Canadian Journal of Law September 2011 Volume 29, No. 5

[...] Mhe operator of a convenience store and gas bar which under the Environmental Protection Act, faces the risk of a wide range of liability claims for bodily R.S.O. 1990, c. E.19, is excluded from the defi- injury and damage to property that the CGL will cover. By denying coverage for pollution liability, the court does not nitions of "air" and "natural environment" since deprive the policy of a very significant measure ofprotec- it was enclosed in a building), the courts will be tion for the myriad other risks that the policy does cover. more inclined to find that the exclusion applies. 114 Mhe pollution exclusion in this case is animated by a unique purpose: to preclude coverage for expensive gov- [Editor's note: Dan Kirby is a partner in and co- ernment-mandated environmental cleanup required by chair of the Environmental Law Group at Osler, legislation that makes polluters strictly liable. Hoskin & Harcourt LLP. Dan's practice focuses The Court of Appeal's holding in the ING In- exclusively on environmental matters of all surance case clarifies its prior holding in Zurich kinds. to the effect that a pollution liability exclusion John MacDonald is a partner in the Osler, clause does not only exclude coverage for the Hoskin & Harcourt LLP litigation group with a activities of "active industrial polluters." It also commercial practice that includes an emphasis excludes coverage for activities that carry "a on insurance coverage issues. known risk of pollution and environmental harm" engaged in by businesses that are not ac- Dave Mollica is an associate in the Litigation tive industrial polluters, but the application of Department at Osler, Hoskin & Harcourt LLP. the exclusion continues to be highly fact- Dave has a broad litigation practice which en- dependent. It also seems clear that if the under- compasses various areas of corporate and com- lying event giving rise to the claim against the mercial law. Dave was formerly a law clerk to insured is founded on a discharge into the natu- The Honourable Justice Abella at the Supreme ral environment (Zurich was not — it concerned Court of Canada.] a discharge into the air in an apartment building,

• EXTENDED WARRANTIES AND INSURANCE, WHAT IS INSURANCE? A HEALTHY DOSE OF COMMON SENSE FROM THE ALBERTA COURT OF APPEAL • Robert W. McDowell, Scott M.J. Rollwagen, Sylvie Bourdeau, Stephen B. Kerr, Koker Christensen and Marvin Mikhail, Fasken Martineau DuMoulin LLP

Overview tended warranty program was offered by Brick On July 21, 2011, the Court of Appeal for Al- Protection Corporation, a sister company to berta released a decision in a significant case The Brick. The Court established that the ex- concerning the meaning of "insurance" under tended warranties do not constitute insurance provincial insurance legislation and its applica- even if they are offered by a sister company of tion to retail extended warranties. In doing so it the retailer. provided helpful guidance on the meaning of While the case arose in a tax context,' the sig- "insurance". nificance of the decision extends beyond the The case arose out of an extended warranty pro- narrow tax issue considered in that: (i) both gram covering repair or replacement of products levels of court hearing the case found that the sold by The Brick, a large retailer of furniture, extended warranties were not contracts of insur- appliances, and electronic equipment. The ex- ance; and (ii) the decision places some limits on

77 Canadian Journal of September 2011 Volume 29, No. 5 the very wide ambit of the defmition of "insur- First, the judge noted that "insurance" is a well- ance" under insurance legislation. 2 developed and homogeneous concept having Background well-established conventions. Second, the judge noted that the business of providing extended Brick Protection provided extended warranties warranties is a distinct business with its own covering products sold by its sister company, history. which operated The Brick, a retailer of furni- ture, appliances and electronic equipment. The Definition of Insurance These warranties covered repair or replacement Against this backdrop, Cote J.A. proceeded to of products purchased at The Brick where such analyze the legal question of whether the ex- products proved defective in workmanship or tended warranties fell within the definition of materials. "insurance" under the Insurance Act. The judge The Provincial Treasurer of Alberta assessed began by quoting the definition of insurance un- which is substan- Brick Protection for over $700,000 in taxes that der the Alberta Insurance Act, ought to have been paid by Brick Protection on tially similar to the definition in many Canadian provinces. It provides that "insurance" means (at the basis that it was operating as an insurance s. 1(aa)): company. With interest and penalties, Brick Protection faced liability of greater than ... the undertaking by one person to indemnify another per- $1,000,000. son against loss or liability for loss in respect ofcertain risk or peril to which the object ofthe insurance might be exposed, The taxing legislation at issue in Brick Protec- or to pay a sum of money or other thing ofvalue on the hap- tion Corp. v. Alberta (Provincial Treasurer), pening of a certain event ... [2011] A.J. No. 819, applied to companies car- The judge then proceeded to note the limited rying on the business of insurance "within the usefulness of the definition, given the degree to meaning of the Insurance Act." Justice Cote which, in theory, it could encompass many (with Justice Costigan concurring), writing for forms of financial products that no layperson the majority, began by noting that the "business would regard as insurance (at para. 23): of insurance" was not a concept having a spe- cific defined meaning under the Insurance Act That definition has a number ofproblems. First, it has two alternative fairly different branches (separated by a comma). (Alberta), RSA 2000, c. 1-3. Second, it is very vague and abstract. Third, if read literally, it In these circumstances, the majority noted that it would cover a host of things which no one in Canada would ever consider when using the word 'insurance'. That is true of was necessary to apply a commercial common any reader, lawyer or lay person, in or outside the business sense approach to the term "business of insur- community. Those three problems may not be fatal when ance" (at para. 18): setting the scope ofthe particular regulatory provisions in the Insurance Act. But as a guide to language in general, or to In deciding whether a certain business is 'insurance', we other statutes on other topics (such as taxation), those three must give some weight to actual practices and commercial problems seriously degrade that definition's usefulness. reality. The Legislature must be presumed to legislate with reference to what actually occurs in the real world, not to Having recognized the limited usefulness of the theoretical nonexistent possibilities. That is doubly so when definition, Cote J.A. proceeded to examine the the new taxing legislation expressly refers to an existing well- treatment of insurance by text writers and in known industry plus its regulation. case law. Noting that the text writers and the Justice Cote referred specifically to two other case law have replaced the ambiguity in the factors that ought to guide the court in determin- definition of insurance with "a necessary use of ing how to interpret "the business of insurance". caution and realism," the judge noted that the

78 Canadian Journal of Insurance Law September 2011 Volume 29, No. 5 proper approach to the interpretation of the in- commercial absurdity. The judge noted that a surance defmition should be consistent with the great many contracts allocate risk, in some cases modern trend in favour of a realistic approach putting all of the risk on one party. It is not, that is sensitive to context. This modern ap- however, for this reason alone that they are re- proach seeks "to make the words in question fit garded as insurance. Furthermore, other compo- into, and faithfully advance, the overall legisla- nents of a traditional insurance relationship were tive scheme and objectives of the Act." absent. The extended warranties could scarcely be described as contracts of indemnity, since The purpose of the Insurance Act, the judge they only governed repair or replacement of noted, is "to regulate the traditional insurance items purchased. Similarly, there was an ab- industry and protect the public from insolvent or sence of any individualized assessment of risk unscrupulous companies and from certain unfair by the putative "insurer" before setting the pre- types of policy and claims processes." mium and concluding the contract. Components Concurring Reasons of Traditional Insurance In concurring reasons, Justice Graesser did not Justice Cote continued by specifically referring go so far as the majority insofar as it interpreted to the absence of any external risk against which the definition of insurance under the Insurance the extended warranties were to protect the con- Act, but rather confined his reasoning to the sumer (at para. 36): general question of what constituted the busi- Another feature of insurance is mentioned briefly in some of ness of insurance within the meaning of the In- the definitions of insurance. Typically, insurance involves out- surance Act. Since the insurance regulator in side risks created neither by the insurer nor by the insured. Even involves such outside risks (though we will Alberta had not taken the view that similar ex- all die someday). The effect of a number ofphrases or tended warranty products were insurance, and clauses very common in insurance policies is the same: the since the business of providing extended war- insurer does not cover risk ofbad workmanship or design, nor ranties does not predominantly involve insur- materials supplied by the insured. (Some bonding companies issue performance bonds sometimes having that effect, but ance companies, it was appropriate to conclude no one argues that analogy here.) Closely connected with in favour of the taxpayer that extended warran- that and overlapping is another insurance industry practice. ties were not insurance business for the purpose Typically the policy is worded so as not to cover simple failure of the taxing. of or loss of the very item insured from internal causes.

The guarantees in issue here are the opposite. They cover Conclusion only product failure as a result ofdefects in materials or Ultimately, the reasoning of the majority is a workmanship ofthe very item sold. And they call only for re- pair or (sometimes) replacement. strong statement of the need to have regard to purpose and context when interpreting the defi- Justice Cote therefore did not regard as material nition of "insurance" under provincial insurance the fact that the putative "insurance" company legislation. The mere fact that a contract trans- in this case was a related company to the re- fers risk and is triggered on the happening of tailer. The focus of the inquiry was on the contingency is not to be taken as automatically nature of the contract that Brick Protection was indicating that the contract is a contract of in- entering into. surance. Rather, it is necessary to look more From this perspective, the judge emphasized deeply at the contract in question with a view to that the stipulations of the Insurance Act had to determining how much a given product resem- be interpreted in such a way as not to produce a bles traditional insurance.

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While the Court in Brick Protection focused mergers and acquisitions, particularly in the fi- only on certain traditional components of an nancial services industry. insurance relationship (i.e. the absence of a tra- Koker Christensen, Partner, Fasken Martineau ditional indemnity relationship, the absence of DuMoulin LLP, is a partner in the Toronto of- external risk, the absence of risk assessment by fice of Fasken Martineau DuMoulin LLP. He is the insurer, the non-involvement of an insurer, engaged in a broad corporate/commercial prac- and the absence of a "remote" risk), the reason- tice with an emphasis on the financial services ing in Brick Protection would permit consider- industry. His practice includes advising banks, ing other criteria such as the existence or insurers, reinsurers, trust companies, fraternal non-existence of an , and the benefit societies, credit unions and insurance element of risk-spreading among similarly- agents/brokers on mergers and acquisitions, in- situated insureds. corporation and licensing, and other corporate By strongly signalling that the definition is to be and regulatory matters. interpreted with reference to those contracts that Marvin Mikhail, Associate, Fasken Martineau are traditionally regarded as insurance, the DuMoulin LLP, is a lawyer in Fasken Marti- Court has taken a clear step in the direction of neau's Financial Institutions group. His activities providing greater clarity for businesses consid- in this area include advising banks, insurance ering marketing financial products that may fall companies, trust companies and credit unions on within the literal definition of insurance. mergers and acquisitions as well as corporate and [Editor's note: Robert W. McDowell, Partner, regulatory matters. Fasken Martineau DuMoulin LLP is a business Scott Rollwagen, Partner, Fasken Martineau law lawyer who specializes in corporate, merg- DuMoulin LLP, specializes in complex legal ers and acquisitions, transactional, fmancing analysis for both corporate-commercial and liti- and regulatory advice with respect to life and gation clients, with experience resolving complex general insurance companies, deposit taking in- issues arising in a fmancial services context. stitutions, , credit unions and other financial institutions. The case arose as a result of an attempt by tax author- Sylvie Bourdeau, Partner, Fasken Martineau ities to claim premium tax against a provider of extended warranties on the basis that the warranties DuMoulin LLP, is a partner at Fasken Marti- were in effect contracts of insurance. neau and has been a member of the Quebec Bar 2 The breadth of the definition of "insurance in the in- surance legislation of most Canadian provinces is so since 1988. She specializes in corporate law, broad that they risk catching within their ambit com- more specifically in mergers and acquisitions, mercial contracts that look nothing like insurance and private financings and business agreements. Her that, as a practical matter, most would not consider to be insurance (e.g., extended warranties). This lack of practice also includes advising financial institu- clarity leaves an essentially legal question to be re- tions on regulatory matters. solved on an ad hoc basis by individual regulators, whose views concerning what is and is not insurance Stephen B Kerr, Partner, Fasken Martineau can diverge widely from province to province notwith- standing substantially identical definitions of insurance DuMoulin LLP, practices general corpo- throughout provincial insurance legislation in Canada. rate/commercial law, with an emphasis on

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