Should the rights of an innocent assured be contaminated by the wrong-doing of another assured?

There is a school of thought which suggests no payment whatsoever should be made under an insurance policy when there is evidence to prove any assured has been guilty of a criminal or willful act or omission which has caused the subject loss or damage to the insured property.

One of the reasons for this is the great potential for collusion between assureds who have a common interest in collecting under the policy. Often it is possible to prove the criminal or willful act of the assureds who directly perpetrated it; however, it may be very difficult to obtain evidence to prove the complicity of the other assured or assureds.

There are numerous examples of the kinds of criminal or willful acts which can give rise to such claims, for instance an assured intentionally setting fire to the insured property. Also, there are cases in which an assured intentionally causes damage to the insured property in such a way as to make it look like vandalism or malicious damage, and cases in which an assured removes insured property and then fabricates evidence to make it appear as if a burglary has occurred. It is not difficult to follow the reasoning of those who consider it entirely proper that an insurer should be able to completely exclude liability under the policy in situations in which it is proven that one of the assureds has been guilty of a wrongful or criminal act in causing the loss.

Conversely, it is also understandable that there is a school of thought which is concerned with the hardship and inequity which results from such a denial position, insofar as truly innocent assureds are concerned. The proponents of the insurer's right to maintain a denial of liability in these cases, point out that when payments are made under such circumstances, it is inevitable that the guilty assured will benefit, in addition to those whose complicity cannot be proven and those who are truly innocent.

Those who argue that the rights of innocent assureds should not be contaminated by the wrongful or dishonest acts of another assured, cite examples of hardship and inequity which can occur. One such example is the situation in which a disgruntled or emotionally upset spouse, or family member, intentionally sets fire to the insured family home. The case of Rankin v. North Waterloo Farmers Mutual Insurance Company¹ dealt with such a situation. In that case, the 16 year old son of the named assureds willfully set fire to the insured family home, causing extensive damage.

Mr. Justice R. E. Holland concluded at the trial level that the boy knew what he was doing, was aware of the possible consequences and realized that what he was doing was wrong.² He further concluded that the insurer was entitled to maintain a denial of liability position. In essence, Mr. Justice Holland recognized the right of the insurer to exclude liability completely in such circumstances and found the insurer had effectively done so by incorporating the following exclusion in the insuring policy:

"This policy does not cover. . . loss or damage caused by a criminal or willful act or omission of the Insured or of any person whose property is insured hereunder."³

However, Mr. Justice Holland's decision was reversed by the Ontario Court of Appeal based upon an argument which had not been addressed at trial. Various United States authorities were cited to support the proposition that an insurer has separate obligations to each assured in respect of their separate interests, so that an innocent assured is not affected by the wrongful act of another person having a different insured interest under the policy. After outlining the principles from the United States jurisprudence, Mr. Justice Weatherston made the following comments in rendering the Ontario Court of Appeal decision in favor of the named assureds:

". . . (I)t is my opinion that the word Insured in the exception clause means, where as here more than one person is insured, the person who is making a claim under the policy. In the present case, the son was separately insured for his own personal effects, but had no interest in the house or the contents owned by the appellants for which loss was proved. The appellants are not affected, in respect of their interests, by the wrongful act of their son."⁴

In reaching its decision in the Rankin case, the Ontario Court of Appeal distinguished the decision of the British Columbia Supreme Court in Bains et al. v. Yorkshire Insurance Co. Ltd.⁵ In that case, one of four joint owners of a house, which was insured under a policy in which they were all named as joint assureds, deliberately set fire to the house without the knowledge or connivance of the other three named assureds. The Court held that the misconduct of the one assured effectually barred the claims of all of them for indemnity for the resulting loss.

Although I must confess to a certain feeling of moral justice that the Ontario Court of Appeal was able to reach a decision to help the unfortunate parents in the Rankin case, I have always felt a very real consternation about the decision, since I consider the exculpatory clause contained in the Rankin policy to be clear and unambiguous, as did Mr. Justice Holland. He was obviously not oblivious to the plight of Mr. and Mrs. Rankin but concluded that he could not find in their favor, based upon the clear wording of the policy.

Another judge came to a different conclusion in the 1981 case of Wiens et al v. Fireman's Fund Insurance Company of Canada ⁶ in the Supreme Court of British Columbia. In that case, Mr. Wiens was the named assured. His wife was not a named assured but was an unnamed assured, being the spouse of the named assured. She wanted to sell the house and travel but Mr. Wiens, according to the trial judge, was a quiet man who enjoyed his home and had no interest in selling, although the property had become quite valuable. He did not share his wife's desire to travel.

Based upon the evidence, the trial judge found that Mrs. Wiens had deliberately set fire to the house. The exculpatory clause in the policy was exactly the same as that in the Rankin policy and he considered it to be clear and unambiguous, hence he dismissed the action. The result was that Mr. Wiens, although entirely innocent, was not allowed to collect under the policy.

The approach taken by the B.C. court in the Bains and the Wiens cases was continued in the 1986 case of Scott et al. v. Wawanesa Mutual Insurance Company⁷ in which the British Columbia Court of Appeal held that the rights of innocent assureds can be contaminated by the wrongdoing of another assured when the insuring policy contains an exclusion which is properly worded to support the insurer's denial position. This decision was affirmed on appeal to the Supreme Court of Canada.⁸

On March 29, 1983, the home of Cecil and Femmie Scott was damaged by a fire which was deliberately set by their fifteen year old son, Charles Scott. The son was acting alone and without the knowledge or complicity of his parents. At the time, the Scotts were insured under a homeowner's insurance policy with Wawanesa Mutual Insurance Company. A Proof of Loss was filed, but Wawanesa denied coverage. The policy defined Insured to include both the named insured, as well as the residents of his household, his spouse, the relatives of either, and any other person under the age of twenty-one in the care of an Insured. The son, Charles, was thus an unnamed insured and his personal property was covered by the policy by virtue of the following clause:

"Coverage C - personal property:

This Policy insures personal property, whether required to be specifically mentioned by any applicable Statutory Conditions of the Policy or not, usual or incidental to the occupancy of the premises as a dwelling, owned, worn or used by an Insured, while on the Principal Residence Premises, or at the option of the Named Insured, personal property owned by others while on the portion of the premises occupied by the Insured."

Wawanesa denied coverage, relying on the following clause:

"Losses excluded: This policy does not insure... Loss or damage caused by a criminal or willful act or omission of the Insured or of any person whose property is insured hereunder;"

Wawanesa argued that since the son was an insured under the policy, and since he willfully set fire to the home, the loss was excluded and Wawanesa was absolved from all liability under the policy.

At trial before Mr. Justice Wood of the British Columbia Supreme Court, the Scotts were successful against Wawanesa. Mr. Justice Wood, following the Ontario Court of Appeal decision in Rankin v. North Waterloo Farmers Mutual Insurance Co. ⁹ agreed that the son was an insured, but held that he had a separate interest and a separate obligation was owed to him under the policy. On appeal, the British Columbia Court of Appeal refused to follow the Rankin case and reversed the trial judge's decision. The judgment of the appeal court is best summarized by the final paragraph of the reasons.

"It is unnecessary to decide whether the indemnification obligation is joint or several. The exclusionary clause is unambiguous. Assuming the position more favorable to the respondents, that it is several, the exclusionary clause bars recovery where the loss is caused by a willful act of the Insured; this clause is therefore fatal to the respondents' claim. Rankin is right in point. The exclusion clause in that case was in the same language as provision (d). It follows that, in my opinion, Rankin should not be followed."¹⁰

At the Supreme Court of Canada level, the majority, in a written decision delivered by Madam Justice L'Heureux Dubé, affirmed the decision of the British Columbia Court of Appeal. Madam Justice L'Heureux Dubé stated:

"In my view, the terms of the insurance policy are perfectly clear and unambiguous. The policy does not cover the type of risk. which occasioned this loss. Such risk was specifically excluded. The wording of the exclusion clause for the purpose of the present case is unambiguous, as is the definition of Insured."¹¹

Madam Justice L'Heureux Dubé went on to specifically agree with the reasoning of the British Columbia Court of Appeal (as quoted above) that the Rankin decision should not be followed. The Supreme Court of Canada decision was a four three split, with Dixon, C.J. and La Forest and Sopinka, J.J. dissenting. They did not take issue with the fact that the Scotts' son was an insured. They considered that the issue was whether the exclusion from coverage caused by the wrongful act or omission of an insured applies only to the insured responsible for the act or omission or whether it applies not only to the responsible insured but also to an innocent insured."¹²

Upon reviewing the policy, the case law, and the different approaches to this problem, the minority held that the son's interest was separate from that of his parents. Given that, and their feeling that the exclusion clause was not clear and precise, they considered that the Ontario Court of Appeal decision in the Rankin case was correct. They felt that the word "insured" means the person who is making the claim under the policy, and not any other assured.

It is interesting to note that not only were the facts in the Rankin case practically identical to those in the Scott case, but the definition of the word "Insured" and the wording of the exclusion were the same as well. The Courts simply took a different approach. In Rankin the Ontario Court of Appeal was of the view that the exclusion clause was ambiguous and therefore applied the contra proferentem doctrine, thus adopting the interpretation most favorable to the assured.

If a policy contains the same language as the policy in the Scott case, it can now be said with confidence that in Canada, an innocent assured will not be able to collect on his or her policy if another assured has willfully caused the damage.

On the other hand, in Scott the British Columbia Court of Appeal and the Supreme Court of Canada found the exclusion clause to be unambiguous and therefore denied recovery.

Although the Supreme Court of Canada decision in Scott was an appeal of a British Columbia case, it is binding in all Canadian provinces, including Ontario, where there are fire insurance policies or homeowner's insurance policies with similar definitions of Insured and similar exclusionary clauses. If a policy contains the same language as the policy in the Scott case, it can now be said with confidence that in Canada, an innocent assured will not be able to collect on his or her policy if another assured has willfully caused the damage. Although the Scott decision does not technically overrule the Rankin decision, for all intents and purposes, the Rankin case is no longer good law.

It must be remembered, however, that the policy wording has to be examined carefully when such unfortunate losses occur, to ensure the wording does properly support a denial of coverage since there are cases which have held that the innocent assured was entitled to indemnity because of the particular wording of the policy. The wording of property insurance policies is not standard. It varies from company to company and from time to time.

The decision of Mr. Justice Craig in the Ontario Supreme Court trial decision in the case of Barraclough et al. v. Royal Insurance Company of Canada et al." illustrates this point. In that case, the policy was of the "plain language" type. The relevant portion of the exculpatory clause which was considered in that case read as follows:

" . . . nor will we pay for any loss or damage you or anyone else whose property is insured under this policy intentionally or criminally cause by your actions or failure to act." ¹⁴

Although Mr. Justice Craig concluded that the wording of the exculpatory clause, was lacking in good draftsmanship, he considered the intention to be clear and expressed the opinion that a fire caused intentionally or criminally by either one of the named assureds was a risk expressly excluded by the contract. Accordingly, while he found that there was insufficient evidence on which to base a finding that the named assured wife was implicated in the arson which her named assured husband had conspired to arrange, he concluded that the policy wording was sufficiently clear to preclude her from collecting under the policy.

To further emphasize that an adjuster and/or a claims person must examine the wording of the exculpatory clause carefully before concluding that it will, or will not, effectively support a denial of liability by an insurer to an innocent assured, I would refer you to the 1985 unreported Ontario Court of Appeal decision in the case of MacPherson v. East Williams Mutual Fire Insurance Co." In that case the husband and wife were separated and held the property as joint tenants. The husband committed the arson.

The Ontario Court of Appeal stated that the exculpatory clause lacked precision and, therefore, the insurer's denial of liability to the innocent assured was not supportable. In a somewhat unusual gesture toward assisting underwriters to word their exculpatory clauses in such a way as to effect their intended purpose, the Court of Appeal went on to suggest a wording which would effect the purpose, stating:

As a matter of interest, and to emphasize that you must examine the wording carefully in each case, I recall being consulted in a matter involving an arson committed by the named assured husband where the innocent named assured wife was making the claim under a fire policy covering the house.

The wording of the exculpatory clause in that policy read exactly as the Court of Appeal in the MacPherson case stated it should read, in order to completely exculpate the insurer from liability under the policy. The policy was written before the MacPherson decision was rendered, hence it was not worded in response to the comments of the Court of Appeal but may well have been worded to overcome the type of reasoning expressed by the Appeal Court in the Rankin case.

You will note that each case I have dealt with so far involves private dwelling risks. Interesting problems present themselves when you encounter situations of guilty and innocent assureds in the context of business risks, where the assureds may be partners or where you are dealing with a corporate assured alone, or in conjunction with named assureds who are officers and/or directors of the limited company.

A decision in 1981 by Mr. Justice Callon of the Ontario Supreme Court in the case of Siountres et al. v. United States Fire Insurance & Reliance Insurance Company,¹⁷ involved a case in which two brothers owned a building in equal shares as partnership property. They were also the sole officers, directors and shareholders of a company known as the Charcoal King Limited which operated a restaurant in the building. They were the named assureds under a policy which also included Charcoal King Limited as a named assured. One of the brothers was guilty of arson in connection with the fire which damaged the insured property.

In dealing with the question of whether the innocent brother was entitled to collect under the policy and whether the limited company was entitled to recovery, Mr. Justice Callon considered the decision in the aforementioned Bains et al. v. Yorkshire Insurance Co. Ltd. case. He considered it to be applicable and concluded that the wrongful act of the one partner barred recovery by the innocent partner. He further concluded that if a director and officer of a corporate assured commits arson, the corporate assured is responsible for the arson and this precludes recovery by the corporation.

In arriving at his decision, Mr. Justice Callon followed the judgment of Mr. Justice Moorhouse in Direct Investments Limited v. Dominion Insurance Corporation et al.,¹⁸ decided in 1968, in which the corporate plaintiff was denied recovery under a policy of insurance. There was strong evidence that certain officers of the corporation were involved in the arson in that case.

It is interesting, and somewhat surprising, to realize that there are very few cases in Canadian jurisprudence which have dealt with the issue of innocent partners. However, in 1985, the Ontario Court of Appeal, in the case of Higgins v. Orion Insurance Co. Ltd. et al.,¹⁹ dealt specifically with that issue. In that case, the Court of Appeal reversed the trial

decision of Mr. Justice Linden who had dismissed the innocent partner's action on the insurance policy.

In the Higgins case, two partners owned the insured property and both were named in the insuring policy. The following is excerpted from the headnote of the Court of Appeal decision appearing in the Ontario Reports:

. . . in the absence of clear language a policy covering the interests of more than one person should be construed as several as to each. Consequently, the innocent partner was not affected by the arson and was entitled to recover on the policy. The judgment should be fashioned to avoid conferring a benefit on a wrongdoer, but since the latter was insolvent there was no prospect of his benefitting."²⁰

While the headnote properly summarizes the disposition of the main aspect of the appeal, dealing with the portion of the claim involving the building coverage which was not subject to a specific exculpatory clause, it is significant to note it makes no reference to the portion of the appeal which dealt with the claim for the destruction of the stock and equipment which was covered under the Commercial Property Floater portion of the policy. That portion of the policy contained an exculpatory clause which read as follows:

" 7. (b) Perils Excluded: This policy does not insure against loss or damage caused directly or indirectly... nor against... loss or damage resulting from any dishonest act on the part of the insured or other party of interest, his or their employees or agents or any person to whom the property may be entrusted (Bailees for hire excepted)."²¹

Upon considering whether the innocent partner should be allowed to collect under the policy with regard to the stock and equipment claim, the Ontario Court of Appeal concluded that the exculpatory clause was clear and unambiguous. Accordingly, the innocent partner was precluded from recovery under that section of the policy.

In conclusion, after reviewing the Canadian cases in this area, it appears clear that an innocent assured will not be able to collect if another assured has willfully caused the damage, unless the wording of the exclusion in the policy is found to be ambiguous or there is no such exclusion, thus allowing the court to rule that the insurer is not entitled to deny coverage to the innocent assured.