Angela Emerson

0n occasion an insured will submit a claim for loss of or damage to property which was brought into Canada in breach of the Canada Customs Act¹. Does this provide the insurer with a defence to the claim?

This issue was considered by the Ontario Court of Appeal in 1990 in Shakur vs. Pilot Insurance Co.² In that case, the Plaintiff brought an action against her insurer for the loss of jewellery by theft, alleging that after removing all her jewellery from a safety deposit box, she was robbed. The insurer alleged that the robbery was a sham and the claim fraudulent.

The Plaintiff admitted that she had knowingly brought some of the jewellery into Canada in violation of the Canada Customs Act.

The Act requires everyone arriving in Canada to make a written report of all goods in his/her charge or custody, to answer all questions respecting these goods as the Customs Officer requires, and to pay duty in certain circumstances. Failure to comply with these requirements renders the goods subject to forfeiture and seizure by the Crown. Additional penalties are set out in the Act.

In the Shakur case, Pilot Insurance Co. put forward four defences relating to the insured's breach of the Customs Act:

"that the insured had no insurable interest in the goods; that it would be contrary to public policy to allow the insured to recover under the policy for goods which had been illegally imported into Canada; that the loss fell within the policy exclusion for "property illegally acquired, kept, stored or transported" that the loss fell within the policy exclusion for "property seized or confiscated for breach of any law or by order of any civil authority."

Both the trial Judge and the Ontario Court of Appeal held that a contravention of the Customs Act does not result in the loss of an insurable interest.

The trial Judge rejected all four defences. This was upheld by the Court of Appeal. (It is interesting to note however that the Court of Appeal ordered a new trial on the issue of whether a robbery had taken place, and when that issue was re-tried, the insured's action was dismissed.)

The reasoning of the trial Judge and the Court of Appeal with respect to the insurer's defences is interesting:

Both the trial Judge and the Ontario Court of Appeal held that a contravention of the Customs Act does not result in the loss of an insurable interest.

The Ontario Court of Appeal concluded that in order to rely on the defence of lack of insurable interest, the insurer must establish that there had been an actual physical seizure or confiscation of the goods at the time of the loss.

B. Public Policy

The trial Judge in Shakur refused to follow earlier case law which held that where there has been a deliberate breach of the law, the Courts should not assist the Plaintiff to derive a profit from it, even when that profit is sought indirectly through an insurance policy. The trial Judge reasoned that: (1) the insurance contract had not been made for an illicit purpose with a view to gain or profit; (2) the goods had not been imported into Canada for the purpose of insuring them in the hope that a loss might occur; and (3) the cause of action against the insurer did not arise out of the breach of the Customs Act.

The trial Judge noted there was no connection between the insurance contract and the illegal act. He concluded that the law interpreting and enforcing the penalty provisions of the Customs Act should be developed between the Crown and the person charged with a breach of the Act, and not collaterally in private litigation between the parties to an insurance contract.

The Court of Appeal agreed with the trial Judge that the defence of public policy must fail, and relied on s. 95 of the Insurance Act³ which states:

95. Unless the contract otherwise provides, a contravention of any criminal or other law in force in Ontario or elsewhere does not, ipso facto, render unenforceable a claim for indemnity under a contract of insurance except where the contravention is committed by the insured, or by another person with the consent of the insured, with intent to bring about loss or damage...

In Shakur the trial Judge held that property is not illegally "kept" or "stored" simply because an insured continues in possession of the property following the deemed forfeiture in the Customs Act. He also held that the exclusion for goods "illegally transported" does not apply unless the goods were being illegally transported at the time of the loss. The Court of Appeal agreed.

The Ontario Court of Appeal concluded that in order to rely on the defence of lack of insurable interest, the insurer must establish that there had been an actual physical seizure

The trial Judge refused to apply this exclusion, but unfortunately did not explain why. The Court of Appeal upheld the Judge's decision, indicating that in order to rely on this exclusion, the insurer must establish that there had been a physical seizure or confiscation of the goods at the time of the loss.

In conclusion, one might have hoped for more support from the Courts in declining claims which involve deliberate breaches of the law. However, the trial Judge stated - as the Courts so often do - that "If the company desired to exclude from coverage goods surreptitiously brought into Canada in noncompliance with Customs legislation it could easily have done so."' The insurer, therefore, does have its remedy by way of amendments to policy language.

It is hoped that the above will be of assistance to claims examiners, adjusters and underwriters alike.