A contract of sale involving payment through installements will not be treated as a rental agreement

Insured equipment is not excluded from coverage by a rental exclusion clause where title remains with the insured even though possession has passed on to a third party if possession is transferred pursuant to a contract of sale.

Economical Insurance Group (c.o.b. Plant Hope Adjusters Ltd) v. Master Forestry Ltd., [2012] N.S.J. No. 536, October 11, 2012, Nova Scotia Supreme Court, D. MacAdam J.

This was an appeal from an adjudicator’s decision of the Small Claims Court. The insured claimed against its insurer for the loss of a piece of machinery caused by a fire in early 2010. In 2007, the insured delivered possession of the machine to a third party pursuant to a conditional sales agreement. The third party initially made significant monthly payments to the insured; however, the payments ceased prior to the fire incident. The insured filed a proof of loss with the insured in 2010 which was denied by the insurer.

The insurance policy excluded property “properly insured which is rented to others”. However, an equipment endorsement was included in the policy providing that equipment rented out by the insured to other contractors as part of their regular operations was allowed. The insurer claimed the exclusion clause applied as the equipment had been rented out to a third party at the time of its demise. Alternatively, the equipment had been sold and therefore the insured had no insurable interest. In the further alternative, the insurer said a one year limitation period applied under the Insurance Act and the insured was time barred from claiming. The insurer also claimed the transfer of possession of the equipment and failure to ensure monthly payments or locate the equipment constituted a material change in the risk.

The Court held the insured retained ownership over the equipment at issue as title did not pass until completion of all payments. It also found that the equipment had not been rented to the third party, the equipment had clearly transferred in possession pursuant to a contract of sale. Applying the doctrine of contra proferentum, there was nothing in the policy limiting the insured from selling insured equipment under a conditional sales contract wherein possession would be delivered to the purchaser while title remained with the insured. In support of this finding, the Court referred to the endorsement as acknowledgement by the insurer that coverage could apply where possession of the insured property had been transferred to a third party. It was also found that nothing the insured did, or failed to do, created a material change in the risk.

The insured relied on Statutory Condition 14 under the Nova Scotia Insurance Act, R.S.N.S. 1989, c. 231 and s. 3(2) of the Limitations of Action Act, R.S.N.S. 1989, c. 258 which provides that a Court may reject a limitation defence where it is equitable to do so. The insurer and the insured were engaged in correspondence but the insurer failed to give any warning it was invoking a limitation defence when it was in possession of all the facts it needed to determine it would deny the claim. The Court, referred to other equitable considerations and concluded it was equitable to deny the limitation defence.

This case was digested by Djuna M. Field and edited by David W. Pilley of Harper Grey LLP.

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