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Insurance Law: Breach of Warranty Voids Coverage
Published in the February 2007 issue of Transportation Notes - View Article
Mr. and Mrs. McIntosh wanted to retire. They owned a house in Windsor, Ontario and a cottage in the Muskoka Lakes region. They were avid boaters and decided that they would supplement their income in retirement by purchasing and chartering a high-speed powerboat for use in “poker runs” and other excursions. They sold their house in Windsor, liquidated their RRSP’s and took out a bank loan to purchase a 32 foot Advantage Victory powerboat for $220,000.
Mr. McIntosh approached a Mr. Macauley at the insurance brokerage of Ogilvy & Ogilvy in order to obtain insurance for the boat. He told Mr. Macauley of his plans to charter the boat and Mr. Macauley told him that commercial insurance would be very expensive and that until such time as he actually obtained paying customers for the boat he should insure it for personal use only. Consequently, Mr. McIntosh completed a pleasure craft application which was forwarded by Macauley to Royal & SunAlliance Insurance Company of Canada (“Royal”), who were not informed about McIntosh’s plan to start a business using the boat.
On August 20, 2002 Ogilvy & Ogilvy sent Mr. McIntosh a copy of the insurance policy stating in the covering letter that they were attempting to obtain a commercial quote as requested but that in the interim coverage was for private pleasure use only. The policy as issued contained a warranty stating that the vessel would be used solely for private pleasure purposes and would not be chartered or leased or used for any commercial purpose. Mr. McIntosh acknowledged receiving the policy and stated that his understanding was that as long as he did not take any paying customers on the boat he would have insurance coverage.
During the summer of 2002, Mr. McIntosh made an attempt to obtain commercial coverage on the boat and Mr. Macauley contacted Royal on his behalf. However, Royal indicated that they were not interested in taking on the risk of insuring the boat for commercial use. Mr. McIntosh acknowledged that Mr. Macauley had informed him that he had been unable to obtain a quote for commercial coverage and that he understood that his boat was only insured for personal use.
In the summer of 2002, Mr. McIntosh took steps to get his business up and running. He opened a bank account in the name of Offshore Performance Tours and put a decal with that name on the deck of the boat. He had business cards printed up and took the boat to tour three poker runs although he claimed that he did not receive any paying customers that summer.
In July of 2003 the policy came up for renewal and again contained the warranty for private pleasure purposes. In the summer of 2003 Mr. McIntosh set up a website for Offshore Performance Tours and placed advertisements in boating magazines. He had flyers printed up offering that for $375 plus GST, an individual could participate in a poker run, receive lunch, dinner, a team shirt and a video of the event, among other things. Despite these efforts, Mr. McIntosh claimed that he did not obtain a single paying customer throughout the summer of 2003. A photograph of his boat appeared in “Poker Runs America”, an on-line magazine relating to performance boating. The boat was shown participating in a poker run which took place on September 12 and 13, 2003, but Mr. McIntosh claimed that the five people shown onboard were all family and friends and none were paying customers.
On the Thanksgiving weekend of October 2003, the boat was stolen. It was found a few days later and it had been completely stripped. The theft was reported to the Ontario Provincial Police and investigated by Constable Poulton. A claim was made under the Royal insurance policy, but coverage was denied on the basis that there had been a breach of the absolute warranty against commercial use of the boat.
Mr. McIntosh sued both Royal and Oglivy & Ogilvy on the basis that he had been led to believe that so long as he did not take paying commercial customers on the boat, he would have valid insurance coverage. However, the Court did not believe his assertions to the effect that he had not had paying customers on the boat. For one thing, the Court believed the evidence of Constable Poulton, a disinterested witness, who testified to the effect that Mr. McIntosh had told him that the boat had been chartered for poker runs in the summer of 2003. Perhaps more compelling was the activity in the bank account of Offshore Performance Tours. This bank account was in the same branch of the Canadian Imperial Bank of Commerce (“CIBC”) in Windsor, in which Mr. McIntosh had his personal account. Monies were periodically deposited in the account of Offshore Performance Tours but Mr. McIntosh claimed that these did not represent revenues from operations. He claimed that they were monies that he deposited in the account in order to cover expenses related to marketing and promotion. However, he was unable to explain why, instead of simply transferring funds from his personal account at the CIBC to the account of Offshore Performance Tours in the same branch, he chose to withdraw large sums of cash and deposit them in an automatic teller machine in another town where the boat was located. Furthermore, he was unable to explain away a deposit for $401.25, which is equivalent to $375 + GST, and corresponds to the daily charter rate for one person on his boat. Nor could he explain away another deposit for $3,210.00, which corresponds to the daily charter rate for 8 people.
With respect to Ogilvy & Ogilvy, the court found that the advice given by Mr. Macauley to Mr. McIntosh had been wrong, in that it was incorrect for him to have asserted that Mr. McIntosh would have coverage under his pleasure policy, so long as he did not take paying customers on the boat. In fact, the activities of promotion and marketing undertaken by Mr. McIntosh probably would have constituted commercial activities and been in breach of the warranty. However, having found that Mr. McIntosh did in fact take paying customers on his boat, he would have been in breach of his warranty in any event and there was no causal link between Mr. Macauley’s bad advice and the denial of coverage.
McIntosh v. Royal & Sunalliance Insurance Company of Canada, 2007 FC 23 (CanLII)