When an insured car is damaged beyond repair and the insurer elects to take title to the salvage, the insurer is entitled to reduce its payment to its insured by the amount of the deductible in the policy. A five-panel bench of the Ontario Court of Appeal overturned McNaughton Automotive Ltd. v. Co-operators General Insurance Co. (2001), 54 O.R. (3d) 704 (ONCA) on the basis that McNaughton Automotive Ltd. was wrongly decided.

Segnitz v. Royal & SunAlliance Insurance Co. of Canada (Appeal by Dominion of Canada General Insurance Co. and Economical Insurance Group), [2005] O.J. No. 2436, Ontario Court of Appeal

In McNaughton Automotive Ltd. v. Co-operators General Insurance Co. (2001), 54 O.R. (3d) 704, the Ontario Court of Appeal determined that when a car is damaged beyond repair and the insurer elects to take title to the salvage, the insurer is not entitled to reduce its payment to its insured by the amount of the deductible in the policy. Leave to the Supreme Court of Canada was denied at McNaughton Automotive Ltd. v. Co-operators General Insurance Co., [2001] S.C.C.A. No. 451. Two years later the Ontario Legislature amended the statutory conditions contained in the Insurance Act R.S.O. 1990 c. 18, to authorize an insurer, in total loss cases, to take title to the salvage of the insured vehicle and to apply the deductible in the insurance policy to the loss. However, the Ontario Legislature did not make the legislative amendments retroactive.

A class action was commenced and certified for the return of deductibles to insureds from whom their automobile insurer had elected to take salvage of vehicles damaged beyond repair but did not reimburse the insured the amount of the deductible in the policy. The insurers brought a motion to strike out the Statements of Claim in the class action on the basis that McNaughton was wrongly decided and that the pleadings did not disclose a reasonable cause of action. The motions judge, Haines J., was sympathetic to the insurers’ submissions but concluded that the principles of stare decisis required him to follow McNaughton, and he dismissed the motion.

An appeal was made to the Ontario Court of Appeal who convened a five-panel bench to determine whether McNaughton was wrongly decided, and if so, should McNaughton be overruled. The Ontario Court of Appeal undertook a detailed analysis of the McNaughton decision and the legislation that the decision was based upon. The Court noted that up until 1993, insurers were unquestionably entitled to apply a deductible when taking salvage in total loss cases. The Court further noted that the legislative history of the amendments did not reflect any conscious legislative intent to change the right to apply deductibles in total loss cases and that this right had existed for many years. The Court concluded that all available indicators suggested the Legislature did not intend to change the pre-1993 right to apply deductible in total loss cases and concluded that the Ontario Court of Appeal had erred in its interpretation of the legislation in McNaughton.

The Ontario Court of Appeal did not criticize the chambers judge for applying stare decisis in refusing to strike the class action, noting that the motions judge properly considered himself bound to follow McNaughton. The Court noted that if the error in McNaughton was to be corrected, it fell upon the Ontario Court of Appeal, not the motions judge, to correct it.

The Court of Appeal next considered whether it would be appropriate to overrule McNaughton. The Court relied upon R. v. Bernard, [1988] 2 S.C.R. 833 at 849 specifically, Dixon C.J.C.’s dissenting judgment, for the proposition that there must be compelling circumstances to justify a departure from a prior erroneous decision. In determining whether circumstances justified overruling McNaughton, the Court followed the approach prescribed in R. v. White (1996), 29 O.R. (3d) 577 which requires a weighing of the advantages and disadvantages of correcting the error. R. v. White requires a consideration of the nature of the error, and the effect and future impact of correcting and maintaining the erroneous decision. The Court noted that the decision in McNaughton had been questioned by the Alberta Court of Appeal in Pauli v. Ace Ina Insurance, [2003] 6 W.W.R. 51, aff’d [2004] 10 W.W.R. 623 (AB C.A.), and by Tysoe J. of the British Columbia Supreme Court in Doyon v. Insurance Corp. of British Columbia (2004), 239 D.L.R. (4th) 749. In addition, the Court noted, amongst other things, that the Legislature had effectively overruled McNaughton by amending the legislation. The Ontario Court of Appeal concluded that it would be in the best interest for the state of the law in Ontario that they correct the McNaughton error. The appeal was allowed, and the actions were struck for failing to disclose a reasonable cause of action.

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