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B LAW402 (43)

Coronation Insurance Co v. Taku Air Transport (edited).doc

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University of Alberta
Business Law
B LAW402
Elaine Geddes

Coronation Insurance Co. v. Taku Air Transport Ltd. June 21; 1991: November 28. Present: La Forest, L'Heureux-Dubé, Sopinka, Cory, McLachlin, Stevenson and Iacobucci JJ. ON APPEAL FROM THE COURT OF APPEAL FOR BRITISH COLUMBIA CORY J. -- This appeal illustrates the difficulties that arise when principles of insurance law set forth by the courts in 1766 are strictly applied to policies of insurance mandated by statute or regulation and which are purportedly for the benefit of third parties (here passengers carried by commercial airlines) and not for the sole benefit of the insured party. Taku and the Insurers Taku was a small commercial air carrier which operated in northern British Columbia. When it began to operate in 1978, the appellants (Coronation) provided the insurance. During the first year of the policy, Taku had three accidents. As a result, Coronation refused to renew the policy. Taku then obtained coverage from the British Aviation Insurance Company. Between 1979 and 1986 Taku was involved in further accidents. Its insurance was terminated and Taku began a new search for insurance coverage. The carrier applied for a policy from Coronation. Peter May again handled the request from a broker. The names Taku and Bond apparently "rang a bell" with Mr. May. Despite the ringing bells he did not check the insurance company's files. Instead he asked Taku to disclose its record. This Taku did not do. Rather it reported but one accident which it stated occurred in 1978 when it was insured by a policy with BAIC. In reality, the reported accident occurred in 1979 at a time when Coronation still insured Taku. In any event Coronation did not undertake an investigation of Taku. It simply calculated the risk of the policy on the basis of the false information it received from Taku. It did not consult its own records. It did not contact the previous insurer BAIC. Nor did it make inquiries at the Canadian Aviation Safety Board as to accidents in which Taku was involved. As well, Coronation asked Taku to declare the number of seats it wished to insure for each aircraft. Taku requested and obtained coverage for only four seats on its Beaver aircraft. As might be expected the appellants drafted the contract of insurance with Taku. The policy ostensibly complied with the Regulations. It included terms and conditions approved by way of Regulation by the Air Transport Committee (A.T.C.) in August 1983. The first term appears in the policy under the heading "conditions": 22. Misrepresentation and Fraud This entire Policy shall be void if the Insured has concealed or misrepresented any material fact or circumstance, whether under the Declarations or otherwise, concerning this insurance or the subject thereof, or in the case of any fraud, attempted fraud or false statement by the Insured touching any matter relating to this insurance of the subject thereof, whether before or after the loss. This second term the A.T.C. purported to approve appeared under the heading "exclusions": 1. This Policy does NOT apply and the Company shall not be liable to indemnify or defend any Insured where, the Aircraft is ... (h)in flight, unless the total number of passengers, (excluding the aircrew for the flight) carried in the aircraft at the time loss or damage occurs is equal to, or less than, the number of "seats" stated in the Declarations for the aircraft; As will be seen from the proceedings in this case the Federal Court (Strayer J.) found that these terms and conditions could not be approved as Regulations by the A.T.C. and they were therefore void. To comply with the regulatory requirements for the licensing of an air carrier, the insurers also issued Endorsement No. 3 which provided that, subject to enumerated conditions, the policy was in accordance with the Air Carrier Regulations, C.R.C. 1978, c. 3. The endorsement restated the clauses removing the insurers' liability in the event of misrepresentation of a material fact and provided: The terms, conditions and exclusions of this Policy are hereby amended to provide coverage in accordance with the provisions of Air Carrier Regulations, C.R.C. c. 3; C.T.C. 1983-7 AIR subject to the following conditions: … 4 The entire Policy shall be void if the Air Carrier has concealed or misrepresented any material fact or circumstance concerning the insurance or the subject thereof, or in case of any fraud, attempted fraud or false statement by the Air Carrier touching any matter relating to the insurance or the subject thereof, whether before or after a loss. The contract of insurance drawn by the insurers reveals that the drafters possessed a detailed knowledge of the contents of the Regulations as they stood at the time of drafting. The policy placed the entire risk of misrepresentation by Taku, the insured, on its passengers. On September 27, 1986, a Beaver aircraft owned and operated by Taku crashed into a lake. At the time of the crash the plane carried five passengers rather than the four declared by Taku in its application. All the passengers including Mr. Passarell and Mr. Florence were killed. Coronation denied coverage under the policy after the accident on the grounds of the misrepresentation of Taku as to its accident record. Coronation commenced an action against Taku to have the policy declared void ab initio or, in the alternative, for a declaration that they were not liable to indemnify Taku. The widows of the passengers and guardians ad litem of the children of Messrs. Florence and Passarell applied and were joined as defendants in the action. They counterclaimed for a declaration that Coronation was obliged to indemnify Taku. Alternatively they claimed that the appellant insurance companies were obliged to satisfy any judgments that might be obtained by the families of the passengers pursuant to the Family Compensation Act, R.S.B.C. 1979, c. 120, since Taku had become insolvent. It must be borne in mind that pursuant to s. 26 of the Insurance Act, R.S.B.C. 1979, c. 200, the insurance companies may raise any defences against the passengers which would be available against the insured Taku. The claims of the parties to this action should be addressed in the light of the regulatory context in which the insurance companies and Taku carried on their affairs. The aviation industry falls within the general category of transportation. The National Transportation Act, R.S.C. 1970, c. N-17, applies to air transport covered by the Aeronautics Act, R.S.C. 1970, c. A-3. Passengers, as users of transportation, are the intended beneficiaries of state intervention in this field. To implement the goals of the legislation, the C.T.C. passed regulations designed to protect passengers by requiring that every commercial air carrier as a condition of receiving a licence obtain insurance coverage for passengers killed or injured as a result of the negligence of the carrier. In 1983, the C.T.C. approved amendments to the Air Carrier Regulations. Among other changes the amendments provided for an increase in the minimum insurance coverage required for each passenger from $40,000 to $300,000. The coverage was to be based upon the number of passenger seats. This substantial increase indicates the importance attached by the regulators to the goal of protecting the ability of passengers, or their dependants, to recover for an air carrier's negligence. These amendments also included a provision that attempted to constrain insurers from placing exclusions or conditions on liability. The text of those regulations is as follows: 20.3 (1) No air carrier shall provide a commercial air service unless it maintains for each incident related to the operation of that service (a) liability insurance covering risks of injury to or death of passengers in an amount that is not less than the amount determined by multiplying $300,000 by the number of passenger seats on board the aircraft engaged in the commercial air service; and (3) No air carrier shall take out liability insurance to comply with subsection (1) that contains an exclusion or waiver provision reducing insurance coverage for any incident below the applicable minima determined pursuant to that subsection, … If the Air Carrier Regulations are breached the air carrier is liable to lose its licence and is guilty of an offence under s. 17 of the Aeronautics Act and s. 161 of the Regulations. Nonetheless it is evident that the Regulations were enacted for the protection and benefit of the passengers. Clearly their aim is to provide insurance coverage for passengers who are killed or injured as a result of the negligence of the air carrier. This regulatory regime demands the active participation of the insurance company. The insurer must draft a contract that satisfies these Regulations and it must submit a certificate of insurance to the C.T.C. The insurer benefits from the scheme as it forces all air carriers to purchase policies as a condition of licence. Although it is the state which has determined by Regulations the conditions for the coverage to be provided by the contract of insurance, the appellants have raised two private law doctrines to deny liability. They cite both the insurance doctrine of uberrima fides and general contract principles to support the position that the policy issued to Taku was void ab initio. The uberrima fides doctrine is a longstanding tenet of insurance law which holds parties to an insurance contract to a standard of utmost good faith in their dealing. It places a heavy burden on those seeking insurance coverage to make full and complete disclosure of all relevant information when applying for a policy. In argument, the appellants referred to and relied upon the doctrine as formulated by Lord Mansfield in Carter v. Boehm (1766), 3 Burr. 1905, 97 E.R. 1162. Mansfield L.J. understood the duty of disclosure to flow from the nature of a typical insurance contract. An insurer must accurately assess the risk of issuing a policy to determine an appropriate premium. Drawing on the experience of the insurance industry in eighteenth-century Britain, he assumed that the party applying for insurance had superior knowledge of the matters affecting the risk. Because of the disparity in access to relevant and essential information between the insurer and the insured, he found that a prospective insured had an obligation at common law to communicate all relevant factors to the insurer. He held that if an insured should fail, even inadvertently, to fulfil this duty then the policy would be void. When Lord Mansfield set the principle governing insurance contracts the world was a little different. It was a simpler if not, in some respects, a gentler place. The business of insurance was very different. Then policies of insurance were issued most frequently to cover a vessel, or its cargo. The contract was issued for the benefit of the insured. It was the owner as insured who would have the detailed knowledge of the vessel or its cargo. No one would know better than the owner of the incipient dry rot or the tendency of the ship to take on water in a fresh breeze. This was knowledge that the insurance company could not readily attain and it was appropriate to relieve the insurer of all responsibility for obtaining it. That principle held true in 1766. It can hold true today where the policy is for the exclusive benefit of the insured. However, I do not think it should be applicable to the situation presented in this case. Here the insurer was entering into a field known to be highly regulated. The Regulations provided that before a commercial air carrier could obtain its licence it was required to obtain and file proof of insurance coverage for its passengers to the extent of $300,000 per passenger. Thus the Regulations require a carrier to have insurance which will benefit members of the public flying as passengers. These members of the public
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