Kozel v The Personal Insurance Company: Failure to Renew a Driver’s License, a Car Crash, and Relief from Forfeiture

In Kozel v The Personal Insurance Company, 2014 ONCA 130 [Kozel], a decision released on February 19, 2014, the Ontario Court of Appeal considered the scope of relief from forfeiture pursuant to section 98 of the Courts of Justice Act, RSO 1990, c C.43 [CJA], in the context of an automobile insurance claim.

Factual Background and the Failure to Renew

In August 2011, the respondent had received an envelope in the mail from the Ontario Ministry of Transportation. The respondent only recalled opening this envelope pertaining to license plate sticker renewal in September, when she provided it to a car dealership from which she was purchasing a car to enable the dealership to obtain licensing. The respondent was unaware that this envelope contained documentation relating to the renewal of her driver’s license.

In February 2012, the respondent was involved in an automobile accident in Florida, which left a motorcyclist severely injured. At the time of this accident, the respondent was driving with an Ontario driver’s license that had expired in October 2011. She was charged in Florida with driving while having an expired license. However, this charge was dropped because of a provision in the Florida legislation allowing for a six month grace period before driving with an expired license results in a charge.

Three days after the accident, the respondent returned to Canada and renewed her license. The motorcyclist subsequently commenced a tort action against her, leading the respondent to bring forward an application seeking a declaration that her insurance company is required to indemnify her and defend her in a third-party action under her contract of insurance. The application judge found in favour of the respondent, and this order was appealed by the insurance company.

Issues on Appeal

1. Was the respondent, at the time of her accident, in breach of her insurance policy?
2. Is the respondent entitled to relief from forfeiture under section 98 of the CJA?

Breach of Insurance Policy

The policy condition at issue in this case was statutory condition 4(1) of the Statutory Conditions — Automobile Insurance, O Reg 777/93, enacted pursuant to the Insurance Act, RSO 1990, c I.8 [Insurance Act], which states the following:

The insured shall not drive or operate or permit any other person to drive or operate the automobile unless the insured or other person is authorized by law to drive or operate it.

The application judge found that because the offence of driving without a valid license is a strict liability offence, a due diligence defence was available to the respondent. Furthermore, the application judge found that the respondent exercised sufficient diligence and thus the defence was made out.

The Ontario Court of Appeal disagreed with the application judge. The availability of the due diligence defence, as per the Supreme Court of Canada’s decision in Lévis (City) v Tétreault; Lévis (City) v 2629-4470 Québec inc, [2006] 1 SCR 420, “depends on the circumstances surrounding the relevant offence. That is, an individual can make out this defence if he or she can show a reasonable misapprehension of facts or reasonable care with respect to the offence with which he or she is charged” (Kozel, para 21).

In this case, the respondent was 77 years old at the time of the accident, having held a driver’s license for sixty years. Her license had always been renewed on time. This time, she had not inquired about or even considered the license renewal: “She produced her driver’s licence for the dealership to copy, and later at a lawyer’s office for identification purposes, but she did not examine it on either occasion” (para 23). This demonstrated an absence of reasonable care. Thus, the defence of due diligence was not available to the respondent.

Relief from Forfeiture

In short, “relief from forfeiture simply refers to the power of a court to protect a person against the loss of an interest or a right because of a failure to perform a covenant or condition in an agreement or contract” (para 28). This remedy is equitable and discretionary in nature.

The statutory provisions at issue in this appeal were section 98 of the CJA and section 129 of the Insurance Act. Section 98 of the CJA states that “[a] court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.”

Meanwhile, and in contrast to the broad wording of the CJA provision, section 129 of the Insurance Act provides courts the discretion to grant relief from forfeiture where policy conditions that relate to proof of loss are breached. The respondent acknowledged that this provision could not provide relief in this case because of its limited purpose.

Before the court determined whether it should exercise its discretion to grant relief from forfeiture, two threshold questions needed to be answered (para 28):

First, does the breach in this case constitute imperfect compliance with a policy term or non-compliance with a condition precedent to coverage? Second, is relief available under s. 98 of the CJA despite the existence of a specific relief against forfeiture provision in the Insurance Act?

Imperfect Compliance or Non-Compliance with a Condition Precedent?

The Ontario Court of Appeal discussed the applicability of section 98 of the CJA to this case. Citing Stuart v Hutchins (1998), 40 OR (3d) 321 (CA), a case related to the scope of the two aforementioned statutory provisions, the Ontario Court of Appeal stated that if “the respondent’s breach of statutory condition 4(1) is imperfect compliance with a policy term, relief against forfeiture under s. 98 of the CJA is available. If, however, the breach amounts to non-compliance with a condition precedent, the court cannot award relief under s. 98” (Kozel, para 40).

The distinction between imperfect compliance and non-compliance with a condition precedent requires a consideration of the seriousness of the breach. If the breach is incidental, it constitutes imperfect compliance; if it is fundamental, the breach is found to be non-compliance with a condition precedent.

Having found that the breach by the respondent in this case was relatively minor, the court categorized the breach as imperfect compliance: “While the provision is a condition in name, the appellant pointed to no language in the contract stressing that the insurance coverage was conditioned on the claimant being authorized to drive” (para 47). Thus, this initial hurdle to the availability of section 98 was met by the respondent.

The court went on to state that a “court should find that an insured’s breach constitutes noncompliance with a condition precedent only in rare cases where the breach is substantial and prejudices the insurer. In all other instances, the breach will be deemed imperfect compliance, and relief against forfeiture will be available” (para 50).

The Availability of Section 98 Relief in Insurance Cases

The court stated that in spite of the existence of section 129 of the Insurance Act, the relief provision in section 98 of the CJA is nonetheless available in insurance cases. In short, courts should interpret relief from forfeiture provisions broadly, in light of the remedy’s equitable nature.

Because section 129 of the Insurance Act is “restricted to instances of imperfect compliance with terms of a policy after a loss has occurred… it has no application to cases where the breach occurred before the loss” (para 58). This leaves individuals who have acted in good faith – such as a person who loses coverage because he or she was driving with an expired license – without a remedy under section 129. Thus, without clear legislative intent stating that section 98 of the CJA is inapplicable in insurance cases, it should be available as an avenue of relief for contracts governed by the Insurance Act.

Application to this Case

Having found that the two threshold questions discussed above were resolved in the respondent’s favour, the Ontario Court of Appeal went on to consider whether the court should exercise its discretion to grant relief from forfeiture.

There are three factors that courts must consider when choosing to exercise this discretion: (1) the conduct of the applicant; (2) the gravity of the breach; and (3) the disparity between the value of the property forfeited and the damage caused by the breach.

The court found that the conduct of the respondent in this case was reasonable. She had paid her insurance premiums on time, and she renewed her driver’s licence as soon as she discovered that it had expired. As it relates to the gravity of the breach, the court stated that in spite of the fact that the license was expired for four months at the time of the car accident, the breach was not serious. It had no impact on the respondent’s ability to drive safely or on the contractual rights of the insurance company. Finally, the court found that the disparity in this case was “enormous: the respondent stands to lose $1,000,000 in insurance coverage, while the breach of statutory condition 4(1) caused no prejudice to the insurance company” (para 71).

Thus, while the application judge’s ruling on due diligence was reversed, the Ontario Court of Appeal granted the respondent relief against forfeiture pursuant to section 98 of the CJA. Allowing the insurance company to enjoy a large windfall at the hands of the respondent in this case would, according to the court, be contrary to the fundamental notions of equity.

Potential Impact of this Case

The Ontario Court of Appeal’s decision in Kozel has broadened the scope of relief from forfeiture under section 98 of the CJA, particularly in light of the court’s strong statement limiting cases where an insured’s breach will be classified as non-compliance with a condition precedent (thus limiting the availability of section 98’s remedy). This may have a significant impact on general contractual litigation.

Moreover, the court’s decision resolved the question of whether the relief provision in section 98 is applicable in the insurance realm; prior to this case, there was very little jurisprudence on this issue.