Insurers must “avoid” obscure terms.

On April 20, 2017, Mr. Justice Kent of the BC Supreme Court ruled that vehicle damage arising from a lessee’s arson does not fall within the “conversion exclusion” clause in an ICBC Autoplan Optional Policy, and an innocent lessor may be entitled to coverage.

 CIT Financial Ltd. v. Insurance Corporation of British Columbia, 2017 BCSC 641, involved a coverage dispute for the alleged arson of a leased vehicle. The Court was asked to interpret the insured plaintiff’s insurance policy and, in particular, whether coverage for the fire damage to the vehicle was excluded by the conversion exclusion clause.

The parties submitted the case to the Court by way of an agreed statement of facts. The parties agreed, for the purposes of the litigation, that the insured was the registered owner of the vehicle. The insured leased the vehicle to a third party, Snap Transport, on September 22, 2010.

In 2013, Snap Transport insured the vehicle under a temporary insurance policy with ICBC (the “Policy”). The Policy provided third party liability, collision, and comprehensive insurance coverage from March 4 through 18, 2013 to the insured. The Policy was subject to the ICBC Autoplan Optional Policy.

On March 9, 2013, the vehicle was damaged by fire. According to the agreed statement of facts, the president and sole director of Snap Transport intentionally caused the fire for the benefit of Snap Transport. The plaintiff paid for the vehicle’s repairs, and then sought coverage for its losses.

The Court considered whether paragraph 5.9(b)(i) of Division 5 of the ICBC Autoplan Optional Policy excluded the plaintiff’s claim for losses. That provision states:

5.9 Restrictions on Indemnity –

…

(b) The corporation is not liable to indemnify any person under this Division for loss or damage, (i) caused by conversion, theft or concealment of a vehicle by a person in lawful possession of the vehicle under a lease, rental agreement or similar written agreement.

The parties focused on the interpretation of the word “conversion” and whether Snap Transport’s conduct fell within that wording. The insured took the position that the tort of conversion had a number of different definitions and the word was thus ambiguous. The insured further argued that deliberate but economically repairable damage to the vehicle is not enough to support a claim of conversion and so the exclusion does not apply in this case.

The insurer argued that “conversion” had a specific legal meaning arising from a well-recognized, clearly-defined tort. It argued that the tort’s proper legal definition was not limited to acts of total destruction of the property, but included substantial intentional damage like that had occurred in this case.

The Court noted that the parties’ arguments appeared to be based largely on the meaning of “conversion” in the context of tort law, rather than on the plain and ordinary language the proverbial “average insured” might know. Nonetheless, Mr. Justice Kent reviewed various definitions, legal and otherwise, of the term conversion, and the parties’ positions. He reached the conclusion that “conversion” and the exclusion clause more generally, did not cover the damages in this case. In doing so, he offered the following caution to insurers (paragraphs 52-60):

[52] In drafting exclusions insurers would be wise to avoid obscure legal terminology or concepts beyond the understanding of the ordinary insured. The Supreme Court of Canada has repeatedly said the language should be clear, express and easily intelligible. The “conversion exclusion” in the ICBC policy under consideration in this case does not come close to meeting those criteria.

[53] Some legal concepts, e.g., theft, defamation, et cetera, are likely to be sufficiently well-known that the use of such terminology in an exclusion may not baffle or confuse. “Conversion” most certainly does not belong in that category.

[54] Here, the policy was issued for the benefit of a lessor. The insurer obviously intended to exclude from coverage certain types of loss or damage to the leased vehicle caused by the lessee or those to whom possession of the vehicle had been permitted by the lessee (e.g., employees, et cetera). If so, a prudent insurer in such a position should figure out the precise scenarios of loss it wishes to exclude (e.g., theft, deliberate damage, et cetera) and then insert those circumstances in the exclusion using plain English readily understandable by an ordinary person…

[57] The case law is itself unclear about the extent of damage that would be required to a leased vehicle in order to constitute the tort of conversion. If the case law is unclear, then so too is the meaning of the word “conversion” in the exclusion…

[60] I am inclined to the view that this particular exclusion (“conversion”) is so vague and obscure in its application as to be effectively unenforceable. However, it is not necessary for me to make any final determination as to what the exclusion does cover. It is sufficient in the circumstances for me to simply determine what the exclusion does not cover…. [Emphasis omitted]

In the result, Mr. Justice Kent determined that the exclusion clause was not applicable, and the insured lessee was entitled to coverage.