Enforceability of contractual limitation periods in insurance policies

March 31st, 2016 by

By Michelle Stephenson

In Daverne v. John Switzer Fuels Ltd., McKeown & Wood Limited commenced a third party claim to require their insurance company (“Federated”) to defend them in a property damage claim against them. They were being sued by the Davernes, to whom they had sold a fuel tank which subsequently leaked.

Just under two years after Federated initially refused to defend them in this action, McKeown & Wood commenced this third party claim.

Federated argued against the third party claim on the basis that the insurance policy held by McKeown & Wood included a limitation period of one year and, as such, any legal action against Federated for denying coverage had to have been commenced within one year of the date of the denial.

At a motion for summary judgment, the motions judge held that the limitation clause in Federated’s insurance policy did not apply to the issue of denial of coverage. However, on appeal, the Ontario Court of Appeal found otherwise.

While the Limitations Act provides a general, two year statutory limitation period for the commencement of legal actions, it includes listed exclusions and provides, under ss. 22 (5)-(6) that the general rule against contracting out of the statutory limitation period does not apply to business agreements. Business agreements, between two business entities, neither of whom is an individual consumer acting in a personal capacity, can include their own valid provisions shortening or lengthening the limitation period for making a claim.

An insurance policy covering risks related to the operation of an insured’s business, such as the one McKeown & Wood held with Federated, was found to qualify as a “business agreement” for the purposes of the Limitations Act.

Furthermore, it was held that a “loss”, to which the limitation clause applied, occurred the moment an insurer “[could] be said to have failed to satisfy its legal obligation” under the insurance policy. Where an insurance company has a duty to defend its insured against a third party claim and does not do so, this denial of a defence constitutes a loss.

In this case, the insureds attempted to claim for this loss by compelling their insurer to defend  them two years after the denial took place. This was a year after the expiry of the contractual limitation period found in the policy and, as a result, they were out of luck.

While this case is a reminder that statutory limitation periods can be contracted out of in some circumstances, it is important to remember that had the insurance policy in this case been held by individuals in their personal capacity, to insure their home or car for example, the policy’s one year limitation clause would not have been enforceable. The statutory limitation period of two years would apply.

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