DATE: 20050615
DOCKETS: 
C40447, C40475, C40487,
C40488, C40489, C40490,
C40501, C40910 and C40911

COURT OF APPEAL FOR ONTARIO

LASKIN, SIMMONS, CRONK and ARMSTRONG JJ.A. and THEN J. (ad hoc)

proceedings under the Class Proceedings Act, 1992, S.O. 1992, c. C.6

BETWEEN:
 
DAVID POLOWIN REAL ESTATE LTD.
Plaintiff (Respondent)
- and -
 
THE DOMINION OF CANADA GENERAL INSURANCE CO.
Defendant (Appellant)
 
AND BETWEEN:
 
SANDY BIG CANOE
Plaintiff (Respondent)
 
- and -
 
THE ECONOMICAL INSURANCE GROUP
Defendant (Appellant)
 
John A. Campion, Paul J. Martinand Annie M.K. Finn for the appellants
The Dominion of Canada General Insurance Co.
 
Paul J. Martin and Annie M.K. Finn for the appellants
ING Halifax Insurance Company, Wawanesa Mutual Insurance Company and Belair Insurance Company Inc.
 
Earl A. Cherniak, Q.C., Alan L.W. D’Silva and Bradley M. Davis for the appellants
The Economical Insurance Group
 
Alan L.W. D’Silva and Bradley M. Davis for the appellants
Federation Insurance Company of Canada and Liberty Mutual Insurance Company
 
Howard B. Borlack and Lisa La Horey for the appellant
Zurich Canada Insurance
 
M. Paul Downs, Michael L. McGowan and Gabrielle Pop-Lazic for the respondents
David Polowin Real Estate Ltd., Sandy Big Canoe, Laurier Duclos, Sharon Farquhar, Boyd Johnston, A. Gordon Shaw and Robert Woods
 
Kirk M. Baert, Celeste Poltak and Douglas Lennox for the respondent
Renaldo Matthews
 
Heard:  September 20-22, 2004
 
In the above appeals and in the following appeals:
 
Plaintiff (Respondent) Defendant (Appellant)
Insurance Company
Dockets
David Polowin Real Estate Ltd. Dominion of Canada C40447/C40488
Sandy Big Canoe Economical Insurance C40501
Laurier Duclos Wawanesa Mutual C40490
Sharon Farquhar* (cross-appeal) Liberty Mutual* (cross-appeal) C40911
Boyd Johnston* (cross-appeal) Federation* (cross-appeal) C40910
Renaldo Matthews Belair Insurance C40487
A. Gordon Shaw Zurich Canada C40475
Robert Woods ING Halifax C40489
 
Appeals from the orders of Justice Roland J. Haines of the Superior Court of Justice, dated July 14, 2003, and October 21, 2003.

LASKIN J.A.:

I.   OVERVIEW

[1]               Each appellant insurer issued a standard Ontario automobile policy to its respondent insured.  The policy provided that the insurer would pay for any damage to the insured’s car less any applicable deductible.  Each insured’s car was damaged beyond repair in an automobile accident.  Each insurer paid its insured the actual cash value of the car less the policy deductible and took title to the salvage.  Statutory condition 6(7) in O. Reg 777/93 passed under the Insurance Act, R.S.O. 1990, c. I.8, as amended (the “Act”) is included in every Ontario automobile policy.  It stipulates that “[i]f the insurer pays…the actual cash value of the automobile, the salvage, if any, shall vest in the insurer”. 

[2]               These facts give rise to this question: where a car is damaged beyond repair and the insurer elects to take title to the salvage, is the insurer entitled to reduce its payment to its insured by the amount of the deductible in the policy?  In 2001, in McNaughton Automotive Ltd. v. Co-operators General Insurance Co. (2001), 54 O.R. (3d) 704, a panel of this court, of which I was a member, answered this question in the negative.  We held that the insurer’s payment of the actual cash value could not be reduced by the deductible because of s. 234(2) of the Act, which states that no variation in a statutory condition is binding on an insured, and because of a similar provision in the policy itself.  The Supreme Court of Canada denied leave to appeal in McNaughton.

[3]               Each of the eight respondents began a class proceeding, alleging a breach of statutory condition 6(7) and conversion.  In 2003, the Legislature amended the statutory conditions to expressly authorize an insurer, in total loss cases, both to take title to the salvage and to apply a deductible.  The Legislature did not make the amendment retroactive.

[4]               The insurers then moved to dismiss the eight actions.  In support of their motions, they filed a substantial record, outlining the legislative history of the provisions in question.  Most of this material was not before the panel in McNaughton.  The insurers’ main submission was that McNaughton was wrongly decided and should be overruled.  The motions judge, Haines J., was sympathetic to the insurers’ submission, but concluded that the principle of stare decisis required him to follow McNaughton.  He dismissed the motions. 

[5]               The insurers now appeal to this court.  The Chief Justice ordered that a panel of five hear these appeals, reflecting our court’s practice when we are asked to overrule one of our previous decisions.

[6]               The insurers’ appeals raise these two broad questions:  did the McNaughton panel err in its interpretation of statutory condition 6(7); and, if it did, should we now overrule our court’s previous decision?  I would answer both questions in the affirmative.

II.  FACTUAL BACKGROUND AND PROCEDURAL ASPECTS OF THE LITIGATION

(a)   Factual Background

[7]               The factual scenarios giving rise to these eight lawsuits are similar.  The plaintiff David Polowin Real Estate Ltd.’s action against The Dominion of Canada General Insurance Co. is typical.  Polowin owned a car insured by Dominion.  In August 2000, the Polowin car collided with another car and was damaged beyond repair.  Dominion settled the property damage claim by paying Polowin the actual cash value of the car less the $250 deductible provided for in the policy.  Dominion took title to the salvage.  In its intended class proceeding, Polowin has sued for the return of the deductible.

(b)      Procedural Aspects of the Litigation

[8]               Dominion and the other seven insurers brought motions under rules 21.01(1)(a) and (b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, to strike out the statements of claim either by the determination of a question of law or on the ground that the pleadings disclosed no reasonable cause of action.  For these motions, the insurers were precluded from filing any evidence.  Instead, they were obliged to accept as true the allegations in each statement of claim.

[9]               Four insurers, however, brought motions for summary judgment under Rule 20.  They filed an extensive evidentiary record in support of their motions.

[10]          How then should we deal with the appeals from the dismissal of all these motions?  I agree with Mr. Cherniak’s submission that the sensible approach is to decide the appeals from the Rule 20 motions and to apply the law decided on those appeals to the appeals on the Rule 21 motions.  I have followed that approach.  Therefore, where relevant, I will refer to parts of the evidentiary record.

(c)   Other Issues

[11]          In addition to the principal issue in this litigation – the interpretation of statutory condition 6(7) – on their motions, the insurers raised numerous other issues, including, for example, the applicability of the limitation period in statutory condition 9(4).  The motions judge’s decision on these other issues has also been appealed.  However, those appeals have been held in abeyance pending the determination of the main appeals.  If the insurers succeed in persuading this court that McNaughton should not be followed, the appeals on the other issues become moot.

III.  THE LEGISLATION

[12]          To put these appeals in their legislative context, I will briefly discuss the 1990 Act; the 1993 amendments, which triggered this litigation; and the later amendments in 1996, which extended the use of deductibles, and in 2003, which reversed the effect of McNaughton.

(a)   The 1990 Act

[13]          Beginning in 1932, the Act contained a number of statutory conditions that had to be included in every Ontario automobile policy.  In the 1990 Act, these conditions were set out in s. 234.  Section 6 [1] of the statutory conditions is titled “Requirements Where Loss or Damage to Automobile”.  Statutory condition 6(7), which is central to these appeals and which has been in the Act since 1966, is titled “No Abandonment; Salvage” and reads:

There shall be no abandonment of the automobile to the insurer without the insurer’s consent.  If the insurer exercises the option to replace the automobile or pays the actual cash value of the automobile, the salvage, if any, shall vest in the insurer.

[14]          Section 234(1) of the Act governed statutory conditions and contained two subsections.  Subsection 234(1)(a) deemed statutory conditions to be part of every contract.  Subsection 234(1)(b), another important provision on these appeals, provided that “no variation or omission of or addition to a statutory condition is binding on the insured.”

[15]          However, all of s. 234(1) was made subject to ss. 235 and 261.  Section 234(1) therefore read as follows:

234(1) Subject to sections 235 and 261,

(a) the conditions set forth in this section are statutory conditions and shall be deemed to be part of every contract and shall be printed in English or French in every policy with the heading “Statutory Conditions” or “Conditions légales”, as may be appropriate; and

(b) no variation or omission of or addition to a statutory condition is binding on the insured. [2]

[16]          Section 261(1)(b) authorized an insurer to include a deductible in an automobile policy:

261(1) A contract or part of a contract providing insurance against loss of or damage to an automobile and the loss of use thereof may contain a clause to the effect that, in the event of loss, the insurer shall pay only,

(a) an agreed portion of any loss that may be sustained; or

(b) the amount of the loss after deduction of a sum specified in the policy,

and in either case not exceeding the amount of the insurance.

[17]          The words “subject to” in s. 234(1) connote an exception to or pave the way for a qualification to the rest of the provision:  see Murphy v. Welsh (1991), 3 O.R. (3d) 182 (C.A.); Trent University Faculty Assn. v. Trent University (1997), 35 O.R. (3d) 375 (C.A.).  Therefore, under the 1990 Act, “subject to” in s. 234(1) made it abundantly clear that in total loss cases the insurer could take title to the salvage on paying its insured the actual cash value of the car less any applicable deductible in the policy.  This much, the respondents concede.

(b)   The 1993 Amendments to the Act

[18]          In 1993, the government introduced Bill 164, which was passed by the Legislature as the Insurance Statute Law Amendment Act, 1993, S.O. 1993, c. 10.  This amendment came into force on January 1, 1994.

[19]          Bill 164 ushered in a different insurance regime for personal injury claims arising out of car accidents.  It also amended s. 234 in two ways relevant to these appeals.

[20]          First, although authorized by the Act, the statutory conditions were moved from the statute to the regulations:  see O. Reg. 777/93.  Second, and perhaps more important, the opening words of s. 234(1) – “subject to sections 235 and 261” – were removed.  The amended s. 234 states in part:

234(1) The conditions prescribed by the regulations made under paragraph 15.1 of subsection 121 (1) are statutory conditions and shall be deemed to be part of every contract to which they apply and shall be printed in English or French in every policy to which they apply with the heading “Statutory Conditions” or “Conditions légales”, as may be appropriate.

 (2) No variation or omission of or addition to a statutory condition is binding on the insured.

(3) Except as otherwise provided in the contract, the statutory conditions referred to in subsection (1) do not apply to the insurance required by section 265 or 268.

[21]          The wording of s. 234 has not changed since 1993.  The removal of the words “subject to”, together with the absence of any reference to deductibles in statutory condition 6(7) and the “no variation” clause in s. 234(2) of the Act, gave the plaintiff in McNaughton grounds to argue that in total loss cases the insurer could not take title to the salvage and apply a deductible.

(c)   The Post-1993 Amendments

[22]          In 1996, the Legislature brought in yet another insurance regime for personal injury claims arising out of car accidents – the Bill 59 regime (Automobile Insurance Rate Stability Act, 1996, S.O. 1996, c. 21).  Bill 59 extended the availability of deductibles.  Sections 261 and 263 of the Act were amended to authorize regulations prescribing mandatory partial payment of loss clauses in some circumstances.  Bill 59 also increased the prescribed deductibles for tort claims not precluded under the no‑fault rules.

[23]          After our court’s decision in McNaughton, the insurance industry persuaded the government to amend the statutory conditions.  On October 1, 2003, a new statutory condition 10.1 was passed.  This statutory condition expressly provided that in all cases an insurer would be liable for only an amount in excess of the applicable deductible in the policy:

10.1(1)  Despite anything in this contract,

(a)         the insurer shall be liable only for amounts in excess of the applicable deductible amount, if any, mentioned in this contract; and

(b)        any provision in this contract relating to an obligation of the insurer to pay an amount or to repair, rebuild or replace property that is damaged or lost shall be satisfied by paying the amount determined by deducting any applicable deductible amount from,

(i) the amount the insured would otherwise be entitled to recover, or

(ii) the cost of repairing, rebuilding or replacing the property.

(2)  For the purposes of subcondition (1), an amount that an insurer is not liable to pay by reason of subsection 261(1) or (1.1) or 263 (5.1) or (5.2.1) of the Insurance Act shall be deemed to be a deductible amount under this contract.

[24]          Undoubtedly, statutory condition 10.1 was passed to counteract the effect of McNaughton.  However, the government refused the industry’s request to make the application of this new statutory condition retroactive.

IV.   THE STANDARD ONTARIO AUTOMOBILE POLICY

[25]          In Ontario, every automobile insurer must use a standard form policy.  The policy is approved by the regulator after discussion with the insurance industry, typically represented by the Insurance Bureau of Canada (“IBC”).  Between 1992 and 1998, the Ontario Insurance Commission (“OIC”) was responsible for regulating the insurance industry.  The Insurance Commissioner approved the standard owner’s policy.  In 1998, responsibility for regulating the industry was transferred to the Financial Services Commission of Ontario and the Superintendent of Financial Services formally approved the standard policy.

[26]          In 1993, the language, if not the substance, of the standard automobile policy changed significantly.  In conjunction with its introduction of Bill 164, the government of the day issued a policy statement called The Road Ahead: Ontario’s Strategy for Automobile Insurance Reform (Toronto: Ontario Automobile Insurance Review, 1991).  The statement outlined the goals, strategies, and rationale for the legislative amendments.  One of the government’s goals – undeniably, a sensible one – was to make the insurance industry more “user friendly”.  To further that goal, the OIC sought the IBC’s assistance in developing a plain language policy for use in Ontario.  After this consultation process, the OIC approved a plain language Ontario Automobile Policy (“OAP1”).

[27]          The plain language policy was introduced in 1994.  Since then, the industry has continued to use this policy, though, of course, it has been amended from time to time to reflect legislative changes and other changes approved by the regulator.

[28]          For the purpose of these appeals, the relevant provisions of the standard owner’s policy have remained essentially the same.  I will outline these provisions, using the OAP1 policy relied on by the parties during oral argument, which the Insurance Commissioner approved for use beginning on November 1, 1996.  The relevant provisions of this policy are ss. 6, 7, and 8.

[29]          Section 6 deals with “Direct Compensation – Property Damage”.  Under s. 6.2, the insurer agrees to pay its insured the cost of damage to the automobile caused by an at‑fault driver.  Section 6.4.2 states that the amount the insurer pays may be subject to a deductible.  The section describes the deductible in these words:

The amount we pay may be subject to a Direct Compensation – Property Damage deductible.  The deductible is the amount you agree to pay toward the cost of any single claim you make under this Section.  The deductible, if any, is the amount shown on the Certificate of Automobile Insurance, multiplied by the percentage to which you or the driver of the automobile were not at fault for the accident.

[30]          The policy then usefully provides examples of how the scheme works.  Example #1 posits a scenario directly relevant to these appeals:

      The insured’s car has an actual cash value of $12,000.

      The insured is involved in a car accident for which someone else is 100 per cent responsible.

      The insured’s car is a total loss.

      The insured’s Direct Compensation – Property Damage (“DC-PD”) deductible is $300.

[31]          In this example, the policy states: “We will pay $11,700 ($12,000 less $300, the deductible).  We will also pay for reasonable alternate transportation.  In sum: You receive $11,700.  You are responsible for $300, the DC-PD deductible.”

[32]          The example shows that the insurer intended to apply a deductible in total loss cases; in other words, it promised to pay its insured the actual cash value of the car less the agreed upon deductible, and the insured in these cases agreed to a deductible.  The example does, however, omit to describe what happens to the salvage in the car.  A reasonable consumer, reading the examples in the policy, would have difficulty determining who is entitled to it.

[33]          Instead, s. 6.5, headed “Your and Other Insured Persons’ Responsibilities”, begins with the phrase “When making a claim for property damage, you and other insured persons must”, and ends with the following bullet point:

  Not leave us to dispose of the automobile unless we agree to accept it.  If we decide to replace the automobile or pay its actual cash value, we own the salvage.

This section addresses the salvage, but says nothing about the deductible.

[34]          Although I do not consider either the omission of any reference to the salvage in the example or of any reference to the deductible in s. 6.5 to be fatal to the insurers’ position, I think that the industry could have avoided some of the legal difficulties it now faces by more careful drafting of the policy provisions.

[35]          Section 7 of the policy deals with optional loss or damage coverages.  Insureds who wish to be covered for damage to their car for which they are at fault must purchase this optional “collision or upset coverage”.  Section 7.1.1 states:

We agree to pay for direct and accidental loss of, or damage to, a described automobile and its equipment caused by a peril such as fire, theft, or collision if the automobile is insured against these perils.

  Under s. 7.3, this coverage may also be subject to a deductible.  Again, the policy provides examples.  Example #2 parallels Example #1 under s. 6, except that it assumes the insured is now 100% responsible for the accident:

Your car has an actual cash value of $12,000.  You are involved in an accident and are 100% responsible.  Your car is a total loss.

You receive nothing under your Direct Compensation – Property Damage Coverage.

You have the optional Collision or Upset Coverage and your deductible is $300.  Under the optional coverage, we will pay $11,700 ($12,000 less $300, the deductible).

In sum: You receive $11,700.  You are responsible for $300, the Collision deductible.

[36]          This example, too, shows the insurer’s intent to apply a deductible in total loss cases.  But, like the example under s. 6, this example also fails to refer to the salvage. 

[37]          Section 7.3 expressly provides that “if you are insured for loss or damage caused by fire or lightning, or for theft of the entire automobile, there is no deductible for these losses.”  Section 7.5 ends with a bullet point identical to that at the end of s. 6.5.

[38]          Section 8 of the policy lists the statutory conditions, including statutory condition 6(7), on which these appeals turn.  Section 8 begins, however, with its own paramountcy clause.  After noting that the Act requires that the statutory conditions be printed as part of every automobile insurance policy in Ontario, the clause states, “If there is a discrepancy between these conditions and the wording in the policy, these conditions prevail.”  In McNaughton, we relied on this provision in holding that in total loss cases the insurer could not both take the salvage and apply a deductible.

[39]          I now turn to the issues on the appeals.

V.   FIRST ISSUE:  DID THE McNAUGHTON PANEL ERR IN ITS INTERPRE­TA­TION OF STATUTORY CONDITION 6(7)?

[40]          The appellants contend that McNaughton was wrongly decided, that the McNaughton panel erred in its interpretation of statutory condition 6(7), and that, properly interpreted, statutory condition 6(7) does not preclude an insurer from taking the salvage and also applying a deductible in total loss cases.

[41]          To address these contentions, I will summarize our court’s decision in McNaughton, discuss the use of deductibles in car insurance policies, and then turn to the interpretation of statutory condition 6(7).

(a)   The Decision in McNaughton

[42]          In McNaughton, the court concluded that statutory condition 6(7) required an insurer who took title to a damaged car to pay its insured the actual cash value of the car without a reduction for the policy deductible.  The McNaughton panel consisted of Sharpe J.A., who wrote our reasons, Simmons J.A., and me.  In our view, the critical question was “whether, in law, the terms of the statutory condition must be given priority or whether they can be qualified by other policy provisions”: at para. 19.  Section 234(2) of the Act answered that question by stipulating that “no variation or omission of or addition to a statutory condition is binding on the insured.”

[43]          In McNaughton, we held that s. 234(2) was “a form of consumer protection legislation”: at para. 20.  By its enactment, the Legislature “limited the extent to which commercial efficacy or the apparent intention of the parties are determinative”: ibid.  Instead, we considered consumer protection to be the controlling principle of interpretation.  The Legislature, in effect, had created a “hierarchy of contractual terms” under which the statutory conditions were “paramount”: at paras. 19-20.  Policy provisions conflicting with a statutory condition had to yield to it.

[44]          We buttressed our conclusion by resort to the paramountcy clause in section 8 of the policy, which stated, “If there is a discrepancy between the statutory conditions and the wording in the policy, the statutory conditions in Section 8 prevail”: at para. 22.

[45]          Finally, we noted that what little authority existed on the point supported the insured’s position: a decision of the Alberta District Court, Mueller v. Western Union Insurance Co., [1974] 5 W.W.R. 530, and commentary in two insurance law texts.

[46]          As I have said, the Supreme Court of Canada denied leave to appeal in McNaughton.

(b)   Deductibles

[47]          Under s. 261 of the Act, the Legislature has authorized the use of deductibles in automobile insurance policies.  Leaving aside the issue in this appeal, an insurer and an insured can agree to include a deductible in the policy.  A deductible turns an insured into an “insurer” for the initial portion of the loss.  Thus, it is sometimes called a “self-insured retention”. 

[48]          A principal rationale for deductibles is that they address the “moral hazard” inherent in insurance.  Moral hazard refers to the chance that the existence of insurance will increase the likelihood of the insured event.  In other words, it addresses the risk an insured will have an incentive to engage in loss-causing behaviour if the payment under the policy will leave the insured better off after the loss than before it.

[49]          For several reasons, the use of deductibles is commonly considered to be sound public policy.  First, deductibles offer consumers a choice.  Deductibles and the cost of insurance premiums are inversely related: the larger the deductible, the lower the premium, and vice versa.  Thus, by agreeing to a large deductible, an insured can purchase insurance at a reduced cost.

[50]          Second, the use of large deductibles permits high-risk drivers to obtain insurance coverage.

[51]          Third, deductibles give insureds an incentive to drive more safely.  This is a manifestation of the moral hazard rationale for their use.  An insured who must pay the initial portion of the loss by a deductible will not be indifferent to the loss.  Instead, the insured will have an incentive to exercise care behind the wheel.  Therefore, the use of deductibles leads to an overall improvement in road safety and an overall reduction in the cost of insurance.

[52]          Finally, the use of deductibles discourages claims for small losses, where the administrative costs of resolving these claims outweigh their settlement value.  Without deductibles, these administrative costs would be passed on to the insured public, thus raising the cost of automobile insurance.  For these reasons, the use of deductibles in automobile insurance is thought to be desirable.  The respondent insureds do not suggest otherwise.

(c)   The Interpretation of Statutory Condition 6(7)

[53]          Statutory condition 6(7) stipulates:

There shall be no abandonment of the automobile to the insurer without the insurer’s consent.  If the insurer exercises the option to replace the automobile or pays the actual cash value of the automobile, the salvage, if any, shall vest in the insurer.

[54]          When a car is damaged beyond repair in an accident, statutory condition 6(7) expressly gives an insurer two options and implicitly a third option to satisfy its indemnity obligation to its insured.  First, the insurer can replace the insured’s car and take title to the salvage.  It is entitled to the salvage because otherwise, its insured will be over‑indemnified.  Second, it can pay the actual cash value of the car and take title to the salvage.  Again, the insurer claims entitlement to the salvage to prevent over-indemnification.  Third, it can elect to leave the salvage with the insured, in which case the insured’s loss would not be the actual cash value of the car but its diminution in value.

[55]          Before statutory condition 6(7) was enacted, an insurer could not compel an insured to give up ownership of a damaged car.  Ferguson J. accurately stated the pre-statutory condition 6(7) law in Hanna v. Waterloo Mutual Insurance Co., [1964] O.J. No. 359 (H.C.J.) at para .3:

But, the car at the time of the accident was the Plaintiff’s car and its ownership would not pass from the owner to the Insurance Company without an agreement to that effect on both sides.

[56]          Thus, in total loss cases, statutory condition 6(7) permits an insurer who has satisfied its indemnity obligation to its insured to acquire title to the salvage.  Both sides essentially agree on this.  They disagree on whether statutory condition 6(7) also quantifies the insurer’s payment obligation when it elects to take title to the salvage by paying its insured the actual cash value of the car. 

[57]          At bottom, their disagreement is about how statutory condition 6(7) should be interpreted.  The insurers contend that statutory condition 6(7) should be interpreted solely as authorization for the transfer of title in the salvage when the insurer elects to replace the insured’s car or to pay its actual cash value.  The insurers say that it should not be interpreted to prescribe the amount an insurer must pay to meet its indemnity obligation and, therefore, it should not be interpreted to preclude the application of any deductible agreed to in the policy.

[58]          The insureds, on the other hand, contend that statutory condition 6(7) should be interpreted not just as a provision permitting the insurer to take title to the salvage but also as a provision quantifying the insurer’s payment obligation when it chooses the option of paying the actual cash value of the car.  McNaughton implicitly assumed that statutory condition 6(7) quantified the insurer’s payment obligation when the insurer elected to pay the actual cash value of the car and take title to the salvage.

[59]          If the interpretation contended for by the insureds is correct, then McNaughton was correctly decided.  If statutory condition 6(7) prescribes the insurer’s payment obligation, then that obligation is the actual cash value of the car, not the actual cash value of the car less any policy deductible.  Whatever deductible may have been agreed to by the policyholder could not reduce the insured’s entitlement to the actual cash value because to do so would run afoul of s. 234(2) of the Act (“no variation…or addition to a statutory condition is binding on the insured”) and of the paramountcy clause in the policy itself.

[60]          Statutory condition 6(7) must be interpreted by applying Professor Driedger’s “modern approach” to statutory interpretation, the approach repeatedly preferred by the Supreme Court of Canada:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament.

See E.A. Driedger, Construction of Statutes, 2nd ed. (Toronto: Butterworths, 1983) [Driedger] at 87, approved in, for example, Rizzo & Rizzo Shoes Ltd. (Re), [1998] 1 S.C.R. 27 at para. 21; and Bell ExpressVu Limited Partnership v. Rex, [2002] 2 S.C.R. 559 at para. 26.

[61]          One aspect of this modern approach is that context matters.  The court must interpret the statutory provision in question in its total context.  Iacobucci J. put it this way in Bell ExpressVu at para. 27:

The preferred approach recognizes the important role that context must inevitably play when a court construes the written words of a statute:  as Professor John Willis incisively noted in his seminal article “Statute Interpretation in a Nutshell” (1938), 16 Can. Bar Rev. 1 at p. 6, “words, like people, take their colour from their surroundings”.

[62]          The context for interpreting statutory condition 6(7) includes its basic purpose, its mandatory inclusion in the standard Ontario automobile policy, the wording of the policy, and the important role of deductibles in our automobile insurance regime.

[63]          A second aspect of this modern approach is that the court should take into account all relevant and admissible indicators of legislative meaning.  After taking these into account, the court should adopt an interpretation that complies with the legislative text, promotes the legislative purpose, and produces a reasonable and sensible meaning.  This sound advice is given by Professor Sullivan, who has edited the third and fourth editions of Driedger.  See Ruth Sullivan, Driedger on the Construction of Statutes, 4th ed. (Toronto: Butterworths, 2002) at 1-3.  See also Bapoo v. Co-Operators General Insurance Co. (1997), 36 O.R. (3d) 616 at 620-21 (C.A.); New Brunswick v. Eastbrooks Pontiac Buick Ltd. (1982), 144 D.L.R. (3d) 21 at 28-29 (N.B.C.A.).

[64]          Applying this approach to statutory interpretation leads me to this conclusion: in McNaughton we wrongly interpreted statutory condition 6(7).  We did so because we wrongly assumed that it quantified the insurer’s payment obligation when the insurer elected to pay the actual cash value of the car and take the salvage.  Having heard these appeals, I am now persuaded that the insurers’ position is the correct position.  As I now view it, statutory condition 6(7) does no more than give an insurer the option to acquire the salvage when it indemnifies the insured for the damaged car.  It does not prescribe the amount the insurer must pay to meet its indemnity obligation.  That amount is set out in the policy itself and may be reduced by a deductible where the policy so provides.  Numerous contextual indicators of legislative meaning support this interpretation of statutory condition 6(7).  I will list these indicators and then address the counter­arguments put forward by the respondents.

(1)   The legislative text  

[65]          I begin with the actual words of statutory condition 6(7).  The critical sentence is the second one:  If the insurer exercises the option to replace the automobile, or pays the actual cash value of the automobile, the salvage, if any, shall vest in the insurer” [my emphasis].  These words are not words one would typically use to describe an amount one contracting party must pay to the other to satisfy a contractual obligation. 

[66]          Far more typical are words such as “we will pay the cost of damage to the automobile” or “we agree to pay for direct and accidental loss of, or damage to, a described automobile”.  These words, of course, are found in the standard policy, where I think a policyholder must look to determine the amount an insurer must pay when an insured’s car is damaged beyond repair.  Invariably, the policy provides for a deductible.

[67]          Moreover, the context in which statutory condition 6(7) is found negates the argument that it quantifies the insurer’s payment obligation.  Statutory condition 6(7) is not found in sections 6 and 7 of the policy, where the insurer’s payment obligations are set out.  Instead, it is included with the other statutory conditions in section 8 of the policy. 

[68]          Further, no part of statutory condition 6 itself deals with how much an insurer must pay for a damaged car.  Instead, statutory condition 6 deals generally with “the requirements” when a car is lost or damaged.  Statutory condition 6(1) requires the insured to give notice of the damage, protect the car from further damage, and deliver a proof of loss declaration.  Statutory conditions 6(2) and (3) deal with repairs.  Statutory condition 6(4) requires the insured to submit to an examination under oath.  Statutory condition 6(5) limits the insurer’s indemnity obligation to the actual cash value of the car but does not quantify how much it must pay.  Statutory condition 6(6) gives the insurer the option of repairing, rebuilding, or replacing the car instead of paying for the damage.  And statutory condition 6(7) deals with the salvage.

[69]          Thus, no subsection of statutory condition 6, or indeed of any other statutory condition, expressly defines how much an insurer must pay its insured when the insured’s car is lost or damaged.  Instead, statutory condition 9(1) – which deals with the time and manner of payment of insurance money – stipulates that “[t]he insurer shall pay the insurance money for which it is liable under this contract within sixty days after the proof of loss has been received by it” [my emphasis].

[70]          The insurance contract – the policy – is explicit about how much the insurer is liable for.  I have already reviewed the relevant provisions of the standard automobile policy.  However, they bear repeating here.

[71]          Section 6 of the policy, which deals with damage to the car for which the insured is not at fault, includes a heading in section 6.4, “How Much We Will Pay”.  The heading is immediately followed by sections 6.4.1 (Determining Fault) and 6.4.2 (The Deductible).  Section 7 of the policy, which provides for optional coverage when the insured is at fault for the damage to the car, similarly contains in section 7.1.1 the heading “Coverage for Loss or Damage to Your Automobile”.  Under this heading, the insurer states its agreement to pay for the damage if the insured has the optional coverage.  Section 7.1.2 sets out the “Coverage Options”, and 7.3 prescribes that the amount the insurer will pay “may be subject to a deductible.”

[72]          The statutory conditions are contained in section 8 of the policy.  At the end of section 8 is a chart.  This chart further confirms that statutory condition 6(7) does not deal with the insurer’s obligation to pay or with deductibles.  The chart is prefaced by the words, “The Statutory Conditions in Section 8 have been included in each section of the policy where they apply.  The chart below details where each condition appears in the policy.”  The chart then provides that statutory condition 6(7) appears in ss. 5.4.2, 6.5, and 7.5 of the policy.  None of these sections refers to what the insurer is required to pay or to the application of a deductible.

[73]          The wording of statutory condition 6(7), the wording of the insurer’s payment obligations in sections 6 and 7 of the policy, the context in which these words are found, and the chart at the end of section 8 show that statutory condition 6(7) was not meant to prescribe how much an insurer must pay an insured when the insured’s car is damaged beyond repair and the insurer takes the salvage.

(2)   Insureds’ position gives them a windfall

[74]          Interpreting statutory condition 6(7) as prescribing the amount insurers must pay when they take the salvage gives insureds a windfall in total loss cases.  Insureds do not pay a premium for the deductible in their policy.  They pay a premium for the non-deductible portion of their coverage.  Therefore, if the insureds are paid the actual cash value of their car without any reduction for the deductible, they will be paid an amount for which they paid no premium.  In short, they will be over-indemnified.  An interpreta­tion that produces windfall results should be avoided: see Brissette Estate v. Westbury Life Insurance Co., [1992] 3 S.C.R. 87.

(3)   Insureds’ position does not produce sensible results

[75]          As I have said, insurance premiums are cost sensitive to deductibles: the higher the deductible, the lower the premium.  Because of this cost sensitivity, the respondents’ interpretation of statutory condition 6(7) does not produce sensible results.  A simple example will show why.

[76]          Suppose two policyholders buy identical cars on the same day.  The first policyholder wants a lower premium and asks for a high deductible of $1,000.  The second policyholder wants greater coverage and opts for a lower deductible of $200.  If both cars are damaged beyond repair, on the respondents’ interpretation of statutory condition 6(7), each policyholder receives the same amount – the actual cash value of the car – without any reduction for the deductible.  This result makes little sense.  The respondents’ interpretation means that in total loss cases, policyholders who have agreed to a high deductible in exchange for a lower premium receive the same as policyholders who have agreed to pay a higher premium to obtain better coverage.  Also, the respondents’ interpretation means that policyholders with the highest deductibles, who are usually the least insurable, do not have to pay the deductible  in the worst kind of collision.  This is an interpretation I think we should also avoid.

(4)   Public policy incentives

[77]          At least before McNaughton, when an insured’s car was damaged beyond repair, the insurer typically chose to settle the claim and take the salvage.  This election had two advantageous consequences.  First, the insured no longer had the burden of dealing with the salvage.  Second, the public no longer had to be concerned that badly damaged and unroadworthy cars would be driven again.

[78]          However, the insurer is not obliged to take the salvage.  The insurer has a choice:  it can also leave the salvage with the insured and pay for the loss in value of the car less the policy deductible.  Although the respondents argue that insurers cannot apply a deductible when they take title to the salvage, they acknowledge that insurers can apply a deductible when they leave the salvage with their insureds.  But this position produces a perverse incentive because it encourages insurers to settle claims by leaving insureds with the salvage.  An interpretation of statutory condition 6(7) that will produce this kind of incentive is not desirable.

(5)   Reasonable expectations of the parties

[79]          Statutory condition 6(7) is not just a legislative provision; because of s. 234(1) of the Act, it is also part of the Ontario automobile insurance policy.  In this context, its meaning should be considered in the light of the principles for interpreting insurance policies.  One such principle is interpreting the scope of coverage to give effect to the reasonable expectations of the parties.  In many American jurisdictions, this principle has wide application.  In Canada, its application has been limited to resolving coverage disputes where the policy is ambiguous: see Reid Crowther & Partners Ltd. v. Simcoe & Erie General Insurance Co., [1993] 1 S.C.R. 252 at 271; Chilton v. Co-Operators General Insurance Co. (1997), 32 O.R. (3d) 161 at 169-73 (C.A.).

[80]          I do not consider the interpretation of statutory condition 6(7) or the application of a deductible in total loss cases to be ambiguous.  Nonetheless, and without deciding whether the reasonable expectations principle should have a wider reach in Canada, I think that I can safely say it is always desirable when a court’s interpretation accords with the parties’ reasonable expectations.  That is undoubtedly the case here.  Deductibles are a well-understood and well-accepted feature of automobile insurance policies.  A reasonable insured would fully expect the insurer to apply a deductible in total loss cases, including in those cases where the insurer acquires the salvage.  A reasonable insured would not expect to receive more than he or she bargained for.

(6)   Consistency with partial loss cases

[81]          The respondents accept that the insurer may apply a deductible in partial loss cases, that is, in cases where repairing the damaged car is possible and makes economic sense.  The insurers’ interpretation of statutory condition 6(7) achieves consistency of treatment between partial and total loss cases.  Consistency is always a desirable objective of statutory and contract interpretation.

(7)   Consistency with the common law principle of subrogation

[82]          The insurers’ interpretation of statutory condition 6(7) is consistent with and indeed reflects the common law principle of subrogation.  The right to claim the salvage amounts to the exercise of the right of subrogation after fully indemnifying the insured for the insured’s loss.  The insured is entitled to full indemnity.  But full indemnity does not mean indemnity for the total loss; it means indemnity for the insured loss.  Where the policy includes a deductible, the insured loss is the amount by which the total loss exceeds the deductible up to the policy limits.  Having fully indemnified the insured for the insured loss, the insurer is entitled to exercise its right of subrogation by claiming the salvage: see Affiliated F.M. Insurance Co. v. Quintette Coal Ltd. (1998), 156 D.L.R. (4th) 307 (B.C.C.A.); and Sage Oilfield Services Ltd. v. Pearl Assurance Co. (1974), 40 D.L.R. (3d) 296 at 298-99 (Sask. C.A.).

[83]          Conversely, the respondents’ interpretation of statutory condition 6(7) requires the insurer to over-indemnify the insured before claiming the salvage.  The insured, in effect, gets to keep the deductible portion of the loss for which the insured has paid no premium.  Yet, there is no principled basis for compelling the insurer to bear the uninsured portion of the loss when it exercises its right of subrogation, a right that arises on indemnification for the insured loss.  This, too, is a result to be avoided in interpreting statutory condition 6(7).

(8)   The paramountcy clause in the policy

[84]          The respondents – as did the McNaughton panel – rely on the paramountcy clause at the beginning of the standard automobile policy to support their interpretation of statutory condition 6(7).  Section 8 sets out the statutory conditions.  The paramountcy clause states, “If there is a discrepancy between these conditions and the wording in the policy, these conditions shall prevail.”

[85]          Although the respondents contend that this clause supports their position, I think that it provides strong support for the interpretation of statutory condition 6(7) put forward by the insurers.  The two sections immediately proceeding section 8 – sections 6 and 7 – expressly provide for the application of deductibles in property damage claims, and indeed give examples of the application of deductibles in total loss claims.  It would be incongruous to interpret statutory condition 6(7) to eliminate deductibles where the insurer takes the salvage in total loss cases, when the immediately preceding sections of the policy have expressly provided for deductibles in these cases. 

[86]          Instead, what I take from the inclusion of the paramountcy clause in section 8 of the policy is that statutory condition 6(7) was never meant to deal with deductibles.  Indemnification provided for in statutory condition 6(7) and deductibles provided for in the policy are, as Rooke J. said in Pauli v. Ace Ina Insurance, [2003] 6 W.W.R. 51, aff’d [2004] 10 W.W.R. 623 (Alta. C.A.) at para. 42, “fundamentally different concepts”. 

[87]          I acknowledge that the total loss examples in sections 6 and 7 of the policy do not expressly deal with the salvage.  As I have already said, that is poor drafting.  There can be no doubt, however, that the insurer intended to apply the deductible in the policy when it took the salvage in a total loss case, and that the insured agreed it could do so.  Where no deductible is to be applied – for example, fire, lightning, and theft – the policy expressly says so.  Nowhere does the policy say that no deductible shall be applied when the insured’s car is damaged beyond repair and the insurer takes the salvage.  These examples in ss. 6 and 7 would therefore be rendered meaningless on the respondents’ interpretation of statutory condition 6(7) and of the paramountcy clause.  A sensible interpretation avoids meaningless results.

(9)   The legislative history of the 1993 amendments

[88]          Up until 1993, insurers were unquestionably entitled to apply a deductible when taking the salvage in total loss cases.  Interpreting statutory condition 6(7) as quantifying the insurer’s payment obligation, together with the 1993 statutory amendments removing the phrase “subject to sections 235 and 261” from s. 234(1) of the Act, produced the decision in McNaughton.

[89]          I will deal separately with the effect of removing the “subject to” phrase.  However, the legislative history – the record of what transpired leading up to the 1993 amendments and afterwards – does not reflect any conscious legislative intent to change the right to apply deductibles in total loss cases, a right that had existed for many years.

[90]          The insurers filed a substantial legislative record on these appeals.  This record was not before the panel in McNaughton.  I will not review it in detail.  However, the record shows that the effect of removing the introductory phrase “subject to” on the insurers’ right to apply a deductible was not discussed in the Legislature; that in the consultations between the IBC and the government preceding the 1993 amendments, neither side suggested that deductibles should be eliminated in total loss cases; that the actuarial studies on the impact of the Bill 164 amendments did not address deductibles; and that insurers’ rate filings after the 1993 amendments assumed deductibles would be applied in total loss cases, and were approved by the regulator.

[91]          This legislative history therefore lends support to the insurers’ interpretation of statutory condition 6(7).  Their interpretation gains further support from the legislative evolution of the automobile insurance regime.  In the 1996 amendments, the Legislature expanded the use of deductibles, further emphasizing the important role they play in automobile insurance.

[92]          These indicators of legislative meaning overwhelmingly demonstrate that statutory condition 6(7) was meant solely to codify the principle that on paying the insured the full value of the damaged car (the actual cash value or replacement value), the insurer is entitled to take the salvage.  Permitting the insured to retain the salvage would result in overcompensation.  In other words, statutory condition 6(7) vests the salvage in the insurer to ensure that the insured obtains the indemnity contracted for, but no more.  As E.R. Hardy Ivamy says in General Principles of Insurance Law, 6th ed. (London: Butterworths, 1993) at 502:

Where, notwithstanding the happening of a total loss, there is a sufficient amount of salvage which possesses some value, the assured cannot claim both to receive from the insurers a full indemnity for his loss and to retain the salvage, since he would thus be more than fully indemnified.

However, statutory condition 6(7) was not meant to define the insurer’s payment obligation.  That obligation is defined in the policy and may be reduced by a deductible. 

[93]          What then is to be said against this interpretation of statutory condition 6(7) and in support of the respondents’ position?  The respondents’ most powerful argument centres on the removal in the 1993 amendments of the opening words of s. 234(1): “subject to… [s. 261, the statutory provision authorizing deductibles].”  It is not just the absence of these words in the 1993 version of s. 234(1) but their presence in the previous legislation that the respondents rely on.  Their presence, the respondents argue, shows that statutory condition 6(7) was meant to quantify the insurer’s payment obligation on taking the salvage in a total loss case; their presence gave the insurer the right to apply a policy deductible.  Their removal in the 1993 amendments, the respondents argue, took away that right. 

[94]          I do not agree with the respondents’ argument.  The central question that this argument raises is whether the Legislature intended to take away a contractual right that had been in existence for a half-century or more:  the insurer’s right to apply a deductible when it took the salvage in total loss cases.  I cannot accept that the Legislature intended to do so.

[95]          I acknowledge that courts should presume that legislatures amend statutory provisions for a purpose and should also presume that often they do so to effect a substantive change in the law: see D.R. Fraser & Co. v. M.N.R., [1949] A.C. 24 at 33; Re McDougall and Board of School Commissioners of Town of Mahone Bay (1979), 101 D.L.R. (3d) 87 at 90-91 (N.S.C.A.); R. v. American News Co. Ltd., [1957] O.R. 145 at 173-74 (C.A.).  However, the presumption of substantive change is rebuttable.  Indeed, ss. 17 and 18 of the Interpretation Act, R.S.O. 1990, c. I.11 preclude the court from automatically assuming that the purpose of every amendment is to change the substantive law:

17.  The repeal or amendment of an Act shall be deemed not to be or to involve any declaration as to the previous state of the law.

18.  The amendment of an Act shall be deemed not to be or to involve a declaration that the law under the Act was or was considered by the Legislature to have been different from the law as it has become under the Act as so amended. 

[96]          Here, all of the available indicators suggest that no change to the pre-1993 right to apply a deductible in total loss cases was ever intended.  Deductibles, as I have tried to explain, historically have been important, accepted, and desirable features of automobile insurance.  If the Legislature had meant to remove deductibles in one significant kind of automobile loss or damage case, I would have expected some notification of it, some discussion in the Legislature, some mention in the Government’s policy statement or in the consultations with the industry.  None of that occurred.

[97]          Of course, whatever the purpose of the “subject to” phrase in the pre-1993 version of s. 234, on my interpretation of statutory condition 6(7), it was unnecessary to preserve the insurer’s right to apply a deductible in all total loss cases.  For the reasons I have already discussed, I do not consider that statutory condition 6(7) defines the insurer’s payment obligation.  Regardless of whether s. 234 contains the “subject to” phrase, statutory condition 6(7) does not preclude the application of a deductible in total loss cases.

[98]          We were not told why the “subject to” phrase was removed in the 1993 amendments.  The insurers suggest that it may have been removed because the statutory conditions were put into the regulations and s. 261 (which authorizes deductibles) thus remained paramount.  I have difficulty with that explanation for two reasons.  First, although the statutory conditions were put into the regulations, they were expressly authorized by s. 234 itself.  Second, this explanation implicitly assumes that s. 261 qualifies statutory condition 6(7).  But that assumption undercuts the insurers’ principal argument – and the one I have accepted – that statutory condition 6(7) and deductibles have fundamentally different purposes. 

[99]          As I view the 1993 amendments, it is equally plausible that they were made to reflect the proper interpretation of statutory condition 6(7).  Whatever the reason, all of the indicators of legislative intent that I have discussed show that the amendments were not made to preclude insurers from applying deductibles when they took the salvage in total loss cases.  I thus reject the respondents’ principal argument in support of McNaughton.

[100]      The respondents make several other submissions to support their argument that McNaughton is correct.  They submit that no deductible should be applied when the insurer takes the salvage because the taking amounts to an expropriation of the insured’s property.  I do not accept this submission.  Once an insured has been fully indemnified for the loss, the right to the salvage is simply the exercise of the right of subrogation to prevent over-indemnification.  This is not a case where the insured’s property has been “expropriated” without proper compensation. 

[101]      The respondents also submit that two of the policy arguments favouring the use of deductibles do not apply in total loss cases.  They say that McNaughton does not create a moral hazard because insureds would not risk life and limb to “total” their car.  They also say that the use of deductibles to eliminate small claims does not apply to claims where the car is damaged beyond repair.

[102]      I also do not accept these submissions.  The policy reasons for the use of deductibles should be looked at generally and systemically, not by focusing on the extent of damage in an individual case where one policy reason or another may not directly apply.  Moreover, even looking at individual cases, two of the important reasons for deductibles – giving consumers a choice on premiums and permitting high-risk drivers to obtain insurance – do not depend on whether or not a car will be damaged beyond repair. 

[103]      The respondents further submit that McNaughton does not result in over-indemnification because an insured who receives the actual cash value does not receive more than the value of the car.  I have already addressed this point.  Full indemnification must relate to the insured loss, not to the actual loss.  A deductible means that a policyholder is not insured for the initial portion of the loss.  If the policyholder is, nonetheless, paid for the initial portion of the loss, then the policyholder has been overcompensated. 

[104]      Finally, the respondents rely on the McNaughton panel’s comment that s. 234(2) of the Act, which prohibits variations of statutory conditions, is a form of consumer protection legislation; and on Gonthier J.’s comment in Smith v. Co-operators General Insurance Co., [2002] 2 S.C.R. 129 at para. 16 that “insurance law is, in many respects, geared towards protection of the consumer” and thus “obliges the courts to impose bright-line boundaries between the permissible and the impermissible”.

[105]      I accept both of these comments, but I do not see how they support the respondents’ interpretation of statutory condition 6(7).  If anything, they support the insurers’ interpretation.  What, I ask rhetorically, could be a clearer boundary than to direct insureds to look at the plain language provisions in ss. 6 and 7 of the policy to determine their insurer’s payment obligations and their entitlement?  Holding that the insurer’s payment obligations for partial loss cases and some total loss cases (where the insurer does not take the salvage) may be found in one part of the policy, while the insurer’s payment obligations in other kinds of total loss cases is to be found in the statutory conditions, which are in an entirely different part of the policy, does nothing to further the “bright-line boundaries” advocated in Smith.

[106]      For these reasons, I do not agree with the respondents’ argument that McNaughton was correctly decided.  Instead, I accept the insurers’ interpretation of statutory condition 6(7).  That interpretation is faithful to the wording of statutory condition 6(7), especially when that wording is considered in its entire context; it accurately reflects the statutory condition’s purpose; and it yields a reasonable and sensible meaning.  Accordingly, I conclude that in McNaughton we erred in our interpretation of statutory condition 6(7).

VI.   SECOND ISSUE:  SHOULD THIS COURT OVERRULE McNAUGHTON?

[107]      Although I have concluded that the McNaughton panel erred in its interpretation of statutory condition 6(7), it does not automatically follow that McNaughton should be overruled.  The principle of stare decisis – “stand by things decided” – comes into play.  Strictly applied, this principle would require us to follow McNaughton even if we did not agree with it.

[108]      The insurers advance two general arguments for why we are entitled to depart from our holding in McNaughton.  First, they say that we need not be concerned about stare decisis.  For several reasons they say that it does not apply.  Second, they say that even if stare decisis does apply, this court has never applied it rigidly.  Here, the insurers contend, we have sufficient reasons not to follow our previous decision.  I agree with this second contention.

(a)   Does Stare Decisis Apply?

[109]      The insurers put forward four arguments why stare decisis does not apply: stare decisis does not apply to the interpretation of contracts; the per incuriam exception to stare decisis applies; the question this court must decide and the question the McNaughton panel decided are different; and “special circumstances” justify departing from McNaughton.  For any of these four reasons, the insurers argue, we are free not to follow McNaughton.  Indeed, the insurers go as far as to argue that the motions judge had authority to depart from McNaughton and that he ought to have done so.  I do not find any of these arguments persuasive.

[110]      There is authority for the proposition that stare decisis does not apply to the interpretation of the provisions of a contract: see, for example, Pedlar v. Road Block Gold Mines of India, Ltd., [1905] 2 Ch. 427 at 437.  This proposition makes sense for the interpretation of individual clauses of a private contract.  Even so, previous decisions may have persuasive value depending on the context: see Ashville Investments Ltd. v. Elmer Contractors Ltd., [1989] 1 Q.B. 488 (C.A.).  But the proposition can have no application whatsoever to the interpretation of the statutory conditions, which must form part of every Ontario automobile insurance policy.  These policies are, in reality, “statutory contracts”: see July v. Neal (1986), 57 O.R. (2d) 129 at 135 (C.A.).  It would be anomalous for statutory condition 6(7) to mean one thing in Polowin’s automobile insurance policy and another thing in the respondent Renaldo Matthews’s policy.  We cannot avoid stare decisis by characterizing the McNaughton decision as merely the interpretation of an ordinary contract.

[111]      The insurers rely on the per incuriam exception to stare decisis.  This well-recognized exception permits a court to overrule one of its previous decisions if two conditions are met:  the panel deciding the earlier case did not advert to judicial or statutory authority binding on it; and had the panel considered this authority, it would have decided the case differently: see Al’s Steak House and Tavern Inc. v. Deloitte & Touche (1997), 13 C.P.C. (4th) 90 (Ont. C.A.); Metro. Toronto v. L.J. McGuinness & Co. Ltd., [1960] O.R. 267 (C.A.); Morelle Ltd. v. Wakeling, [1955] 1 All E.R. 708 at 718.

[112]      The insurers submit that the McNaughton panel did not advert to s. 261 of the Act, the provision expressly authorizing deductibles, or to the legislative evolution of s. 234, and that it did not have the benefit of the record of the legislative history filed on these appeals.

[113]      I see three difficulties with the insurers’ position.  First, although the McNaughton panel did not refer to s. 261 in its reasons, the insurer relied on this provision in argument.  Indeed, it was expressly referred to in the insurer’s factum.  I do not think it is fair to assume that the panel did not consider s. 261 simply because the provision was not cited in the court’s reasons.  Second, the legislative evolution of s. 234 was also available for the McNaughton panel’s consideration.  Third, the application of stare decisis or the per incuriam exception to it should not ordinarily turn on the evidentiary record filed by counsel.  To hold otherwise runs up against the apt observation of MacKinnon J.A.: “The binding effect of precedent, where the court has made a clear statement of principle, cannot depend on whether, in the opinion of succeeding Courts on an examination of the available record, the case was properly argued or not”: R. v. Bell (1977), 15 O.R. (2d) 425 at 430 [reversed on other grounds [1979] 25 S.C.R. 212], cited by Zuber J.A. in R. v. 517653 Ontario Ltd. (1985), 35 M.V.R. 161 at 164 (Ont. C.A.).  Taking these difficulties into account, in my view, the per incuriam exception to stare decisis does not assist the insurers on these appeals.

[114]      The insurers also contend that on these appeals we must resolve a different question from the question the court had to resolve in McNaughton.  These appeals, the insurers argue, turn on the interplay between ss. 234 and 261 of the Act, while the McNaughton panel focused solely on statutory condition 6(7).  This contention has no merit.  The fundamental issue in these appeals and in the McNaughton appeal is the same:  the proper interpretation of statutory condition 6(7).

[115]      Finally, the insurers seek to invoke a “special circumstances” exception to the application of stare decisis.  This argument has two branches.  The first relies on cases that discuss the doctrine of issue estoppel.  Those cases hold that a court retains discretion to refuse to apply issue estoppel where to do so would work an injustice: see Minott v. O’Shanter Development Co. (1999), 42 O.R. (3d) 321 (C.A.).  The insurers argue for a similar discretion to refuse to invoke stare decisis.  I do not accept this argument.  The jurisprudence on issue estoppel has no bearing on these appeals.  None of the appellants or the respondents participated in McNaughton or in any other case dealing with the interpretation of statutory condition 6(7).

[116]      The second branch of the argument relies on the fact McNaughton was decided in a lawsuit between a single insured and a single insurer, while the present litigation involves numerous insureds and insurers.  Differences such as these may exist in any instances of successive litigation.  They cannot constitute a special circumstance precluding the application of stare decisis.

[117]      In short, none of the four reasons offered by the insurers justify concluding that we need not be concerned about the application of stare decisis to our court’s previous decision in McNaughton.  Therefore, in my view, the insurers’ companion argument on the motions judge’s authority to depart from McNaughton has no merit.  The motions judge’s ruling was entirely appropriate.  A fair reading of his reasons suggests that he would have decided the motions differently had he been free to do so.  But he properly considered himself bound to follow McNaughton.  If the error in McNaughton is to be corrected, it falls to this court, not to the motions judge, to do so.

(b)   Should We Overrule McNaughton?

[118]      Lord Denning once wrote, “The doctrine of precedent does not compel your Lordships to follow the wrong path until you fall over the edge of the cliff”, to which Justice Brandeis might have replied: “It is usually more important that a rule of law be settled, than that it be settled right”: see Ostime v. Australian Mutual Provident Society, [1960] A.C. 459 at 489 and Di Santo v. Pennsylvania 273 U.S. 267 at 270 (1927) respectively.  These words, by two great jurists, capture the essence of the debate about stare decisis.

[119]      The values underlying the principle of stare decisis are well known:  consistency, certainty, predictability, and sound judicial administration.  Adherence to precedent promotes these values.  The more willing a court is to abandon its own previous judgments, the greater the prospect for confusion and uncertainty.  “Consistency”, wrote Lord Scarman, “is necessary to certainty – one of the great objectives of law”: see Farrell v. Alexander, [1976] 1 All E.R. 129 at 147.  People should be able to know the law so that they can conduct themselves in accordance with it.

[120]      Adherence to precedent also enhances the legitimacy and acceptability of judge-made law, and by so doing enhances the appearance of justice.  Moreover, courts could not function if established principles of law could be reconsidered in every subsequent case.  Justice Cardozo put it this way in his brilliant lectures on The Nature of the Judicial Process (New Haven: Yale University Press, 1960) at 149:

[T]he labor of judges would be increased almost to the breaking point if every past decision could be reopened in every case, and one could not lay one’s own course of bricks on the secure foundation of the courses laid by others who had gone before him.

[121]      But there is, of course, a price to be paid for rigid adherence to precedent:  injustices in individual cases, continued application of legal principles long since outdated as society has changed, and uncertainty bred by judges who draw overly fine distinctions to avoid stare decisis.

[122]      Most modern judges disavow both a rigid adherence to precedent and an unrestrained right to depart from their court’s previous authority.  Instead, they apply stare decisis flexibly, seeking a reasonable point on the spectrum Chancellor Megarry describes so well:

Much has been written and spoken on the doctrine of judicial precedent, and doubtless much more is still to come.  At one extreme lies the goal of such certainty in the law as to obviate virtually all litigation save on disputed questions of fact; and the price to be paid is that of injustice in unforeseen cases.  At the other extreme there is the goal of perfect hand-tailored justice in every case, at the price of great uncertainty in the law, and a flood of litigation.  Each price is too great; and inevitably the greatest of judges have differed in their views as to the point between the extremes at which the line is to be drawn.  Those who feel most assured that they are wiser than their fathers are the most bold.  (R.E. Megarry, A Second Miscellany-at-Law (London: Stevens & Sons Ltd., 1973) at 134.)

[123]      Where along the spectrum have we drawn the line?  In R. v. Bernard, [1988] 2 S.C.R. 833 at 849, in a dissenting judgment, Dickson C.J.C. wrote, “There must be compelling circumstances to justify departure from a prior decision.”  See also R. v. Chaulk, [1990] 3 S.C.R. 1303 at 1352 per Lamer C.J.C., where Dickson C.J.C.’s dissent on this point was adopted by the Court; and R. v. Salituro, [1991] 3 S.C.R. 654.  In other words, for the Supreme Court, acceptance is the rule; departure, the exception. 

[124]      In Bernard, Chaulk, Salituro, and other cases, the Supreme Court has articulated five factors that would allow it to overrule one of its previous decisions: where a previous decision does not reflect the values of the Canadian Charter of Rights and Freedoms; where a previous decision is inconsistent with or “attenuated” by a later decision of the Court; where the social, political, or economic assumptions underlying a previous decision are no longer valid in contemporary society; where the previous state of the law was uncertain or where a previous decision caused uncertainty; and, in criminal cases, where the result of overruling is to establish a rule favourable to the accused.

[125]      These five factors were not meant to be a comprehensive list, nor need they all be present to justify overruling a previous decision.  Instead, as Lamer C.J. said in Chaulk at 1353, “They are…guidelines to assist this Court in exercising its discretion.”  But overruling a previous decision based on one or more of these five factors promotes the interests of justice and the court’s own sense of justice by bringing judge-made law into line with constitutional, legislative, or social changes, by removing conflicts and uncertainties in the law, or by protecting individual liberty.

[126]      Our court has never itemized a similar list of factors to justify overturning one of our decisions. The Supreme Court’s factors likely provide a useful, though not exhaustive, checklist for provincial appellate courts in Canada.  Certainly, our court has adopted a similar view to that of the Supreme Court.  Thus, for example, we have said that we will not overrule one of our previous decisions unless it was “manifestly wrong”; and we have not felt bound by a judgment of the court “where the liberty of the subject is in issue if [we are] convinced that the judgment is wrong”: see R. v. Jenkins (1996), 29 O.R. (3d) 30 (C.A.) (leave to appeal to the S.C.C. denied, [1996] S.C.C.A. No. 583); and R. v. Santeramo (1976), 32 C.C.C. (2d) 35 at 46 (Ont. C.A.).  In short, although departure is the exception, we will overrule our precedents in an appropriate case.

[127]      Instead of focusing on phrases such as “manifestly wrong”, the approach I prefer is that adopted by this court in R. v. White (1996), 29 O.R. (3d) 577 at 602.  It calls on the court to weigh the advantages and disadvantages of correcting the error in a previous decision.  This approach focuses on the nature of the error, and the effect and future impact of either correcting it or maintaining it.  In doing so, this approach not only takes into account the effect and impact on the parties and future litigants but also on the integrity and administration of our justice system.

[128]      At a general level, overruling McNaughton would sacrifice the important rationales for stare decisis: consistency, certainty, and predictability. Moreover, overruling cannot be justified by any of the five factors outlined by the Supreme Court of Canada: no Charter values are at stake; McNaughton has not been “attenuated” by any later decisions of this court; the assumptions underlying McNaughton have not changed; McNaughton has not caused uncertainty; and this is not a criminal case so the liberty of the individual is not at stake.

[129]      Also, overruling McNaughton will not have any future impact because the Legislature has already corrected the “error”, though it did not – as it might have done – do so retroactively.  And, the insurance industry complied with McNaughton, once the Supreme Court denied leave to appeal.  At most, only money is at stake, albeit a large amount of money.  All of these considerations weigh in favour of maintaining the McNaughton decision, even though I believe it to be wrong.

[130]      However, in my view, seven considerations, taken together, justify overruling McNaughton. 

[131]      First, and perhaps most important, although McNaughton has not been “attenuated” by any later decisions of this court, its reasoning has been questioned by two courts in other jurisdictions: the Alberta Court of Appeal in Pauli, supra, and Tysoe J. of the British Columbia Supreme Court in Doyon v. Insurance Corp. of British Columbia (2004), 239 D.L.R. (4th) 749.  Both Pauli and Doyon held that when a car was damaged beyond repair and the insurer elected to take the salvage, the insurer was entitled to pay its insured the actual cash value of the car, less the policy deductible.  In short, both the Alberta and British Columbia courts reached a result opposite to the result in McNaughton. 

[132]      Admittedly, as the respondents point out, the statutory regimes in both western provinces differ from the statutory regime under which McNaughton was decided.  And both Fruman J.A. in Pauli and Tysoe J. in Doyon commented on these differences in giving their decisions.  Nonetheless, both Pauli and Doyon questioned the correctness of McNaughton.

[133]      In Pauli, the insurer argued that statutory condition 4(7) in the Alberta Insurance Act, R.S.A. 2000, c. I-3 – which is identical to Ontario’s statutory condition 6(7) – “describes the mechanism for taking title to the salvage, rather than specifying the quantum of the actual payment.”  Fruman J.A. held that this argument had merit and produced a “sensible commercial and public policy result”.  It is the same argument that I have accepted on these appeals.  Pauli must also be taken to have overruled Mueller v. Western Union Insurance Co., [1974] 5 W.W.R. 530, the District Court decision relied on in McNaughton. [3]

[134]      In Doyon, Tysoe J., too, concluded that s. 143 of the regulations passed under British Columbia’s Insurance (Motor Vehicle) Act, B.C. Reg. 447/83 – which is equivalent to Ontario’s statutory condition 6(7) – “sets out the mechanism by which the Defendant can elect to obtain the salvage ”.  In his view, in a total loss situation where the insurer elected to take the salvage, if the insured was paid the actual cash value without a reduction for the deductible, the insured would receive a windfall “because he would receive more than he was seeking when he obtained the insurance”.  Tysoe J. held that such a recovery “could neither be sensibly sought nor anticipated at the time the insurance policy was issued.  This is not the interpretation which the courts should support”: at para. 35.

[135]      Tysoe J. also accepted – as I have in these appeals – that the insurer’s entitlement to the salvage that arises on payment of the actual cash value minus the deductible is consistent with the common law of subrogation.  He rejected the insured’s argument that at common law the insurer had no right to the salvage if a deductible were applied because then the insured would not be indemnified for the full loss.  Instead, Tysoe J. explained (at paras. 43-44) that the entitlement to the salvage arose on indemnification for the insured loss, that is the loss in excess of the deductible or self-insured retention:

The requirement that an insured must be fully indemnified before the insurer is entitled at common law to the salvage in the insured article corresponds to the requirement that an insured must be fully indemnified before the insurer is entitled at common law to exercise its right of subrogation with respect to third parties which caused the loss to the insured.  Both of these requirements flow from the principle expressed in Castellain v. Preston (1883), 11 Q.B.D. 380 (C.A.) that in the case of an indemnity contract of insurance, the insured is entitled to be fully indemnified but cannot be more than fully indemnified.  In dealing with the doctrine of subrogation, the B.C. Court of Appeal has held, following Lord Napier v. Hunter, [1993] 1 All E.R. 385 (H.L.), that an insured is self insured in respect of the deductible amount and that, if an insured suffers an insured loss and an uninsured loss, the insurer is entitled to exercise the right of subrogation upon full indemnification of the insured loss only:  Affiliated FM Insurance Co. v. Quintette Coal Ltd. (1998), 156 D.L.R. (4th) 307 (B.C.C.A.).

One would think that the same reasoning should apply to the concept of salvage.  If so, the insurer would be entitled to the salvage at common law upon fully indemnifying the insured in respect of the insured loss and without the requirement to have also indemnified the insured in respect of the deductible, being the uninsured loss.

[136]      In many contexts, a later decision of another provincial appellate court, much less of a superior court, would not justify our court in departing from its own previous authority.  After all, as the Supreme Court of Canada has said, “the only required uniformity among provincial appellate courts is that which is the result of the decisions of this Court”: see Wolf v. R., [1975] 2 S.C.R. 107 at 109.

[137]      But in the automobile insurance context, I think that a strong case can be made for consistency of interpretation among provincial appellate courts.  The various provincial statutory automobile insurance regimes, though not identical, are similar.  Moreover, statutory condition 6(7), which permits the insurer to take the salvage in total loss situations, is identical to those in the other provincial insurance regimes.  Achieving a consistent interpretation of this statutory condition is the strongest justification for overruling McNaughton.  But other considerations also warrant doing so. 

[138]      A second consideration favouring overruling McNaughton is this:  although the precise holding in McNaughton – that insurers cannot both take the salvage and also apply a deductible in total loss situations – has been reversed by legislation, that case and these appeals raise the broader question of the interpretation of statutory conditions in a standard automobile insurance policy.  This broader question is likely to recur in the future, in a wide variety of contexts.  It would, I think, be unfortunate if future courts interpreting one of the statutory conditions, were encumbered by the panel’s erroneous interpretation in McNaughton. 

[139]      Third, although stare decisis generally promotes the value of certainty, that value has limited application on the question at stake in these appeals.  Insureds have not governed their conduct on the basis of McNaughton.  Their purchase of car insurance has not been affected by whether or not the insurer applies a deductible in total loss cases.  The wise observation of Cardozo applies here:  “There should be greater readiness to abandon an untenable position when the rule to be discarded may not reasonably be supposed to have determined the conduct of litigants”: see Cardozo, supra, at 151, quoted in R. v. White, supra, at 604.

[140]      Fourth, the case for overruling is more compelling because McNaughton is of relatively recent vintage.  It is less than four years old.  It is neither a decision that has stood for many years, nor a decision that has been reaffirmed by the court in later cases.  Better then to correct an error early than to let it settle in.  Moreover, when it was decided, it was the first case of its kind, not just in Ontario but across the country.  Since then, the western cases and, indeed, the full argument on these appeals, “threw up the problem in sharper relief than that in which it could be previously viewed when there was no precedent on it”: see Delta Acceptance Corporation Ltd. v. Redman, [1966] 2 O.R. 37 at 51 (C.A.).

[141]      Fifth, this panel, unlike the McNaughton panel, has the benefit of the legislative history of the 1993 amendments, the record of which the appellants filed on their Rule 20 motions.  Although I do not accept that this record justifies applying the per incuriam exception to stare decisis, I do think it is a relevant consideration in the flexible application of stare decisis.  This legislative history puts the purpose and effect of the 1993 legislative changes in a better context.  As context is critical in statutory interpretation, the availability of this legislative record is a factor supporting our overruling McNaughton.  See Thomson v. Nova Scotia (Workers’ Compensation Appeals Tribunal) (2002), 223 D.L.R. (4th) 193, where the Nova Scotia Court of Appeal took a similar view.

[142]      Sixth, with numerous class certification motions pending, a substantial amount of money is potentially at stake in this litigation.  Although the amount in issue should not ordinarily be a decisive consideration, it remains a relevant consideration. 

[143]      Finally, I do not think that this court should be less willing to depart from its own decisions because the Supreme Court of Canada, our country’s final court, can correct errors made by a provincial appellate court.  For people in Ontario, the Court of Appeal for Ontario is the final court in the vast majority of cases.  The Supreme Court grants leave rarely and does not ordinarily do so simply because it considers a provincial appellate court decision to be wrong.  More is required to obtain leave – the case must raise an issue of public or national importance.  The Supreme Court denied leave to appeal in McNaughton.  If we dismiss these appeals because of stare decisis, it is not obvious that the appellants will obtain leave to appeal to our highest court.

[144]      Taking into account these seven considerations, I would overrule McNaughton and would hold that under statutory condition 6(7), an insurer may take title to the salvage on paying its insured the actual cash value less the policy deductible.

[145]      To paraphrase what this court said in White, supra, at 604 – in overruling a previous decision of our court on a criminal jury instruction – in the exercise of our responsibility for the state of the law in this jurisdiction, I think that the proper course is to correct the McNaughton error now.

VII.  CONCLUSION

[146]      I would allow the insurers’ appeals, set aside the orders of Haines J., and dismiss each plaintiff’s action.  I would do so on the ground that statutory condition 6(7) does not prohibit the application of the policy deductible in total loss cases.  Therefore:

(1)             on the Rule 20 motions, I would hold that there is no genuine issue for trial in respect of the claims for breach of contract and conversion;

(2)             on the rule 21.01(1)(a) motions, I would hold that the question of law, the interpretation of statutory condition 6(7), must be determined in favour of the insurers; and

(3)             on the rule 21.01(1)(b) motions, I would hold that each plaintiff’s claim fails to disclose a reasonable cause of action, either for breach of contract or for conversion.

[147]      My proposed disposition would not affect McNaughton itself.  That case was finally determined when the Supreme Court of Canada denied leave to appeal.  Whether the court’s decision in these appeals would affect the subsequent certification and class proceedings in McNaughton is not before us.

[148]      The parties may make written submissions on the costs of the motions before Haines J. and of the appeals through the Office of the Registrar within thirty days of the release of these reasons.

[149]      The panel is grateful to all counsel on these appeals for their written and oral submissions.

Released:  JUNE 15 2005   JL         

Signed: “John Laskin J.A.”

“I agree  Janet Simmons J.A.”

“I agree  E.A. Cronk J.A.”

“I agree  Robert P. Armstrong J.A.”

“I agree  Edward Then J. (ad hoc)


[1] In the 1990 Act, this statutory condition is 7(7).  When the Act was amended in 1993 and the statutory conditions were put into the regulations (see para. 20 of these reasons), this statutory condition was renumbered as statutory condition 6(7).  It was so referred to by the parties and I have so referred to it throughout these reasons.

[2] Section 235 created exceptions to the mandatory application of the statutory conditions, exceptions that are not relevant here.

[3] In Pauli, in the Alberta Court of Queen’s Bench, Rooke J. expressly overruled Mueller.  Fruman J.A. did not refer to Mueller but affirmed Rooke J.’s decision.