Jevco Insurance Company v. Wawanesa Insurance Company. Jevco Insurance Company v. Pilot Insurance Company

Jevco Insurance Company v. Wawanesa Insurance Company Jevco Insurance Company v. Pilot Insurance Company [Indexed as: Jevco Insurance Co. v. Wawanesa Insurance Co.] 42 O.R. (3d) 276 [1998] O.J. No. 5037 Court File Nos. RE6151/88 and 97-CV-134700 Ontario Court (General Division) H. Spiegel J. December 3, 1998 Insurance Automobile insurance Statutory accident benefits Loss transfer indemnity Insurer liable for loss transfer indemnity pursuant to s. 275 of Insurance Act notwithstanding fact that insured's automobile driven by person without consent of insured Insurer not liable for loss transfer indemnity pursuant to s. 275 of Insurance Act where its insured's automobile is driven by excluded driver Insurance Act, R.S.O. 1990, c. I.8, s. 275. The insurer J Co. appealed from two arbitration awards. In one award ("the W Co. award"), the arbitrator ruled in favour of the insurer W Co. and held that an insurer who might otherwise be liable for loss transfer indemnity under s. 275 of the Insurance Act, R.S.O. 1990, c. I.8 is not liable where the insured vehicle is being driven without the consent of its insured owner. In the other award ("the P Co. award"), the arbitrator dismissed J Co.'s claim against P Co. for loss transfer indemnity pursuant to s. 275 of the Act on the grounds that the automobile insured by P Co. was being driven by an excluded driver named in an Excluded Driver Endorsement in the P Co. policy and that s. 240 of the Act precludes the operation of s. 275 in such circumstances. Held, the appeal from W Co. award should be allowed; the appeal from the P Co. award should be dismissed. The arbitrator made the fundamental error in the W Co. award of applying third-party liability principles to the loss transfer indemnity provision in s. 275 of the Act. The second party insurer's obligation to indemnify derives from it having a policy in force on a class of automobile specified by the regulations that was involved in the incident from which the responsibility to pay statutory accident benefits arose. The wording of s. 275(1) focuses on the "insurers" of automobiles. Section 9(2) of Reg. 664, R.R.O. 1990 says that a second party insurer "under a policy insuring any class of automobile... is obligated to indemnify a first party insurer". This supports the conclusion that if the second party insurer's policy insures the automobile in the circumstances described in s. 275(1), the

second party insurer has an obligation for loss transfer indemnity. There is nothing in s. 275(1) or the regulation to suggest that the second party insurer's obligation is dependent on the existence of enforceable third-party liability coverage in its policy. Section 275 creates a statutory obligation, imposed on one insurer to indemnify another, that has nothing to do with the obligation of an insurer to indemnify its own insured for thirdparty liability. Section 275(2) incorporates the fault determination rules solely as a mechanism for determining the monetary extent of the obligation imposed on the second party insurer by s. 275(1). This does not make the obligation for loss transfer conditional on the fault of an insured whom the second party insurer insures against third-party liability. Section 239(1) of the Act does not have the result that an automobile driven by a without-consent driver is not "insured" within the meaning of s. 275(1). Even though s. 239(1) does not mandate coverage for the without-consent driver, there is nothing in s. 239(1) that affects the coverage of the person named in the contract in respect of the automobile described in the contract. The arbitrator in the P Co. arbitration did not err in holding that s. 240 of the Act excludes the obligation of the first party insurer for loss transfer indemnity when the excluded driver is driving the automobile. Cases referred to Ontario (Minister of Transport) v. Economical Mutual Insurance Co. (1973), 1 O.R. (2d) 459 (H.C.J.); R. v. Z. (D.A.), [1992] 2 S.C.R. 1025, 76 C.C.C. (3d) 97, 5 Alta. L.R. (3d) 1, 16 C.R. (4th) 133, 140 N.R. 237; Ukranian (Fort William Credit Union) Ltd. v. Nesbitt Burns Ltd. (1997), 36 O.R. (3d) 311, 152 D.L.R. (4th) 640 (C.A.) Statutes referred to Compulsory Automobile Insurance Act, R.S.O. 1990, c. C.25, s. 2(1)(b) Insurance Act, R.S.O. 1990, c. I.8 (as amended S.O. 1990, c. 2), ss. 1 "insurer", 224(1) "insured", 239, 240, 258, 263, 275 Motor Vehicle Accident Claims Act, R.S.O. 1990, c. M.41 Rules and regulations referred to Automobile Insurance Regulation (Insurance Act), R.R.O. 1990, Reg. 664, s. 9 APPEAL from two arbitration awards. Stanley C. Tessis, for applicant, Jevco Insurance Company. Brian C. Atherton, for respondent, Wawanesa Insurance Company. Harry J. Daniel, Q.C., for respondent, Pilot Insurance Company.

H. SPIEGEL J.: Nature of the Proceedings In the first styled application, Jevco Insurance Company ("Jevco") appeals from the interim award of the learned arbitrator, A.E. Ayers, Q.C., dated August 31, 1997, on a preliminary issue of law wherein he ruled in favour of Wawanesa Insurance Company ("Wawanesa") holding that an insurer who might otherwise be liable for loss transfer indemnity under s. 275 of the Insurance Act, R.S.O. 1990, c. I.8 (the "Act") is not liable where the insured vehicle is being driven without the consent of its insured owner. In the second styled application, Jevco appeals from the award of the learned arbitrator, the Honourable R.S. Montgomery, Q.C., dated October 2, 1997, dismissing its claim against Pilot Insurance Company ("Pilot") for loss transfer indemnity pursuant to s. 275 of the Act, on the grounds that the automobile insured by Pilot was being driven by an excluded driver named in an excluded driver endorsement ("OEF 28A") in the Pilot policy and that s. 240 of the Act precludes the operation of s. 275 in such circumstances. The issue in the Wawanesa appeal is whether an insurer is liable for loss transfer indemnity pursuant to s. 275 of the Act while its insured's automobile is being driven by a person without the consent of the insured owner. The issue in the Pilot appeal is whether an insurer is liable for loss transfer indemnity pursuant to s. 275 of the Act while its insured's automobile is being driven by an excluded driver. This appears to be the first time that either of these issues have been considered by a court. Both appeals involve the interpretation s. 275 of the Act and the relevant regulations, as well as s. 240 and other related sections of the Act. They were heard together, with counsel for Jevco presenting his argument in respect of both appeals at the same time. It is therefore appropriate to deal with both applications together. Relevant Legislative Provisions The pertinent portions of s. 275 of the Act are: 275(1) The insurer responsible under subsection 268(2) for the payment of statutory accident benefits to such classes of persons as may be named in the regulations is entitled, subject to such terms, conditions, provisions, exclusions and limits as may be prescribed, to indemnification in relation to such benefits paid by it from the insurers of such class or classes of automobiles as may be named in the regulation involved in the incident from which the responsibility to pay statutory accident benefits arose. (2) Indemnification under subsection (1) shall be made according to the respective degree of fault of each insurer's insured as determined under the

fault determination rules. The regulation referred to in s. 275(1) is the Automobile Insurance Regulation, R.R.O. 1990, Reg. 664, the pertinent portions of which are: 9(1) In this section, "first party insurer" means the insurer responsible under subsection 268(2) of the Act for the payment of statutory accident benefits;..... "second party insurer" means an insurer required under s. 275 of the Act to indemnify the first party insurer. (2) A second party insurer under a policy insuring any class of automobile other than motorcycles, off-road vehicles and motorized snow vehicles is obligated under section 275 of the Act to indemnify a first party insurer, (a) if the person receiving statutory accident benefits from the first party insurer is claiming them under a policy insuring a motorcycle and, (i) if the motorcycle was involved in the incident out of which the responsibility to pay statutory accident benefits arises... Section 240 reads as follows: 240. If a contract evidenced by a motor vehicle liability policy names an excluded driver, the insurer is not liable to any person under the contract or under this Act or the regulations for any loss or damage that occurs while the excluded driver is driving an automobile insured under the contract, except as provided in the Statutory Accident Benefits Schedule. The following provisions of the Act are also relevant to these applications: 224(1) In this Part,..... "insured" means a person insured by a contract where named or not and includes every person who is entitled to statutory accident benefits under the contract whether or not described therein as an insured person......

239(1) Subject to section 240, every contract evidenced by an owner's policy insures the person named therein, and every other person who with the named person's consent drives, or is an occupant of, an automobile owned by the insured named in the contract and within the description or definition thereof in the contract, against liability imposed by law upon the insured named in the contract or that other person for loss or damage, (a) arising from the ownership or directly or indirectly from the use or operation of any such automobile; and (b) resulting from bodily injury to or the death of any person and damage to property. (2) A lack of consent does not invalidate such statutory accident benefits as are set out in the Statutory Accident Benefits Schedule. The Wawanesa Appeal Factual background On June 8, 1994, a motorcycle operated by David Sampara and insured by Jevco came into collision with a 1981 Dodge automobile that was insured by Wawanesa and owned by Rachelle Martel and driven by Danny Landry. David Sampara was injured in the accident and was paid statutory accident benefits (SABs) by Jevco, which claimed indemnification from Wawanesa pursuant to s. 275. Wawanesa denied the claim on the basis that the Martel vehicle was being driven by Landry without the consent of the insured owner. Both parties agreed to refer the following preliminary issue of law to the learned arbitrator: Whether an insurer who might otherwise be liable for loss transfer indemnity pursuant to the provisions of s. 275 of the Insurance Act, R.S.O. 1990, c. I.8 is liable where there is: (a) (b) a lack of consent as referred to in s. 192 of the Highway Traffic Act, R.S.O. 1990, c. H.8: a lack of consent as referred to in s. 239 of the Insurance Act, R.S.O. 1990, c. I.8. Reasons of the learned arbitrator The learned arbitrator found that entitlement to indemnification under s. 275 was conditional upon a determination of fault. Section 275(2) incorporates the fault determination rules ("FDR") as the mechanism by which the degree of fault is determined. The learned arbitrator observed that these rules had been used for many years by insurers as a means of determining the liability of their respective insureds with respect to property damage claims. In these situations an insurer would always have a complete defence to the claim of another insurer to be indemnified for property damage if

its insured vehicle was being driven without the consent of the insured. He felt that none of the amendments to the Act since 1990 eliminated such a defence. Although he did not explicitly say so, he must have concluded that this defence was therefore available to a second party insurer in a claim for loss transfer indemnity under s. 275 of the Act. He rejected the argument of Jevco that a person driving without consent is an "insured" within the definition in s. 224 of the Act. He held that someone driving without consent may be an "insured" under s. 224 for the limited purpose of receiving accident benefits pursuant to Part B of the Standard Motor Vehicle Liability Policy but not be an insured for any other purpose. He noted that ss. 2 to 5 of the FDR all use the word "insured". He reasoned that since the FDR only apply to liability for an accident, the only part of a Standard Motor Vehicle Liability Policy that is relevant is Part A, which deals with third-party liability. In his opinion, the definition of "insured" with respect to "motor vehicle liability policies" is found in s. 239 of the Act, which specifically excludes a without-consent driver from coverage. He held that the FDR only apply where there is an "insured" (named or unnamed) within the meaning of s. 239 of the Act. Since a without-consent driver is not an insured under s. 239, there is no "insured" to whom fault can be allocated and therefore, no insurer liable for loss transfer indemnity. The learned arbitrator also referred to s. 240 of the Act as supporting his conclusion. He felt the wording of this section made it clear that there is no right to loss transfer indemnity when the automobile is driven by an excluded driver, even though the excluded driver would still be an insured for the purpose of limited accident benefits coverage under Part B of the policy. He could not imagine that the legislature would have intended a different result when the vehicle is being driven by a "car thief". It should be noted that the learned arbitrator, when he referred to the Parts A and B of the Standard Motor Vehicle Liability Policy, was likely referring to the Standard Automobile Policy, Owner's Policy (O.P.F. No. 1) in which third party liability and accident benefits are dealt with in Part A and Part B respectively. Counsel agree that the Wawanesa policy in force at the material time was the Ontario Automobile Policy, Owner's Policy (O.A.P. No. 1) in which third-party liability and accident benefits are dealt with in ss. 3 and 4 respectively. Although O.P.F. No. 1 is in the traditional language of an automobile policy and O.A.P. No. 1 is in "plain language", counsel agree that nothing turns on the difference in wording between the two forms of the policy. Argument Jevco submits that the learned arbitrator erred in applying principles applicable to the operation of the third party liability provisions of the Standard Automobile Policy to the operation of the loss transfer provisions of s. 275. Jevco contends that s. 275 creates a statutory right of indemnity between two insurers and as long as there is a policy of a second party insurer in force, the right to indemnification applies irrespective of any rights between the insurer and the insured or the insured and third parties.

Jevco contends that the fault allocation under the FDR is premised on the behaviour of drivers of the insured vehicle and not on the driver being insured under the policy of the second party insurer. Further, it contends that the reason the word "insured" is used in certain sections of the FDR is because one of the purposes of these rules is to permit an insured to recover against its insurer for property damage in the same manner as if its insurer insured the tort-feasor: see s. 263 of the Act. Jevco also argues that even if the learned arbitrator was correct in finding that it was necessary that there be an "insured" to whom fault was attributable before an insurer incurs an obligation for loss transfer indemnity, the without-consent driver is an "insured" because he is a person entitled to SABs and therefore falls within the definition of "insured" as set out in s. 224(1) of the Act. Wawanesa submits that the learned arbitrator made no error in his decision. It contends that loss transfer is not an absolute right because it is dependent upon the respective degree of fault as determined by the FDR of each insurer's insured loss transfer is a fault concept similar to the third-party liability provisions of the Standard Automobile Policy and that s. 239 provides the only relevant definition of "insured". Since s. 239(1) of the Act clearly excludes the insurer's responsibility for the third party liability of the "at fault" conduct of a without-consent driver, it would be inconsistent to deviate from this principle when applying the loss transfer indemnity provisions of the Act. Wawanesa raises two further issues. First, it submits that s. 275(1) provides for loss transfer indemnity only between "insurers" of vehicles involved in an accident. It contends that, as a result of s. 239(1), an automobile being operated by a without-consent driver is "uninsured", therefore, there is no "insurer" of such a vehicle. Secondly, it argues that there is no obligation to indemnify unless there is some degree of fault on an "insurer's insured" as that term is used in s. 275(2) and the term "insured" does not include a without-consent driver even though that person may be an "insured" by virtue of s. 224 of the Act. Discussion I will say at the outset that I completely agree with the learned arbitrator's statement that the numerous "cutting and pasting exercises" to which the Insurance Act has been subjected since 1990 have created ambiguities. These ambiguities undoubtedly made his task a difficult one. Nevertheless, I have concluded that he made the fundamental error of applying third-party liability principles to the loss transfer indemnity provision in s. 275, resulting in an erroneous determination of the issue before him. In my view, the second party insurer's obligation to indemnify derives from it having a policy in force on a class or automobile specified by the regulations that was involved in the incident from which the responsibility to pay SABs arose. The wording of s. 275(1) focuses on the "insurers" of automobiles. Section 9(2) of Reg. 664 says that a second party insurer "under a policy insuring any class of automobile... is obligated to indemnify a first party insurer". This supports the conclusion that if the second party

insurer's policy insures the automobile in the circumstances described in s. 275(1), the second party insurer has an obligation for loss transfer indemnity. There is nothing in s. 275(1) or the regulation to suggest that the second party insurer's obligation is dependent on the existence of enforceable third-party liability coverage in its policy. Section 275 creates a statutory obligation, imposed on one insurer to indemnify another that has nothing to do with the obligation of an insurer to indemnify its own insured for third-party liability. Third party liability is liability imposed by law on an insured. Loss transfer indemnity is liability imposed by law on an insurer. The fact that the FDR are used in some situations to determine fault for the purpose of establishing liability does not justify the conclusion that they deal only with third-party liability. This erroneous conclusion led the learned arbitrator to the third party liability portion of the standard motor vehicle liability policy and then to s. 239(1) of the Act. He felt that s. 239(1) provided the only definition of "insured" for "motor vehicle liability policies" and, therefore, the meaning which must be given to the word "insured" in ss. 2 to 5 of the FDR. In my opinion, the learned arbitrator placed undue emphasis on the fact that the word "insured" is used in the FDR in ss. 2 to 5. As counsel for Jevco points out, the word "driver" is used in subsequent sections, which he submits envisages a determination of fault of a driver who is not necessarily an insured. On balance, I do not think that the use of the word "insured" in some sections of the FDR and the use of the word "driver" in others is of assistance in interpreting s. 275. In my view, s. 275(2) incorporates the FDR solely as a mechanism for determining the monetary extent of the obligation imposed on the second party insurer by s. 275(1). This does not make the obligation for loss transfer conditional on the fault of an insured whom the second party insurer insures against thirdparty liability. Moreover, even if an at fault "insured" were necessary, I find that the learned arbitrator erred in holding that the "definition of 'insured' with respect to motor vehicle liability policies is found in s. 239" of the Act and that this was the only meaning of "insured" that could be used for the purpose of the loss transfer indemnity provisions. Indeed s. 239 deals with only one type of motor vehicle liability policy, i.e., an owner's policy, and describes one type of coverage which must be provided in such a policy. Section 239(1) limits such coverage to the person named in the policy and "every other person who with the named person's consent drives" but this does not constitute a definition of the term "insured" for motor vehicle liability policies, let alone the only definition for the purpose of loss transfer indemnity. In my view the only definition of the term "insured" for the purposes of Part VI of the Act is set out in s. 224(1), which provides in part:... "insured" means a person insured by a contract whether named or not and includes every person who is entitled to Statutory Accident Benefits under the contract whether or not described therein as an insured person.

(Emphasis added) The learned arbitrator found that this definition was not applicable because a person could be an insured under s. 224(1) for the purpose of "receiving specified accident benefits pursuant to Part B of the Standard Motor Vehicle Liability Policy but not be an insured for any other purpose". He relied on the concept expressed by Lerner J. in Ontario (Minister of Transport) v. Economical Mutual Insurance Co. (1973), 1 O.R. (2d) 459 (H.C.J.), that a policy of automobile insurance may cover different risks, each of which could be insured against in a separate policy. While this concept may have been applicable in the factual situation of that case, it does not provide any basis for me to ignore the express statutory definition of "insured" in the interpretation of s. 275. The Act gives a defined meaning of "insured" for Part VI, and s. 275 does not qualify the term "insured". The subject-matter of s. 275 is loss transfer indemnity for SABs. Section 275(5) provides that an arbitration with respect to indemnification is stayed where any of the "insurers and an insured" are parties to a proceeding in which entitlement to SABs is in issue. The word "insured" there clearly means a person entitled to SABs. Even though s. 275(2) speaks of fault of the insured, I see nothing inconsistent in giving "insured" the same meaning in s. 275(2). It follows therefore that I do not agree with Wawanesa's contention that a without-consent driver is not an "insurer's insured" as that term is used in s. 275(2). I do not agree with Wawanesa's contention that as a result of s. 239(1), an automobile driven by a without-consent driver is not "insured" within the meaning of s. 275(1). Even though s. 239(1) does not mandate coverage for the without-consent driver, there is nothing in s. 239(1) that affects the coverage of the person named in the contract in respect of the automobile described in the contract. For example, in a situation where the loss or damage results from the failure of the named insured to maintain the automobile in a safe operating condition, or for some other negligent act of the named insured unrelated to the conduct of the without-consent driver, liability could be "imposed by law" on the named insured. Section 239(1) clearly requires the policy to insure the named insured against this type of liability even though the automobile is being driven by the without-consent driver. In my view, in such circumstances the automobile remains "insured" within the meaning of s. 275(1). In my view, the conclusion I have reached is consistent with the purpose of the loss transfer indemnity scheme. I accept as correct the following statement of the Ontario Insurance Commission in its bulletin 11/94 dealing with loss transfer at p. 2: Loss transfer was introduced in June, 1990, in order to address the cost implications of moving away from tort-based compensation and to a first party accident benefits provided on a no-fault basis. Since June, 1990, insureds look to their own insurers for accident benefits instead of seeking compensation from third parties. Certain types of vehicles that might have been less likely to experience bodily injury claims under a tort-based compensation system are more likely to require accident benefits

payments for such claims under a no-fault system. Loss Transfer balances the cost of providing compensation on a first party basis between these specified classes of vehicles. The legislature recognized that insurers of certain classes of automobiles such as motorcycles and snowmobiles will bear inordinately high costs of providing SABs because their drivers are more likely to suffer serious personal injuries than the drivers of other classes of automobiles. The loss transfer indemnity scheme set out in s. 275 is meant to shift those costs in some circumstances from the first party insurer to the second party insurer. In my view, the legislature has not demonstrated an intention to limit those circumstances to cases where the second part insurer is responsible to indemnify the driver of its automobile against third party liability. Having regard for the purpose of the legislation, I see no compelling reason why it should be so limited. For the reasons which will be discussed in the disposition of the Pilot appeal, I agree the learned arbitrator's interpretation of the effect of s. 240 on loss transfer indemnity in the case of an excluded driver. However I do not agree with his conclusion that the legislature must have intended the same result when the vehicle is driven by a "car thief". I see no reason why the insurer of a vehicle that is stolen without any fault on the part of the owner should necessarily be treated in the same manner as the insurer of a vehicle whose owner and driver have both breached an express condition upon which the insurer relied in issuing the policy. Moreover, I have found that the legislature in establishing the excluded driver scheme intended, for reasons which are consistent with the object and purpose of that scheme to relieve the insurer from any liability for loss or damage (except for SABs) which occurs while the automobile is being driven by an excluded driver. In my view no such intention has been demon strated in the case of the insurer of the automobile being driven by the without-consent driver. Disposition I would therefore allow the appeal of Jevco, set aside the interim ruling of the learned arbitrator and declare that an insurer is liable for loss transfer indemnity pursuant to s. 275 notwithstanding the lack of consent described in the preliminary issue of law. Jevco is entitled to its costs of the appeal. The parties have agreed that it is not necessary for me to deal with the quantum of costs. The Pilot Appeal Factual background On February 19, 1995, an automobile owned by Patricia Maracle and driven by Gary Maracle was involved in an accident with a motorcycle owned and operated by Richard Cosby. The Maracle automobile was a listed vehicle under an Ontario Automobile Owners Policy ("O.A.P. No. 1") issued by Pilot to Patricia Maracle. This policy contained an excluded driver endorsement (OEF 28A") that named Gary Maracle as an excluded driver. Jevco paid SABs to Richard Cosby and sought indemnification from

Pilot for such payments pursuant to s. 275 of the Act. Pilot declined to indemnify Jevco on the grounds that the collision occurred while the automobile was being driven by an excluded driver named in the OEF 28A appended to the Pilot policy. The parties referred the matter to arbitration by the Honourable R.S. Montgomery, Q.C. Reasons of the learned arbitrator The learned arbitrator restricted his enquiry to the issue of the scope of operation of s. 240 of the Act. He referred to s. 1 of the Act, which defines "insurer" as "the person who undertakes or agrees or offers to undertake a contract", and held that the reference to "person" in s. 240 includes an insurer such as Jevco. He concluded that s. 240 was intended to exclude any obligation of the insurer (except for SABs) when an excluded driver is operating the motor vehicle, including the obligation for loss transfer indemnity pursuant to s. 275. The position of the parties Jevco argues that s. 275 is a comprehensive code dealing with loss transfer indemnity which is only subject to such "terms, conditions, provisions, exclusions and limits as may be prescribed." It is contended that the word "prescribed" refers only to the regulations. Therefore it contends the right to loss transfer indemnity is not subject to any other provision of the Act, and there is nothing in the regulations which excludes or limits loss transfer indemnity when an excluded driver is driving the automobile. Jevco submits that the learned arbitrator erred in concluding that s. 240 excluded the obligation of an insurer for loss transfer indemnity. Jevco contends that s. 240 was intended to extend protection to an insurer against liability to third parties when an excluded driver is operating the automobile that causes the loss or damage. It submits that the use of the words "loss or damage" supports the interpretation that it is the loss or damage suffered by the victim of the negligently operated automobile that is the subjectmatter of s. 240. Jevco further argues that "loss or damage" is not an appropriate term to describe the indemnity for contractual SABs liability provided for in s. 275. It relies on the case of Ukranian (Fort William Credit Union) Ltd. v. Nesbitt Burns Ltd. (1997), 36 O.R. (3d) 311, 152 D.L.R. (4th) 640 (C.A.), for the proposition that a claim for contribution and indemnity is not a claim for damages. Jevco further submits that the scope of operation of s. 240 is restricted to the insurer's liability with respect to loss or damage that occurs "while the excluded driver is driving". SABs paid to an insured do not constitute loss or damage which occurs "while the excluded driver is driving". Since the liability of the second party is to indemnify the first party insurer for SABs, this is not a liability within the ambit of the section. Pilot submits that the words "the insurer is not liable to any person under the contract or under this Act or the regulations" makes it clear that the section is broad enough to cover loss transfer indemnity, which is an obligation that flows from the Act, the specifics and mechanics of which are set out in the regulations.

Jevco responds by submitting that "under the contract or under this Act or the regulations" simply addresses the fact that the Act gives a direct right of action to a judgment creditor of an insured (s. 258) and the regulations could be argued as creating a statutory insurance policy. Pilot submits that s. 240 cannot be limited in its operation to the insurer's obligation with respect to third party liability because the section makes a specific exception with respect to the insurer's liability as provided for in the SABs schedule. It contends this only makes sense if the scope of operation of the section is broad enough to include SABs in the absence of the exception. Alternatively, Pilot further submits that even if s. 240 does not exclude Jevco's claim, that Pilot is not obliged to indemnify Jevco because under s. 275 this obligation rests only on an "insurer" of an automobile involved in the accident. Pilot argues that the O.E.F. 28A endorsement clearly states that insurance provided by the policy is eliminated while the excluded driver drives the automobile. The effect of the endorsement is that there is no insurance and therefore Pilot is not an "insurer" of the Maracle automobile within the meaning of s. 275, while the excluded driver is driving. Discussion While the reference in s. 275 to such "terms, conditions, provisions, exclusions and limits as may be prescribed" may indeed refer to the regulations, the section does not say it is subject only to such "exclusions and limits". Accordingly, I cannot agree with Jevco's submission that s. 275 is not subject to other provisions of the Act. In my view, the words "under this Act or the regulations" in s. 240 are certainly broad enough to encompass the liability for loss transfer indemnity. I cannot accept Jevco's contention that these words are intended solely to address the direct cause of action created by s. 258 and the concept that the regulations may be viewed as creating a statutory policy. Nor do I agree with Jevco's submission that s. 240 was intended simply to extend protection to an insurer against liability to third parties created by s. 239(1) for the at-fault conduct of the excluded driver. If this was so then the language of s. 239(1) would have been more closely followed. Similarly it would not make sense to have a specific exception relating to SABs in s. 240 unless, without the exception, the insurer's liability to pay SABs would be included in the scope of the section which leads to the conclusion that the scope is wider than third party liability. While the word damage may not be appropriate to describe the indemnity for SABs, the word "loss" is broad enough to include the payment of the SABs for which the first party insurer seeks indemnity, especially since s. 275 is referred to as the loss transfer provision. Is the loss, however, a loss "which occurs while the excluded driver is driving"? The insurer's liability under s. 275 is to indemnify the first party insurer for its loss resulting from payment of SABs. The payment of SABs may result or arise indirectly from the

driving but to say that it occurs while the excluded driver is driving seems to stretch the words beyond their ordinary meaning. However in interpreting a statutory provision a court must look not only at the words used by the legislature in their ordinary sense but also in the context of the scheme and purpose of the legislation and to give the words a meaning which best fits the object and purpose of the legislative scheme: see R. v. Z. (D.A.), [1992] 2 S.C.R. 1025, 76 C.C.C. (3d) 97. I have already discussed the object and purpose of the loss transfer indemnity scheme in dealing with the Wawanesa appeal. I must also consider the purpose of the excluded driver concept and determine whether s. 240 was intended to override or exclude the operation of the loss transfer indemnity scheme. Prior to 1990, if an insurer was asked to provide automobile coverage to a person in circumstances where it appeared that the automobile would be available to another person whom the insurer regarded as a substandard driver, the insurer had only two options, it could charge a premium which reflected the perceived risk involved in the other person driving, or it could decline the request for insurance. Even if the person seeking coverage undertook that the other person would not drive the automobile, there was nothing in the Act which would relieve the insurer from liability to third parties if this undertaking was breached. The result was that the person would have to pay the higher premium or go without coverage which was not an acceptable option in view of the compulsory automobile insurance legislation. The excluded driver scheme was designed to remedy this unsatisfactory situation. The scheme was implemented by Bill 68, S.O. 1990, c. 2 which permitted the naming of persons as excluded drivers in contrac ts of automobile insurance and which amended a number of Acts to grant protection from liability to the insurers issuing such contracts if the automobile was driven by the excluded driver. In addition to s. 240, the amendments to the Act included: (a) section 225 of the Act which provides that except as provided in the SABs schedule, the insured under a contract shall be deemed not to include any person who sustains loss or damage while any automobile insured under the contract is being used or operated by an excluded driver; (b) section 265(3) of the Act which provides that except as provided in the SABs schedule, a person who sustains loss or damage while the insured automobile is being used or operated by an excluded driver shall be deemed not to be a person insured under the contract in which the excluded driver is named for the purpose of uninsured motorist coverage. At the same time, amendments were made to the Compulsory Automobile Insurance Act, R.S.O. 1990, c. C.25 ("CAIA") and the Motor Vehicle Accident Claims Act, R.S.O. 1990, c. M.41 ("MVAC") which provided that if a motor vehicle insured under a contract

was driven by an excluded driver, the motor vehicle was deemed to be an uninsured motor vehicle for the purpose of these Acts. The effect of the amendment to the CAIA makes an owner who permits an excluded driver to drive the motor vehicle guilty of an offence under s. 2(1)(b) of that Act. The effect of the amendment to the MVAC is that a person who suffers injury or death arising out of the use or operation of a motor vehicle by an excluded driver can make a claim against the Motor Vehicle Accident Claims Fund ("the Fund"). These amendments indicate that the legislature intended to extend to the insurer a very broad scope of protection from liability when the excluded driver is driving. I find it difficult to believe that the legislature would have intended to protect the insurer of the automobile being driven by the excluded driver from liability at the expense of the Fund and not have intended s. 240 to protect such an insurer from liability for loss transfer indemnity under s. 275 of the Act. It seems to me that the interests of the publicly financed Fund are at least as worthy of protection as the interests of the first party insurer claiming loss transfer indemnity. In my view such an interpretation of s. 240 best ensures the attainment of the object and purpose of the excluded driver scheme and does not significantly impair the operation of the loss transfer indemnity scheme. I therefore conclude that the learned arbitrator did not err in holding that s. 240 excludes the obligation of the first party insurer for loss transfer indemnity when the excluded driver is driving the automobile. In view of the conclusion that I have reached, it is not necessary to deal with Pilot's alternative submission that they were not "insurers" of the Maracle automobile within the meaning of s. 275(1) while it was being driven by the excluded driver. Disposition The appeal of Jevco from the award the learned arbitrator is therefore dismissed with costs. The parties have agreed that it is not necessary for me to deal with the quantum of costs. I would like to express my gratitude to all counsel for their very capable and comprehensive written and oral submissions. Appeal from W. Co. award allowed; appeal from P. Co. award dismissed.