Court of Appeal at fault, 30 class actions become a total loss

Last summer, in David Polowin Real Estate Ltd. v. Dominion of Canada General Insurance Co.,[1] the Ontario Court of Appeal overturned its own decision on a question of law it decided just a few years ago in McNaughton Automotive Ltd. v. Co-operators General Insurance Co.[2] In so doing, the Court wrestled with whether and when it could, or should, overrule one of its past decisions.

In both cases, the controversy surrounded whether 1993 amendments to automobile insurance legislation affected how insurance companies adjusted a narrow category of loss claims. At issue was whether, in adjusting an at-fault total loss claim (a "write-off" of the vehicle), insurers could continue the standard practice of subtracting the amount of the deductible under the insured’s policy from the actual cash value paid to the insured, when the insurer retained title to the salvage (the "totalled" car).

Prior to 1993, the statutory conditions to all automobile insurance polices were located in the InsuranceAct[3] and were preceded by language that declared them to be "subject to s.261”, the deductible provisions of the Act. The 1993 amendments shifted the statutory conditions from the Act to the Regulations, but removed the "subject to s.261" language. Thus, it was argued that the statutory conditions should thereafter be read without reference to the provisions of the Act, thereby preventing the insurer from subtracting the deductible from the cash payout to the car owner.

Statutory condition 6(7) was at the centre of both cases. It stated, “if the insurer pays…the actual cash value of the automobile, the salvage, if any, shall vest in the insurer”. Looking to capitalize on sloppy legislative drafting, the applicant in McNaughton argued that if the insurer reduced the payment for actual cash value by the amount of the deductible, then the actual cash value was not being paid, and therefore, the salvage should not vest in the insurer. By looking at this statutory condition in a vacuum and without reference to the use of deductibles, the applicant argued that the insurer was being unjustly enriched by either the amount of the deductible, or, by taking the salvage (the wrecked car).

In McNaughton, the applicant car owner sought a declaration that it was not lawful for the insurer to reduce its payout by the amount of the deductible. With an interpretation in favour of the applicant, a class action was intended – to seek either repayment of the deductibles subtracted from the payment of actual cash value or reimbursement for the value of the salvage. In McNaughton, the Ontario Court of Appeal agreed with the applicant’s interpretation, holding that where an insurance policy and a statutory condition are at odds, statutory conditions will prevail. So, when read in light of the consumer protectionist character of the Insurance Act, statutory condition 6(7) was interpreted to forbid insurers from subtracting the deductible from the payment of actual cash value in total loss cases where they claimed the salvage. This ruling prompted dozens of companion class actions against the automotive insurance industry across the country. Over 30 actions were launched in Ontario alone.

In response, some of the defendant insurers brought summary judgment motions seeking to relitigate this question of law and challenge the correctness of the Court of Appeal’s decision in McNaughton. In Polowin, the insurers put before the court a more comprehensive record than was before the court in McNaughton. That record contained, among other things, the legislative history for the legislation governing automobile insurance and evidence as to the role played by deductibles in the automobile insurance context. The initial motions judge, bound by the Court of Appeal’s ruling in McNaughton, found in favour of the plaintiffs. The insurers then appealed that decision to the Court of Appeal, arguing that the court had erred in McNaughton and should overrule its prior interpretation of statutory condition 6(7).

Writing for the five-member panel that heard the subsequent appeal in Polowin, Mr. Justice Laskin (who had also been part of the panel that decided McNaughton) stated that to properly apply statutory condition 6(7), the court must interpret it in its “total context” and found that the insurers’ standard practice of applying the deductible and retaining salvage in at-fault total loss claims was acceptable. Thus, the Court of Appeal agreed with the insurers that in McNaughton it had indeed erred in its interpretation of statutory condition 6(7).

It might appear that the Court of Appeal’s acknowledgement that it had erred in McNaughton should be the end of the story. However, it was not. Laskin J.A. made it clear that, to overrule itself, the court needed to decide not only that McNaughton had been wrongly decided, but also that it would be appropriate to overrule its past decision.

In addressing whether to overrule McNaughton, the court considered five factors that the Supreme Court of Canada has found to be relevant in whether to overrule one of its previous decisions:

(1) where the previous decision does not reflect the values of the Canadian Charter of Rights and Freedoms; (2) where the previous decision is inconsistent with or “attenuated” by a later decision of the Court; (3) where the social, political, or economic assumptions underlying a previous decision are no longer valid in contemporary society; (4) where the previous state of law was uncertain or where a previous decision caused uncertainty; and, (5) in criminal cases, where the result of overruling a prior decision is to establish a rule favourable to the accused. [4]

Despite the Court’s view that these factors favoured upholding the original ruling in McNaughton, and despite the important judicial principles of consistency, certainty and predictability, the Court chose to overrule itself. To do so, the Court introduced a flexible and broad approach that “weigh[ed] the advantages and disadvantages of correcting the error in a previous decision.” In doing so, the Court declined to create a formulaic test, preferring instead to rely on its discretion. The Court found that the following seven considerations, taken together, justified overruling its decision in McNaughton:

(1) McNaughton was the first case of its kind and had since been questioned by two courts in other jurisdictions;

(2) McNaughton had the potential to impact the future interpretation of statutory conditions in standard automobile insurance policies in other contexts;

(3) While the principle of stare decisis promotes the value of certainty, that value is of limited application here because McNaughton did not affect whether insureds purchased car insurance and, as such, did not affect the behaviour of members of the public;

(4) McNaughton was a recent case that is less than four years old and had not been reaffirmed;

(5) The legislative record supported overruling the decision;

(6) A substantial amount of money was at stake; and

(7) The Court of Appeal should not refuse to overturn a decision on the basis of precedent, or stare decisis, because leave to appeal to the Supreme Court of Canada is not automatic and Canada ’s highest court cannot therefore be relied upon to resolve any inconsistencies that result from differing rulings by the Court of Appeal on a particular issue. In this case, there was a chance that the erroneous decision in McNaughton could remain the law in Ontario , should the Supreme Court of Canada refuse to hear a further appeal to settle the issue.[5]

Thus, the court applied a broad contextual approach to the question of when it will overrule its own past decision. What remains unclear is how much guidance this decision will provide to future litigants trying to convince the Court of Appeal to change its mind. These 7 ‘conditions’ do not necessarily create a new test, but evidence the Court’s willingness to exercise its discretion to overrule itself in appropriate cases.

The Court of Appeal’s decision destroyed the foundation of over 30 class actions against insurers in Ontario . It is therefore no great surprise that plaintiffs’ counsel have sought leave to appeal to the Supreme Court of Canada.

Published December 9, 2005