Policy interpretation drives the bus

Coverage granted under commercial automobile policy for bus involved in an accident the day after acquisition

Insurance law – Automobile insurance – Ownership of vehicle – Material change in risk – Interpretation of policy – Duty to defend – Insurer – Rights, duties and liabilities

PK Construction Ltd. v. Aviva Insurance, [2020] N.S.J. No. 252, 2020 NSSC 209, Nova Scotia Supreme Court, July 30, 2020, J.A. Keith J.

The insurer denied coverage under a commercial automobile policy after the insured’s newly acquired bus was involved in a single vehicle accident. The insured was in the construction business, and insured all of its vehicles under the commercial automobile policy in issue. The policy required the insured to provide the insurer with notice of any additional vehicles within 14 days of delivery. The insured took delivery of the bus on a Saturday and the accident occurred the next day. The insured had not yet notified the insurer of the acquisition of the bus as the insured’s broker was closed over the weekend. The insured called the insurer on Monday to report the accident and to add the bus to the policy. Several occupants of the bus made personal injury claims.

In issue was whether the bus was a “newly acquired vehicle” under the policy. If the bus fell under the definition of a “newly acquired vehicle”, then the bus would automatically be insured within 14 days of delivery. The policy defined “newly acquired vehicle” as:

“an automobile, ownership of which is acquired by the insured and, within fourteen days following the date of its delivery to him, notified to the Insurer in respect of which the insured has no other valid insurance, if either it replaces an automobile described in the application or the Insurer insures (in respect of the section or subsection of the Insuring Agreements under which claim is made) all automobiles owned by the insured at such delivery date and in respect of which the insured pays any additional premium required; provided, however, that insurance hereunder shall not apply if the insured is engaged in the business of selling automobiles”.

Neither party was able to locate a Canadian case addressing the question of insurance coverage under a commercial policy for an additional vehicle which was involved in an accident within 14 days of delivery. The Court considered decisions involving the loss of replacement vehicles under commercial automobile policies, but noted that the bus was not replacing a vehicle. The Court determined that coverage was available for an additional vehicle, as opposed to a replacement vehicle, when three conditions were met:

1. The insured insures all vehicles owned by the insured as at the date the insured acquired and took delivery of the additional vehicle in question;
2. The accident (or date of loss) is within 14 days of the date of delivery of the additional vehicle acquired by the insured; and
3. The insured acts reasonably in the circumstances; or in a manner that reflects the reasonable expectations of the parties.

The insurer’s argument for denying coverage fell under the third ground. The insurer argued that whether the bus was a “newly acquired vehicle” should take into account an assessment of risk. The bus was modified, and the insurer argued that the bus represented a material change in risk. As such, the insurer could not reasonably be expected to cover the bus.

The Court disagreed with the insurer, determining that the nature of a “newly acquired vehicle” could only be grounds for denying coverage in rare and exceptional circumstances, which were not present in this case. The insurer was aware of a smaller but similar vehicle owned by the insured before the acquisition of the bus. The function of the bus was to transport larger numbers of people, which was connected to the insured’s business. Moreover, the insurer previously insured several modified vehicles.

In the result, the bus was a “newly acquired vehicle”, the insurer had a duty to defend the insured and to pay any valid claims arising out of the accident.

This case was digested by Joe Antifaev, and first published in the LexisNexis® Harper Grey Insurance Law Netletter and the Harper Grey Insurance Law Newsletter. If you would like to discuss this case further, please contact Joe Antifaev at jantifaev@harpergrey.com.

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