Strict Compliance: Don’t Risk It!

Has this ever happened to you – an insured binds an automobile insurance policy, pays three months of the insurance premiums, and their fourth payment returns as an NSF? This is not an uncommon occurrence. It allows an insurer to terminate the policy for non-payment of premiums. However, the process to effectively terminate a policy requires strict compliance.

Statutory Conditions 11 – The Insurer’s Obligations

Ontario Regulation 777/93, titled Statutory Conditions – Automobile Insurance, applies to all automobile insurance contracts in Ontario. Statutory Condition 11 specifically addresses an insurer’s obligations when terminating a policy for non-payment of premiums. The condition outlines the following elements, which must be satisfied in order for an insurer to successfully terminate a policy:

1. The insured must be in arrears with respect to their premium.
2. A termination letter must be sent to the insured via registered mail or personal service. Depending on which method is used, the condition prescribes the notice period that must be given.
3. The termination notice shall:
   1. State the amount due under the contract and identify any administrative fees that must be paid
   2. State that the contract will terminate at 12:01 a.m. of the day specified in the letter
   3. State that the arrears are payable in cash or money order or certified cheque
   4. State an Ontario address where payment can be made

Statutory Condition 11(5) states that the notice period begins to be counted the day after the day on which the termination letter is mailed.

There is no obligation for the insurer to establish that the insured actually received the termination letter. The insurer is only required to establish that a termination letter was sent to the insured’s last known address either by registered mail or personal service.

Strict Compliance

Justice Chalmers was one of the most recent Superior Court judges who had to consider a termination case on appeal from a priority arbitration. In Definity v Allstate and Gore, Definity received an application for accident benefits and began paying accident benefits. After investigating, Definity identified that the claimant previously had a policy with Gore. Definity commenced an arbitration against Gore. Gore took the position that its policy was terminated for non-payment of premiums before the date of loss, and that its policy was not in effect. The matter proceeded by way of a preliminary issue before Arbitrator Bialkowski who concluded that the Gore termination was invalid, and the Gore policy was therefore in effect on the date of loss.

On appeal, Justice Chalmers reviewed Statutory Condition 11 and assessed all of the factors set out within. The court noted that a standard of perfection was not required and, in reality, not achievable. However, when it comes to the “essential elements” of a termination, there must be strict compliance.

Justice Chalmers quoted Arbitrator Bialkowski noting the “essential elements” of a termination were:

1. The amount due, together with any administration fee being sought;
2. The date on which the termination is to take place; and,
3. That the insured has a right to avoid termination by paying the amount outstanding and the specific administration fee by noon on the day before the date on which the termination is to take place.

Justice Chalmers quoted past cases confirming that the insurer must prove that it strictly complied with the Statutory Condition if it seeks to unilaterally terminate a policy mid-contract. The repercussion of a non-compliant termination is that the policy remains in effect until such time as the policy is properly terminated in compliance with Statutory Condition 11.

In Definity v Allstate and Gore, the Gore termination letter was largely compliant; however, it included a single amount owing that tallied the outstanding premium and the administrative fee. Arbitrator Bialkowski concluded, and it was upheld on appeal by Justice Chalmers, that the Statutory Condition requires an insurer to separate the premium owing and the administration fee, which Gore did not do. In turn, Gore’s termination letter did not allow the insured to see the sum of the administration fee and confirm that it was reasonable and did not exceed the amount an insurer is permitted to charge under the regulation.

Gore’s policy was found to not have been properly terminated, rendering it still in effect on the date of loss.

The Lesson

It is not uncommon for insurers to terminate policies for non-payment of premiums; however, insurers must ensure that they are terminating such policies in compliance with Statutory Condition 11. The courts have consistently asserted that the “essential elements” must be strictly adhered to in order for a termination to be effective. Failing to do so means that the policy will be in effect in perpetuity, until it is terminated in compliance with the Statutory Condition.

See Definity Insurance Company v Allstate Insurance Company and Gore Mutual Insurance Company, not published, February 22, 2024