[1]          On December 6, 2006, Han Wen (“Wen”) was operating a 2002 Acura RSX 2DR motor vehicle (the “Acura”) when she collided with a pedestrian, Mr. Yang (“Yang”), who suffered injuries as a result of that accident.  Yang, et al. brought a companion action claiming damages for personal injury arising out of the accident.

[2]          Wen was also the registered owner of the Acura at the time of the accident. She and her common-law spouse Jie Shen (“Shen”) are the defendants in the companion action initiated by Yang for personal injury. Unifund Assurance Company (“Unifund”) is a statutory third-party, having denied coverage to both defendants in that action. State Farm Mutual Automobile Insurance Company (“State Farm”) provided insurance coverage to Yang and State Farm was added as a defendant in the companion action after Unifund denied coverage to Wen and Shen.  State Farm is named as a defendant in the companion action for the purpose of claiming, if necessary, uninsured/underinsured coverage in the event that one or both of Wen and Shen are found to be uninsured without a right of indemnity from Unifund.  With respect to this action, the plaintiffs, Wen and Shen, assigned their rights to State Farm pursuant to an Assignment of Rights Agreement.

[3]           State Farm and Unifund both contend that the other must respond to the claims for damages for personal injury brought by Yang, et al. in the companion action arising out of the accident. The actions were ordered to be tried separately.

[4]          Both the State Farm policy and the Unifund policy have limits of $1 million and Yang’s tort recovery will be the same regardless of which insurer is responding to the action.

[5]          In 2005, Wen purchased the 2002 Acura in order to go back and forth to university.

[6]          Unifund issued an owner’s policy to Shen with respect to a 2000 BMW 540 motor vehicle.  That policy was in effect for the period December 14, 2005 to January 1, 2007 (the “BMW policy”). The BMW policy had policy limits of $1 million and a Family Protection Coverage endorsement of $1 million.

[7]          Shen also had a policy with Unifund insuring his Toyota Previa motor vehicle (the “Previa policy”) which had a policy in effect for the period from June 1, 2007 to June 1, 2008. The policy had similar coverage for liability and Family Protection.

[8]          Both the BMW policy and the Previa policy were the subject of Certificates of Automobile Insurance (Ontario) issued by Unifund through its exclusive agent Johnson Insurance Inc. (“Johnson”).

[9]          On the date of Wen's accident with Yang on December 6, 2006, Wen did not have any insurance with respect to the Acura and produced a fraudulent pink slip to the police officer attending at the scene of the accident.

[10]      On December 7, 2006, the day after Wen’s accident, Shen called Johnson requesting the addition of the Acura to the BMW policy. A Certificate of Automobile Insurance (Ontario) was issued for the period December 1, 2006 to January 1, 2007. The coverage was identical to coverage that was already in place for the BMW motor vehicle.  Johnson’s employee, Stewdell D'Acres (“D'Acres”) added the Acura to the BMW policy.

[11]      The BMW policy, with the Acura added as an additional vehicle (the “BMW/Acura policy”), was the subject of a renewal certificate for the policy period dated January 1, 2007 to January 1, 2008, issued by Unifund through Johnson.

[12]      On April 5, 2007, a letter from Unifund was sent to Shen advising him that the pre-authorized payment for premium deductions for the BMW/Acura policy was returned due to insufficient funds. A registered Notice of Termination dated May 11, 2007 was then sent for “nonpayment of premium in accordance with the statutory condition for termination”.

[13]      Both the Previa policy and the BMW/Acura policy were terminated by Unifund on June 20, 2007 and June 26, 2007, respectively.  The June 20, 2007 letter explained in detail the reasons for the termination, including allegations of misrepresentations and omissions made by Shen and Wen.

[14]      Unifund alleges that Shen and Wen contravened a term of the contract and/or committed a fraud due to their failure to disclose Wen’s accident of December 6, 2006, and the proper owner of the vehicle, to Unifund such that their right to recover against Unifund is forfeited.  Additionally, they contend that Shen failed to advise Unifund of a material change in the risk. They also contend that Shen did not have an insurable interest in the Acura registered to Wen when he added the Acura to his existing insurance policy with Unifund.

[15]      The following issues were raised at trial:

[16]      State Farm submits that while Shen was not the registered owner of the Acura, Shen did have an insurable interest in the vehicle registered to Wen.  State Farm submits that Wen and Shen had a joint interest in the economic viability of their household.  State Farm argues that Wen’s expressed intention to transfer the Acura to Shen, which according to Wen’s testimony was the plan in November 2006, makes sense because the sale would allow her to obtain money for tuition.  Wen had borrowed money from her parents to fund the original purchase of the Acura and she was unable to maintain insurance on the vehicle without the support of her parents and ultimately Shen.  State Farm argues that the plan to eventually sell the Acura to Shen proves that he at least had an equitable interest in the Acura.

[17]      State Farm also contends that Wen took no part in obtaining insurance for the Acura through Unifund.  It was Shen who made all the arrangements without Wen’s involvement.  The couple was sharing financial responsibilities within the household and Shen had an indirect interest in Wen having a vehicle and in insuring that vehicle.  Shen benefited from the fact that Wen could drive herself to university.  Shen had an interest in the vehicle being insured for liability as it would be financially detrimental to their household for Wen to face personal liability for damages arising from her operation of the Acura.           

[18]      In the Supreme Court of Canada decision of Kosmopoulos v. Constitution Insurance Co., 1987 CanLII 75 (SCC), [1987] 1 S.C.R. 2, [1987] S.C.J. No. 2, at para. 42 the Court made the following statement about an insurable interest:  “To ‘have a moral certainty of advantage or benefit, but for those risks or dangers’, or ‘to be so circumstanced with respect to [the subject matter of the insurance] as to have benefit from its existence, prejudice from its destruction’ is to have an insurable interest in it”.

[19]      The Court further stated at para. 42 that to prove the existence of an insurable interest, the insured must demonstrate: “some relation to, or concern in the subject of the insurance, which relation or concern by the happening of the perils insured against may be so affected as to produce a damage, detriment or prejudice to the person insuring”.

[20]      Applying the test in Kosmopoulos, I find that Shen did not have an insurable interest in the Acura.  It is clear from his testimony that he did not have any monetary interest in the vehicle and that it was Wen and her parents who paid for the vehicle.  Shen did not pay for the vehicle’s maintenance, nor did he use the vehicle.  He testified that he did not have a set of keys for the vehicle.  In a statement given to Unifund, Shen stated that he owned the vehicle which was false.

[21]      On the day of the accident, Shen testified that he did not inquire about Wen’s insurance, but rather he testified that it was Wen’s responsibility to look after any issues because she had the accident and she should handle it by herself.  Shen’s evidence was that on the date of the accident, he did not ask Wen whether she had any insurance and he did not view the use of the Acura as directly affecting him. His specific words were: “Because she had an accident she should, she should handle it by herself.”  There was no demonstration of concern by Shen nor any suggestion that he felt affected or prejudiced by the accident.  It is extraordinary to think that against this factual backdrop Shen decided to insure the Acura the day after the accident.

[22]      Shen and Wen both testified that Wen intended to sell the Acura to Shen in 2006.  I do not accept the evidence of either Wen or Shen that Wen intended to sell the Acura to Shen in 2006.  Shen owned two other vehicles and based on the evidence of Shen's bank records at the time; he did not have the finances to purchase another vehicle.  I find the transfer story was one that was fabricated by Shen and Wen in order to attempt to protect Wen from any liability resulting from the accident on December 6, 2006.  It was an attempt to deceive Unifund and Shen clearly had no insurable interest in the Acura.

[23]      In case I am incorrect and Shen did have an insurable interest in the Acura, I must determine the second issue:

[24]      The following sections of the Insurance Act, R.S.O. 1990, c. 1.8 are relevant with respect to the determination of this issue:

[25]      It is undisputed that Shen called Johnson and spoke to their representative, D’Acres, on December 7, 2006, the day after the accident. Shen requested that the Acura vehicle be added to the existing BMW policy which was valid until January 1, 2007.  The policy became effective as of December 1, 2006.

[26]      State Farm submits that D’Acres made a mistake and backdated the policy to December 1, 2006. Therefore, Unifund is responsible for the coverage as of December 1, 2006 which covers the period of the accident.

[27]      State Farm further submits that Shen testified that he was not asked by D’Acres about, nor did he report, the December 6, 2006 motor vehicle accident. He did not claim he was the only licensed driver of the Acura, nor was he asked this question. He advised D’Acres that he wanted to add a car to his policy and he was asked what type of vehicle he wanted to add. After this, he received a quote and he then agreed to the policy addition. He recalls that he received a document in the mail and went to Johnson’s office to sign the document.  The temporary document he received the next day started from December 1, 2006 and ran for one month. Shen testified that he did not suggest at any time that the policy period commence as of December 1, 2006.  On cross-examination he admitted that he was under the impression that it would not be possible to backdate the policy but that he was told by his paralegal, Mr. Yau (“Yau”) that “they can do this”.

[28]      Shen also testified that he did not tell D’Acres or anyone at Johnson anything about the ownership of the vehicle when he went to the office or spoke to them over the telephone. When asked if he recalled being asked whether he was the owner of the Acura over the phone or in person the next day he replied: “no I didn’t”. It was his evidence that he added the Acura to his policy because he knew Wen had an accident and for her protection he “put this under his insurance”.  I do not accept this explanation.  It is completely self-serving and ignores the reality of the situation ‑ namely, that Wen had been in an accident.

[29]      Shen ultimately agreed to give a statement at the office of the paralegal Yau in April 2007. He testified that the information he provided in the statement was not accurate in terms of the ownership of the Acura.  In fact, in that statement he had lied and stated he was the owner. At trial he denied that he was the registered owner of the vehicle and that he became the registered owner of the vehicle.  At the same time, he denied that a letter from Yau Legal Associates dated January 12, 2007 was sent with his authorization.

[30]      Shen confirmed in his testimony that his statement of April 30, 2007, contained false information even though he signed it.  He indicated that the statement was a typed statement prepared for him by others.  I do not accept that others were to blame for the false information contained in the statement. I find that Shen was well aware that some of the key information he provided in that statement was false.

[31]      Notwithstanding the above, State Farm submits that the evidence of D’Acres was not to be preferred to the evidence of Shen. They submit that D’Acres gave evidence on her examination for discovery that was confirmed as truthful during her cross-examination at trial when she stated she made a “bad mistake” when she backdated the policy to December 1, 2006 and she stated, “I just chalk it up to my experience.”

[32]      State Farm submits that D’Acres’ evidence and recollection are unreliable. When asked on cross-examination whether she remembered explaining her mistake of backdating the policy to her adjuster five years ago, she could not recall.  In contrast to this, D'Acres testified she had specific recollection of receiving information from Shen over the telephone which State Farm submits is questionable given her lack of recall with respect to her discussion with the adjuster.  State Farm contends that D’Acres was eventually moved from her position and may now be attempting to justify her own actions by laying blame upon Shen.  State Farm submits that the transaction over the phone occurred in a hurried fashion and was a simple amendment to an existing policy that was to remain in force until January 1, 2007.  State Farm contends that Shen was not asked about the ownership of the Acura, but rather D’Acres assumed that he owned the vehicle and entered the information.  State Farm argues that Shen was not asked about any prior motor vehicle accidents and because he had not been involved in one himself, it is likely that he did not feel the need to disclose Wen’s accident.

[33]      State Farm therefore submits that it was D’Acres’ idea and her input that led to the policy being backdated to December 1, 2006 rather than Shen advising her to do so. D’Acres testified that it was done at Shen’s request. State Farm submits that D’Acres backdated the policy and is attempting to justify her position now by saying that it would have been unnecessary to backdate as Shen already had coverage on the two vehicles he had insured through Unifund. Her evidence was that he would be automatically covered for 14 days.  State Farm contends that D’Acres’ mistake bound Unifund so that the policy, with the Acura as an additional vehicle, continued in force through to January 1, 2007 and was then renewed until January 1, 2008. State Farm submits that the mistakes of D’Acres cannot be turned into evidence of fraud or intentional misrepresentation by Shen or Wen.

[34]      State Farm also submits that ss. 233(3), 233(4) and 258 of the Insurance Act, R.S.O. 1990, c. 1.8, taken together, prohibit Unifund from relying upon any misrepresentations allegedly made by Shen because no such statements were contained in any written application or policy document.

[35]      State Farm relies on the decisions of Ashton v. Tu (1998), 1998 CanLII 1766 (ON CA), 40 O.R. (3d) 690, [1998] O.J. No. 2239 (C.A.) and Campanaro v. Kim (1998), 1998 CanLII 5925 (ON CA), 41 O.R. (3d) 545, [1998] O.J. No. 3518 (C.A.) for the proposition that an insurer issuing an instrument that purports to be a motor vehicle liability policy cannot validly defend an action on the basis of any misrepresentation by the named insured, including a misrepresentation about the ownership of the insured vehicle. State Farm states that consent is not an issue in this case as Wen was driving a vehicle in respect of which she was a registered owner.  Therefore, State Farm argues that s. 258 precludes the insurer from defending a claim based upon misrepresentations, rendering the policy void because the defense limiting provisions of s. 258(5) apply to all misrepresentations, including a misrepresentation about the ownership of the insured vehicle.

[36]      State Farm argues that there is no exemption that allows an insurer to avoid the absolute liability flowing from the issuance of a policy and a pink slip.  When a claim arises during the coverage period set out in the motor vehicle liability certificate, even when backdated, it falls within the policy insuring agreement. The uninsured motorist carrier standing in the position of the insured of a motor vehicle liability carrier can take advantage of the statutory claim provided by s. 258.

[37]      State Farm also contends that by issuing an instrument (the liability slip and binder) as a motor vehicle liability policy, the insured under that policy and through him, the uninsured motorist carrier, can rely on the defense limiting provisions of s. 258(5).  State Farm submits that it is not an answer to argue that the policy was void because it insured an accident that had already happened.  To proceed as Unifund submits would dramatically undercut the protection given to an innocent third party such as Yang.  State Farm contends that claims costs to which insurers such as Unifund are exposed in responding to claims where its insured has been guilty of a fraudulent misrepresentation are taken into account in assessing general premium levels. 

[38]      Taking into consideration the applicable statutory provisions, I find that Shen and Wen’s right to recover indemnity from Unifund is forfeited based on their actions.  State Farm, not Unifund, must respond to the claims for damages brought by Yang, et al. in the companion action arising out of the motor vehicle accident.

[39]      There are several instances of intentional misrepresentations made by both Shen and Wen.  The consequence is that their right to recover indemnity is forfeited.  I did not find their evidence to be credible because on a number of occasions they were not truthful.  I find that they were knowingly involved in a scheme to deceive Unifund.

[40]      While D’Acres backdated the policy, I find that she would not have done this unless Shen requested that it be backdated.  Additionally, Shen clearly had a motive to ask that the policy be backdated.  I found D’Acres to be forthright in her testimony and in the excerpts relied upon from her examination for discovery, as she admitted that she made a mistake in backdating the policy.  However, I accept her evidence that Shen requested the backdating and I accept her evidence that she acted on his instructions.

[41]      Throughout Shen and Wen’s evidence, it was apparent that they were attempting to deflect the blame for their actions upon the paralegal Yau with whom they had consulted the day after the accident.  I note that Yau did not testify.  I find that Shen and Wen knew that their actions were wrong and that they were being dishonest.  They knew that their actions would have the effect of defrauding Unifund.  They must take responsibility for their own actions and for their own misrepresentations.  They had every opportunity to deal with the matter properly and honestly and they failed to do so.  They were clearly in contravention of ss. 233(1)(b) and (c) of the Insurance Act as they committed a fraud and made false statements.

[42]      There were many examples of misrepresentations committed by both Shen and Wen that significantly affect their credibility.  Wen obtained a fraudulent pink slip for the Acura.  She continued to operate the Acura despite the fact that she knew it was improper to do so without liability insurance.  She was knowingly operating the vehicle without any insurance when she struck Yang. She also knowingly gave to the police officer at the scene of the accident a fraudulent pink slip and failed to advise the police officer that she was operating a vehicle without insurance.

[43]      Wen and Shen participated in a scheme to either misrepresent to Unifund or fail to disclose to Unifund that the Acura was in fact owned by Wen and had been involved in an accident the previous day in which a pedestrian had been injured.

[44]      There is a general duty of an insured to disclose material facts under a contract of insurance as set out in Nicholas Legh-Jones, John Birds & David Owen, eds., MacGillivray on Insurance Law, 11th ed. (London: Sweet & Maxwell, 2008) at 17-004.  The scheme Shen and Wen devised runs directly contrary to the insured’s obligation of “utmost good faith” in dealing with the insurer.  I agree as submitted by Unifund, that there was an agreement by Shen and Wen to withhold, either through wilful misrepresentation or wilful omission, information that they knew would affect the insurer’s decision whether to add the Acura to the existing vehicle policy.

[45]      In her evidence, Wen testified that Yau came up with the scheme to add the Acura to Shen’s existing policy and to tell Unifund that Shen owned the Acura.  She also testified that Yau told her not to tell the insurance company about the accident.  This was also stated by Shen in his testimony. As I did not hear any evidence from Yau, I make no finding with respect to Yau’s participation.  As indicated, both Shen and Wen knew that their scheme was wrong and they knowingly acted upon it.  They both also testified that they were aware that if they disclosed to an insurer that the Acura had been in a serious accident the day before in which a pedestrian was injured, the insurer would not add the Acura to a policy and provide coverage.

[46]      Shen, upon contacting Johnson on December 7, 2006 to add the Acura to his existing motor vehicle policy, was governed by the common law duty of disclosure in insurance contracts and owed Unifund a duty of the “utmost good faith”.  

[47]      I accept the evidence of D’Acres that Shen was taken through a process of computer screen prompts which prevented her from moving to the next question until the answer had been entered by her.  I find that it was Shen who denied that the vehicle had been involved in any accidents and who also denied that there was any other driver in the household.  I do accept the evidence of D’Acres that Shen informed her that he was the owner of the vehicle. 

[48]      These were all misrepresentations and I accept that D’Acres would not have continued adding the Acura to the existing policy had she been told the truth.  If she were told the truth, she would have spoken with her supervisor or taken additional steps to gain approval before the Acura was added to the existing policy.  Shen’s failure to disclose these facts and to advise of the accident was contrary to the requirements of the existing standard automobile policy.

[49]      Also, this was clearly not a new application for insurance and no formal application was required.  Mr. Bruno Panzica, Regional Sales Manager for Johnson, testified that if an insured person requested that a vehicle be added to their existing policy, this would not require taking out a new application as it is a straight endorsement.  State Farm, in their written submissions, describe the addition of the Acura on December 7, 2006 as “a simple amendment to an existing policy”, acknowledging that this was not a new application for insurance.

[50]      Sections 233(1)(b) and (c) of the Insurance Act do not refer solely to the application for insurance. These sections refer to events that can occur before and after a policy comes into effect.  In this case, Unifund submits that the plan to concoct a scheme of intentional misrepresentation in advance by Shen and Wen and the failure to cooperate with Unifund by providing false statements on April 30, 2007 are relevant.  I agree.  Contrary to s. 233(1)(b) of the Insurance Act, they committed a fraud and contrary to s. 233(1)(c) they wilfully made a false statement in respect of a claim.          

[51]      Unifund submits that the decision in Campanaro “is a complete non-sequitur on the facts of this case”.  I agree that Campanaro does not apply in this situation.  Unifund has conceded that pursuant to the absolute liability provisions of the Insurance Act, it is responsible to the third party up to the minimum limits and has already advanced minimum limits of $200,000 plus costs to the innocent third party, Yang.  I agree with Unifund’s submission that s. 258(9) does allow an insurer to rely upon any misrepresentations or policy breaches for that portion of its policy limits above the minimum limits.  The absolute liability provisions also do not provide protection to an insured who is in breach of the contract.  The innocent third party will not suffer because the balance of the policy limit will be paid by State Farm.

[52]      Unifund also submits that there is no relief from forfeiture under s. 129 of the Insurance Act for Shen and Wen for their intentional misrepresentations.  I agree.  They were under a duty to disclose facts to Unifund and they failed to do so and as such Shen and Wen are not entitled to claim equitable relief.

[53]      State Farm submits that Unifund initially took a non-payment position with respect to the BMW/Acura policy and that Unifund then took a misrepresentation position by June and July of 2007.  They submit that if the accident had occurred sometime in 2007 during the policy period from January 1, 2007 to January 1, 2008, this might be relevant and would raise the issue of estoppel.  However, the policy period ending January 1, 2007 had already expired and the Acura had been added by way of the certificate issued by Unifund at the insistence of its agent effective December 1, 2006.  That policy change is binding upon Unifund and if it has an issue with being bound, that issue must be taken up with Johnson.

[54]      I disagree with this position taken by State Farm.  The evidence was clear that initially Shen was not responding to Johnson or Unifund with respect to the accident and what had happened.  I accept that Unifund did not have any knowledge of Shen and Wen’s version of the accident and the ownership of the Acura until after they obtained statements from them on April 30, 2007 and conducted subsequent investigations.

[55]      Those statements contained many falsehoods, including the ownership of the vehicle and the relationship between Shen and Wen.  This was several months after the accident and they both continued to deceive Unifund as to the actual facts.  Both Shen and Wen admitted that their statements contained many falsehoods at trial. They both knew that they would not have been entitled to insurance coverage for the Acura had they been forthright and honest with any insurer.  Both admitted that in their testimony.  They were very much aware that Wen was in an extremely difficult predicament given that she had no insurance at the time of the accident, had produced a fraudulent pink slip and seriously injured a pedestrian.  They fully participated in a scheme to deceive Unifund.  I therefore find that Shen and Wen’s right to recover indemnity from Unifund is forfeited.

[56]      Unifund also contends that Shen failed to advise Unifund of a material change in the risk contrary to Statutory Condition One contained in O. Reg. 777/93 under the Insurance Act.  The test for what constitutes a material change in the risk is “whether if the matters concealed or misrepresented had been truly disclosed, they would, on a fair consideration of the evidence, have influenced the reasonable insurer to decline the risk or to have stipulated for a higher premium”.  See Mutual Insurance Company v. Ontario Metal Products, 1924 CanLII 336 (UK JCPC), [1925] 1 D.L.R. 583, 1924 CarswellOnt 111 (P.C.), at para. 13.

[57]      Statutory Condition One provides that:

[58]      Unifund contends that there was an existing contract (the BMW policy) and the addition of the Acura to that contract constitutes a change in the risk material to that contract.  However, the definition of “change in risk material to the contract” in O. Reg. 77/93 refers specifically to “the automobile” that is insured under the contract.  These provisions apply to changes that take place after the initial application for insurance in respect of the particular automobile covered by the policy – in this case, which would be the BMW.  Adding a new car to the policy is a different matter – one that in my mind does not fit logically into the law on material change in risk.

[59]      The language of s. 1.4.1 of Ontario Automobile Policy 1 also suggests that the material change in risk test applies to vehicles that are already insured (i.e. a described automobile that is the subject of the original application):

[60]      In the context of this case, I would interpret this as applying to a change in information supplied in Shen’s original application for the BMW policy, and the described automobile would be the BMW.  The Acura cannot be a described automobile from the original application for insurance, because at the time in question Shen had just added it to his BMW policy.  For these reasons, I conclude that material change in the risk has no application to the facts of this case.

[61]      I order the following: