In Quality Car Rentals Inc. v Sedaghat, the Divisional Court heard an appeal from the Small Claims Court where the plaintiff’s action against a rental driver and his insurance company was dismissed as statute-barred under the Insurance Act.
The plaintiff, Quality Car Rentals, made its customers sign an agreement requiring them to pay $10,000 to Quality if the vehicle sustained damage while in their possession. This amount would be charged to customers regardless of whether they were at fault for the damage. Quality also made sure that its rental drivers were insured under a policy that included OPCF 27 coverage (“Legal Liability for Damage to Non-Owned Automobiles”). Mr. Sedaghat had such coverage through Aviva.
Mr. Sedaghat was subsequently involved in an accident that resulted in over $30,000 in damage to his rental vehicle. Quality sued Mr. Sedaghat for $10,000 pursuant to its rental agreement – which incidentally was the amount Quality had paid to its own insurer as a deductible – and brought a direct claim against Aviva under the OPCF 27.
Quality based its claim in contract, arguing that section 263 of the Insurance Act only operates as a bar to negligence claims. The Deputy Judge granted the defendants’ motion because he was not convinced that Quality’s claim fell within the exception under s. 263(5)(a.1), which provides in part:
an insured has no right of action against a person under an agreement, other than a contract of automobile insurance, in respect of damages to the insured’s automobile… except to the extent that the person is at fault or negligent in respect of those damages…
On appeal, the Divisional Court accepted Aviva’s argument that this section prevents rental car companies from bringing claims in contract to recover property damage to their vehicles except against their own insurers or where the contractual party (i.e. the rental driver) is at fault for the damage. This provision also avoids a perverse outcome whereby renters would be required to pay rental companies for vehicle damage that was not their fault but then have no recourse for indemnification against the at-fault driver pursuant to s. 263(5)(a). Finally, this section frees rental companies of the need to obtain collision coverage because they can still sue at-fault renters for the damage.
One of the more nuanced aspects of the decision is the Court’s rejection of Quality’s argument that Mr. Sedaghat’s careless driving charge brought its contractual claim within the “fault” ambit of s. 263(5)(a.1). Quality did not lead evidence about its own collision coverage or lack thereof. Instead, the evidence before the Court was that Quality’s insurer had agreed to pay the full $30,000 in damages – less the $10,000 deductible – on the basis that neither Quality nor Mr. Sedaghat was at fault.
The Court held it was the determination of Quality’s insurer under s. 263(3) – rather than Mr. Sedaghat’s actual fault – that was the relevant consideration for the purposes of the contractual exception. The Court reasoned as follows at paragraph 34:
[T]he deductible in this case arose because Quality’s own insurer found that its insured loss for Direct Compensation Property Damage exceeded the deductible amount. That is, its insurer has determined that it would pay for damage for which Quality and its renter were not at fault and the deductible relates only to that payment. As such, the deductible simply cannot be a loss for which Mr. Sedaghat was at fault and therefore it cannot be the subject of a claim under s.263(5)(a.1). Had there been evidence, for example, that Quality’s insurer only paid a percentage of Quality’s loss due to its fault determination, then the at-fault portion could be the subject of a lawsuit. But the deductible amount on the Direct Compensation Property Damage coverage is always a reduction of the payment for the “not at fault” portion of the damage or loss under s.263(3) and therefore it can never be the subject of a claim under s.263(5)(a.1).
Overall, this case provides an excellent overview of the Direct Compensation Property Damage scheme under the Insurance Act as well as gives helpful guidance to insurance lawyers on this niche contract law exception to our no-fault regime.