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Aviva Insurance v. PK Construction: Words Come First When Interpreting Insurance Policy

Published:

September 23, 2021

Author(s):

• Jillian M. Kean

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On September 9, 2021, the Nova Scotia Court of Appeal released its decision in Aviva Insurance v. PK Construction Ltd. Dealing with Nova Scotia’s Standard Automobile Policy (SPF1) and the definition of “newly acquired automobile”, the case offered the Court a chance to both re-confirm the principles of contractual interpretation laid down in formative Supreme Court of Canada cases, including Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada and Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Co., and to emphasize the strength of the first stage of the contractual interpretation process:

• Contractual Interpretation. The primary take-away of this decision is the strength of the first stage of the contractual interpretation process. The Supreme Court of Canada reminded us of this in Sabean v. Portage Mutual Insurance Company, a 2017 N.S. case about automobile insurance, but in the context of SEF44. Only where the words themselves, read in the context of the contract as a whole, have more than one reasonable meaning will there be an ambiguity. The reasonable expectations of the parties need only be addressed at the second stage of the contractual interpretation process, per the Supreme Court of Canada’s 1979 decision in Consolidated-Bathurst v. Mutual Boiler.

• “Newly acquired automobile”. The case also offered an occasion for the Court of Appeal to provide insight into the SPF1, and specifically the meaning of “newly acquired automobile”, a term rarely discussed in Nova Scotia case law.

• Fleet Distinction. One key was that the insured had all of its vehicles insured with the defendant insurer. This made all the difference when the Court applied the definition of “newly acquired automobile” to the facts of this case. This case could therefore be distinguishable where insurance on an automobile involved in an accident is not part of a larger scheme of insurance over a fleet of automobiles.

• Rule 12. Though not the focus here, the Court also commented on the appropriate use of Rule 12 – Question of Law of Nova Scotia’s Civil Procedure Rules. For those dealing with Nova Scotia cases, this decision is a good read to brush up on how the Court of Appeal views the best way to use Rule 12.

Here’s an overview of the facts of the case, the key issue, and the Court of Appeal’s analysis.

The Facts

PK Construction owned a number of automobiles, all insured with Aviva pursuant to a commercial fleet policy. On Saturday, May 7, 2016, Peter Kalkman, owner of PK Construction, purchased an unconventional automobile: a modified used school bus. The bus was re-configured and equipped with bench seating and a kitchen table and was to be used for transportation as well as for meals and meetings. Mr. Kalkman further intended to use the bus to haul race cars. The bus lacked seatbelts. Early Sunday morning, the bus was involved in a single vehicle accident while driven by a named insured. On board were several passengers, three of whom sustained injury.

The Issue

The insurer denied coverage on the basis that the bus was not a “newly acquired vehicle”, and it would have refused coverage had it been asked to place it before the accident. It argued that the bus was fundamentally different from all other business automobiles they insured for PK Construction, and this constituted a material change in the risk, which avoided coverage. The issue was whether the insurer had to defend actions brought by passengers of the bus, and provide indemnify for any valid claims arising. Namely, was there coverage under the liability insurance offered by Section A – Third Party Liability of the SPF1?

The Appeal Decision

On appeal was the Supreme Court of Nova Scotia’s decision, which focused on the reasonable expectations of the parties – not terribly surprising given the peculiar nature of the automobile involved in the accident. However, the Court of Appeal took the opportunity to remind us that the first step in any contractual interpretation begins with the wording of the policy itself, and not the parties’ reasonable expectations.

Unambiguous Policy Wording. The wording in issue was the contractual definition of “newly acquired automobile”, which reads (in part) as follows:

[A] “newly acquired automobile” … is an automobile, ownership of which is acquired by the insured and, within fourteen days following the date of its delivery to him, notified to the insurer, if … the Insurer insures … all automobiles owned by the insured at such delivery date …

The Court noted that the first step in analyzing an insurance contract is to determine the meaning of the wording in question, if possible. The Court cited Progressive Homes v. Lombard General Insurance Co. of Canada, stating “courts should [first] give effect to clear language, reading the contract as a whole”. The analysis does not go beyond this step if the wording is not ambiguous. The Court determined the definition of “newly acquired automobile” in the SPF1 was not ambiguous; therefore, there was no reason to move on to the second stage of the analysis, where the parties’ reasonable expectations would properly come into play. In finding the definition of “newly acquired automobile” was not ambiguous, the Court stated as follows (at paragraph 74):

With respect, I fail to see any ambiguity in the terms of the standard form policy.  Aviva offered fleet insurance to PK Construction which included coverage for a “newly acquired automobile”.  The motions judge correctly identified the policy conditions that needed to be met to trigger coverage (at para. 90).  The parties stipulated through the Agreed Statement of Facts all of those conditions were met. 

Essentially, if an insured acquires a new automobile and the insurer insures all automobiles owned by the insured, then the insurer must cover the insured for an accident arising within 14 days of the new automobile’s purchase. The bus was an automobile as defined in Nova Scotia’s Insurance Act, and the accident happened within 14 days of purchase.

Material Change in Risk. The Court of Appeal declined to follow the lower court’s reasoning that even if the bus met the definition of “newly acquired automobile”, the insurer could still deny coverage “in rare and exceptional circumstances” when the “nature [of the newly acquired automobile] is so dramatically different and unique as to sever any reasonable expectation of coverage”. This addressed Aviva’s arguments regarding material change in risk (found in Section F – Mandatory Conditions of the SPF1). The Court discussed how the SPF1 contemplated such potential increased risk (at paragraph 83):

As for the [insurer’s] concern about risk, when an additional vehicle is acquired, there will usually be additional risk for the insurer because of the potential for it to be on the road at the same time as the other vehicles. Yet the standard form insurance policy clearly contemplates an insured’s ability to acquire an additional automobile, and for at least 14 days, enjoy insurance coverage, provided the insured is not in the business of selling automobiles and all of the insured’s vehicles are already insured with the same provider.

The Court further stated that the risk of newly acquired automobiles is assumed where the insurer insures a fleet of automobiles (at paragraph 94):

To assist in compensating the insurer for the increased risk, the policy requires that all of the insured’s vehicles be insured with the insurer – presumably generating additional premium revenue as a result.  In addition, the insurer knew of the likelihood of an increased risk from the potential of a newly acquired automobile at the time it set the fleet insurance premium. 

The Court therefore seemed satisfied that the bus was insured as long as it met the statutory definition of automobile (a self-propelled vehicle or trolley bus), and that it would meet that definition no matter how strange or uncharacteristically outside the norm the automobile and its intended use were. They further commented that the insurer would have the opportunity to assess the new risk once notified within 14 days, but that until then, the automobile was covered.

Third Party Claims. Finally, the Court discussed how in the case of third party indemnity claims, neither a failure to notify the insurer within 14 days, nor  a material change in risk, would be fatal to third party recovery, at least insofar as indemnity for damages is concerned (up to statutory limits). Section 133 of the N.S. Insurance Act prevents an innocent third party from being prejudiced by lapses in automobile insurance coverage. The Court stated (at paragraph 101):

… I would add that an insured, pursuant to the Mandatory Conditions of the Standard Automobile Policy, is required to promptly notify the insurer or its agent of any change in the risk material to the contract and within its knowledge.  Breach of that condition may have consequences for an insured, but not for the insurer’s obligation to injured third parties.  In any event, the insured in this case notified the insurer’s broker about the Bus on the first business day after he had acquired it. 

Please contact your McInnes Cooper lawyer or any member of our Insurance Defence Team @ McInnes Cooper to discuss how the Court’s decision might affect the interpretation of your insurance policies.

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