of Appeal in MacDonald v. Chicago Title Insurance Company of Canada 2015 ONCA 842 had previously arrived at this correctness standard, which is different than set out in 2014 by the Supreme Court of Canada in Sattva Capital Corp. v. Creston Moly Corp. 2014 SCC 53 [see the Fernandes Hearn LLP article in the firm’s August 2014 Newsletter]. In Sattva the Supreme Court of Canada held that contractual interpretation involves mixed questions of mixed fact and law rather than pure questions of law and the standard of review is reasonableness, not correctness.

(*2) at paragraph 33