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This Document Contains Chapters 12 to 13 Chapter 12 Other Torts Instructor’s Manual–Answers by Shannon O’Byrne I. TEACHING OBJECTIVES After studying this chapter, students should have an understanding of • the range of torts that are relevant to business organizations • how torts arise from the use of property • how torts arise from business operations • how a business can manage the risk of liability in tort This is the last of the three chapters on tort. Its primary objective is to introduce students to the important remaining torts that arise in a business context. A secondary objective of the chapter is to emphasize the commercial context of these torts. More specifically, the torts are presented as part of the risk-identification process for a business. In even a small and relatively simple operation like Ron’s, torts can arise that threaten the continued viability of the business. Ron’s business can itself be the cause of harm or it can be harmed by the tortious conduct of others. II. TEACHING STRATEGIES This chapter can be particularly enjoyable to teach. The events and the legal issues are of genuine interest to students, and the case examples are both accessible and interesting. The principle challenge in teaching this material is finding the appropriate storyline or framework. The Business Law in Practice scenario helps to keep class discussion focused and on topic. Ron’s business is not engaged in manufacturing anything inherently dangerous. Its operations are simple. Yet it still faces tort risk exposure that can threaten overall profitability. Indeed, every tort discussed in this chapter could either be committed by Ron Smithson or against him. The text contextualizes the torts as a way of avoiding a shopping list approach to this area. The structure of Chapter 12 distinguishes between torts arising from the use of property and torts arising from business operations. The latter category is broken down further into business–consumer torts and business–business torts. Tort actions relevant to business can be helpfully divided in two classes: those that arise because a business occupies property and those that arise through business operations. To assist students, emphasize the logic of the chapter’s structure because it provides a pedagogically useful framework. The most difficult material for students will likely relate to property and, in particular, occupiers’ liability. For those instructors in provinces where occupiers’ liability is governed by statute law, it is generally adequate to explain that liability under the statute is very close to negligence liability and that even trespassers are owed a duty, albeit a reduced one. See the suggested answer to Question for Critical Thinking 1 for possible approaches to this issue of why even trespassers are owed a duty. Where a common law regime exists, instructors can provide full discussion of the various distinctions or, as above, resort to a broad overview. An instructor might take the position that the most important and practical consideration is what business can do to reduce risk or prevent harm from occurring in the first place. Categorizing classes of entrants is an important exercise once harm has occurred, but realistically, this process will be undertaken by lawyers and the courts, not by the business itself. The tort of nuisance is another area students may find challenging because of the policy concerns at play, as discussed on page 271 of the textbook. For a contextual approach to this issue, see the answer to Situation for Discussion 6, infra. Torts discussed in the second part of the chapter, under the heading Torts Involving Customers, are generally accessible to students. The assault and battery concepts are easily explained. False imprisonment raises issues that many may have encountered through working in retail stores. Note that students may be inclined to object to the risks placed on the storeowner in trying to deal with shoplifting. Turn the tables and have them consider the implications of false accusations on the shopper (see Question for Critical Thinking 3). With the exception of defamation, the business–business torts section introduces torts that will very likely be new to the class. It is helpful to emphasize the interest that each tort is seeking to protect, beyond just general profitability. Passing off, for example, seeks to protect the business’s proprietary interest in its reputation. Interference with contractual relations seeks to protect the business’s right to performance from the other side without third parties seeking to destroy that. Defamation protects the business’s right to its reputation. A risk management perspective infuses this chapter and entire unit, as emphasized in the concluding section of the chapter (Managing the Risk of Diverse Commercial Torts). III. STUDENT ACTIVITIES Task 1: Provide students with a case that involves a tort discussed in this chapter. Ask them to write a memo to their hypothetical employer about the case’s importance to business operations. Task 2: Have students identify a tort situation (relevant to this chapter) from a newspaper or online article or case involving a business. Ask them to outline what the plaintiff needs or needed to prove to be successful, what defences are available or potentially available to the defendants, what the implications of the case are for the business or businesses involved, and what the business could have done differently from a risk management perspective. Task 3: Ask students to create a tort risk management plan for the business described in the Business Law in Practice scenario (page 266 of the textbook). The torts should focus on, or even be limited to, the torts that are discussed in Chapter 12. Task 4: Show the class the video clip “Citizen Arrest,” contained on the DVD accompanying this Instructor’s Manual. This clip relates to the case box about R v Chen 2010 ONCJ 641 (textbook page 276). Ask the class to consider the following questions: • To what extent should shop owners be entitled to protect product in their store? • Will the amendment to the Criminal Code (discussed on textbook page 278) lead to vigilantism? IV. EXPLANATION OF SELECTED FEATURES Page 270 Business Application of the Law: Slip and Fall Critical Analysis: What risk management strategies can a business put in place to reduce the chances of a customer slipping and falling? For a helpful resource, see John W. Yeargain and Michael C. Budden, “Using risk management to avoid slip and fall accidents,” Entrepreneur (2001) at . The authors helpfully identify the three main types of slip and falls as (1) slip-and-fall inside the premises, (2) displays or improperly stacked goods causing injury, and (3) slip and fall outside the premises. The entire article is worthwhile, but what follow are quotations from the authors’ recommendations relevant to the question under consideration: • Develop an atmosphere of liability-cost containment. Work to instill in your employees the necessity of monitoring the firm’s property and the necessity of minimizing /eliminating potential hazards. • Assign specific store personnel the duty of periodic inspection of the aisles for debris, breakage, and improperly arranged displays of goods. Employees should be trained to recognize and eliminate dangerous in-store situations. • Time intervals between inspections need to be established and followed. Depending on the situation, the established interval may need to be shortened. For instance, a store may find that an interval of 30 minutes may normally be appropriate for monitoring its entrances and exits. However, on rainy days, a cleanup person with mop and bucket may need to constantly monitor and work to eliminate water accumulation hazards at entrances and exits. • Enlist the aid of your liability insurance carrier in your efforts to control costs. Most insurance carriers can and regularly do provide risk management assistance to clients. Beyond this, the article discusses how to design ramps for access for those with disabilities. Page 270 Photo caption: What main defences does a retailer have should a customer sue for a slip and fall? Defences include that the customer did not take reasonable care for his own safety and this failure was a cause of the accident, that the floor surface was not hazardous, and that the retailer exercised reasonable care in keeping the floor surface clear of hazards. Page 271 Photo caption: How can locating houses and factories adjacent to each other lead to claims in nuisance? Someone occupying property for residential purposes is very likely to be adversely affected by a factory next door, thereby leading to a nuisance claim. If industrial properties are all located together, and all residential properties are located together, this is less likely to be the case. Page 272 Case: TMS Lighting Ltd v KJS Transport Inc 2014 ONCA 1, varying 2012 ONSC 5907 Critical Analysis: Could TMS and KJS have come to some kind of compromise on the nuisance issue instead of litigating? On the facts of this case, TMS’s manufacturing process was adversely affected by dust emanating from the KJS parking lot. It seems that KJS tried the remedial option of putting down gravel and erecting a tall fence. However, paving—a relatively costlier option—appeared to be the only effective solution to the dust problem. There was some evidence on cost of paving at trial including as follows: [128] Mr. Singh [KJS’s representative] produced an Invoice dated June 7, 2011, for $70,000.00, from Triple Star Paving for asphalt paving. Mr. Singh explained that the paving was to eliminate the dust. He acknowledged, however, that the second page of the invoice shows that the charge for asphalt for the rear parking lot was only $10,000.00, and that the balance of the invoice was for a four foot wide, four inch thick L-shaped concrete path. See TMS Lighting v KJS Transport, 2012 ONSC 5907. Regardless of the exact cost of paving, it is possible that TMS could have offered to share in the expense, given the defendant’s reluctance to get the work done promptly. This might have produced a solution that would have been less costly than taking the matter to trial. It is unknown though whether the defendant would have agreed to such a proposal, of course. Though the defendant pled poverty in court, saying it could not afford the cost of repaving at the time the problem of dust arose, this excuse does not appear to have been accepted by the court. According to the trial judge’s decision in TMS Lighting v KJS Transport, 2012 [129] While Mr. Singh sought to explain KJS’ delay in paving its parking lot by suggesting that it could not afford to undertake the paving at an earlier time, he admitted that Pardeep Singh paid KJS $7,000.00 per month for rent and a further $5,000 to $6,000 per month for transportation services, for a total of $10,000 to $12,000.00 per month. He agreed that this amounted to $120,000.00 to $140,000.00 per year from Mr. Singh alone. Given its circumstances, TMS might have tried mediation and arbitration but this is not always a viable option. It seems that the proper fix was known—paving—but that the defendant simply would not agree to take that step. In the circumstances at bar, perhaps nothing short of litigation would likely force the defendant’s hand. Page 274 Case: TMS Lighting Ltd v KJS Transport Inc 2014 ONCA 1, varying 2012 ONSC 5907 Critical Analysis: KJS began trespassing on TMS’s property in 2007 yet it was not until 2012 that TMS’s matter finally went to trial and it was able to secure an injunction. Do you think the civil justice system served TMS well? Why or why not? There is a very good argument that TMS was not well served given the great amount of time between a significant legal problem and its ultimate resolution. The delay between when KJS’s trucks starting knocking over parking lot barriers onto TMS’s parking lot (causing trespass) and its legal resolution (including the issuance of a permanent injunction by the trial judge in 2012) is of considerable duration. More specifically, per the Court of Appeal at para 53, the trial judge found “that repositioning or realignment of the barrier stones was required on a regular basis from September 2006 to the end of August 2012, a period of 72 months.” To add insult to injury, the plaintiff had to replace 10 damaged barrier stones, incurring costs of $5,910 plus GST (per Court of Appeal at para 51.) The difficulty faced by the plaintiff is that the litigation process is inherently slow, beginning with pleadings, moving to discoveries, then to trial, and in this case, even an appeal. Years are consumed in the process making ADR measures more attractive. However, as noted, ADR measures are not always feasible or appropriate. Page 274 Environmental Perspective: Tort Actions Relating to the Environment Critical Analysis: What are the advantages of regulation of the environment via environmental protection legislation as opposed to by private action? The main advantage of environmental regulation via environmental protection legislation is that it is more flexible than private action. It resolves the problem at the legislative level and avoids the often unsatisfactory road of litigation, which can be costly and slow. In addition, the common law is often harsh and inflexible. Municipal zoning and land-use planning laws make it clear what type of development and activities can take place in certain areas. Legislation removes the uncertainty of what can be done where, how, and when. Page 275 Photo caption: In what ways could storing chemical waste in oil drums generate torts in relation to adjoining landowners? The box gives a rundown of the four torts that may provide a remedy for environmental damage to a landowner: negligence (on the basis of the defendant’s carelessness), trespass (on the basis that chemicals escape from the oil drums and enter the plaintiff’s land without permission or authorization), the tort in Rylands v Fletcher (on the basis that the escaped chemicals come onto plaintiff’s land because of the defendant’s dangerous and non-natural use of his land), and nuisance (on the basis that the defendant’s pollutants constitute an unreasonable and substantial interference with the plaintiff’s rights to enjoy her own property). Page 276 Case: R v Chen, 2010 ONCJ 641, [2010] OJ No 5741 Critical Analysis: Do you think the Criminal Code provides enough protection to a business owner trying to deal with a shoplifter? Note that Government of Canada has recently enacted an amendment to the citizen’s arrest provisions under 494(2) of the Criminal Code, which states: “The owner or a person in lawful possession of property ... may arrest a person without a warrant if they find them committing a criminal offence on or in relation to that property and (a) they make the arrest at that time or (b) they make the arrest within a reasonable time after the offence is committed and they believe on reasonable grounds that it is not feasible in the circumstances for a peace officer to make the arrest” [emphasis added]. Is this amendment to the Criminal Code necessary? Regarding restrictions on the business owner, the Criminal Code is absolutely obligated to strike a balance between a business owner who is trying to protect inventory and the human rights of the purported thief. There is a common humanity owed to everyone, as discussed by the law in the context of trespass and it applies here too. Beyond this, the storeowner may be mistaken in concluding that he has found a shoplifter. The person accosted may simply be an innocent shopper. The limits placed on the storeowner in the Criminal Code therefore seem reasonable from a variety of perspectives. Assuming that R v Chen states the law, the recent amendment to the Criminal Code (which covers “the returning thief scenario”) may not have been necessary. However, the reach of Chen is not entirely clear and the amendment does help to confirm the rights of the business owner. As well, the amendment adds an important proviso that was not expressly required in Chen, namely, that the arresting individual believes “on reasonable grounds that it is not feasible in the circumstances for a peace officer to make the arrest.” As to the necessity of the Criminal Code amendments, it could be argued that the business owner already had sufficient powers in the pre-amendment regime and that the new provision could encourage vigilantism. Page 278 Case: Ciba-Geigy Canada Ltd v Apotex Inc, [1992] 3 SCR 120, [1992] SCJ No 83 Critical Analysis: Do you think it is right that a manufacturer should receive legal protection for the features of its product, including colour? There is great economic value in goodwill, which the law protects. If the features are not generic and they distinguish the product from the competitors’ products, then some protection is reasonable. For example a bottle is itself a product by way of functioning as a container; it could also be construed, for trade dress purposes, as a “package” for perfume or liquor. Such packaging may be unique enough that the consumer relates to the packaging and associates it with the product. While the functioning aspect of a bottle cannot be protected, the unique shape certainly can be. Colour cannot be registered as a trademark by itself but colour can be part of a trademark. For example, the colour pink could not be registered in relation to any good or service but the colour pink could be registered as part of a trademark (the colour of the trademark, if you will) as in a pink oval-shaped pill or pillbox. Page 282 Technology and the Law: E-Torts: Defamation on the Internet Critical Analysis: How can a business protect its reputation from attack on the Internet? Maintaining a business’s reputation is crucial, including online. Owners and managers must be proactive in monitoring what is being said about the business in question. One Forbes contributor suggests that the business put a Google search in place “that brings forward new mentions of …[the subject] company’s name instantly, as quick as the new items appear.” See Cheryl Connor, “Protecting Your Online Reputation: 3 Key Tasks Your Business Must Complete in 2014,” Forbes (09 December 2013) online Forbes: . Connor also notes, relying on Dr. Chris Anderson of Cyber investigation Services Inc., that a company must decide what measures to take if and when the company’s reputation comes under attack online. Anderson identifies the following possible responses: • “Doing nothing • Crafting a polished written response • Trying to resolve the issue with the poster • Asking the website to step in • Identifying an anonymous poster • Using legal letters to threaten the poster • Filing a lawsuit to seek damages and force removal” There is no one-size-fits-all approach but if the matter appears serious, it stands to reason that legal advice is appropriate and next steps can be planned. Page 284 Business Application of the Law: Protection of Privacy Critical Analysis: Does the new tort of intrusion upon seclusion improve the law? Do you think that the $20 000 ceiling on damage awards set by the court in Tsige is too low? Based on the court’s analysis in Tsige, this new tort improves the law because the tort acknowledges the great many ways in which privacy can be intruded on today. According to the court, [67] For over one hundred years, technological change has motivated the legal protection of the individual’s right to privacy. In modern times, the pace of technological change has accelerated exponentially. Legal scholars such as Peter Burns have written of “the pressing need to preserve ‘privacy’ which is being threatened by science and technology to the point of surrender”.... The internet and digital technology have brought an enormous change in the way we communicate and in our capacity to capture, store and retrieve information. As the facts of this case indicate, routinely kept electronic data bases render our most personal financial information vulnerable. Sensitive information as to our health is similarly available, as are records of the books we have borrowed or bought, the movies we have rented or downloaded, where we have shopped, where we have travelled, and the nature of our communications by cell phone, e-mail or text message. [68] It is within the capacity of the common law to evolve to respond to the problem posed by the routine collection and aggregation of highly personal information that is readily accessible in electronic form. Technological change poses a novel threat to a right of privacy that has been protected for hundreds of years by the common law under various guises and that, since 1982 and the Charter, has been recognized as a right that is integral to our social and political order. As to whether the upper limit of damages for invasion of privacy is set too low, general damages for pain and suffering have a maximum threshold set by the Supreme Court of Canada of approximately $360 000 in 2015 dollars. This is the maximum amount that a plaintiff who suffered quadriplegia through another’s negligence would receive, for example. In this context, a $20 000 suggested limit for damages relating to invasion of privacy seems more than generous. Chapter 13 The Agency Relationship Instructor’s Manual–Answers by Dorothy DuPlessis I. TEACHING OBJECTIVES After studying this chapter, students should have an understanding of • the agency relationship and its relevance to business • how an agency relationship comes into being • agency duties and liabilities • how the agency relationship ends The textbook takes the view that the agency relationship is a fundamental and critical aspect of business, and as such it devotes a full chapter to its treatment. Placement at the beginning of the unit on business activity helps inform and facilitate the discussion of partnership and corporation law, which follows in Chapters 14, 15, and 16. Specifically, the chapter attempts to show that it would be virtually impossible to conduct business on any significant scale without the legal recognition of agency. The chapter begins with an examination of the prevalence of the relationship within business organizations (i.e., between the organization and its employees) and between business organizations and outsiders. The agency relationship is not, however, without risks. The chapter illustrates the risks inherent in agency and how these risks can be managed. II. TEACHING STRATEGIES Agency Defined Students often have a fuzzy or narrow view of agency. Most often students view an agent as someone who represents another, but they often have a very vague notion of what that entails. Further, students usually think of agency in terms of real estate or insurance agents and do not normally think of the relationship in terms of employees being agents for the organizations that employ them. As the first part of the chapter is devoted to defining agency and how the relationship is created, a series of questions to elicit students’ comprehension of the topic can be useful: • What is an agent? (provides an opportunity to take the definition beyond the concept of “representation”) • What are some common examples of agency? (useful for illustrating the prevalence of agency in business) • Why would someone employ an agent? (time, expertise, geography, legal considerations) • Has anyone in the class ever had any experience using an agent? (easily be answered by students and can provide a vehicle for further class discussion) • How did you enter the relationship? How is an agency relationship formed? (provides an opportunity to discuss the various ways that agency is created, with emphasis on the most prevalent way: by agreement) – by agreement: Situation for Discussion (SD) 1 (page 317) – by estoppel: SD 4 (page 318) – extension of existing authority: SD 3 (page 318), Doiron v Devon Capital Corp (page 299) – representation of authority: SD 2 (page 317), SD 6 (page 318) – termination or reduction of authority: Rockland Industries Inc v Amerada Minerals Corporation of Canada (page 301) – by ratification Risks in Agency A review of agency and its many business applications provides the background for an exploration of the risks associated with the relationship. Risks can be examined from the perspective of both the principal and the agent, as a business not only may act as a principal using an agent but also as an agent on behalf of a principal. • What are the risks of using an agent? Question for Critical Thinking (QCT) 6 (page 317) and SD 7 (page 319). Risks for the principal: The Business Law in Practice (page 294) featuring the owner of an online tailoring business and his purchasing agent can be used to illustrate the more common risks of agency: the agent enters a contract that the principal is not pleased with and the agent enters a contract that exceeds his authority. In both cases, the principal is liable on the contract. The principal is liable for torts committed while the agent is acting within his actual or apparent authority. • Is it fair that the principal is bound by contracts when the agent is acting with only apparent authority? QCT 2 (page 317) • Are there any risks associated with acting as an agent? QCT 1 (page 317), SD 5 (page 318), SD 8 (page 319), Raso v Dionigi (page 306), Krawchuk v Scherbak (page 312) Risks for the agent: Aside from the risks inherent in most contracts (i.e., not being paid for services), an agent faces additional risks associated with the fiduciary nature of the relationship QCT 5 (page 317). As a fiduciary, an agent can be liable for breach of duties owed to the principal. These risks can be examined in relation to specific kinds of agents. For example, an insurance agent’s duty to an insured would include • providing the insurance coverage asked for by the client • obtaining proper coverage in accordance with the insured’s needs • explaining the differences in coverage of different policies • informing himself or herself of the nature of the insurance interest and on the basis of such information providing appropriate insurance to cover such risks • exercising reasonable discretion in choosing an insurer • providing proper information and advice Similarly, the focus could be on the specific duties of a real estate agent. These duties include • not acting for more than one party in a transaction, unless there has been full disclosure and consent • not receiving remuneration from a person other than the principal in relation to a particular transaction in which the agent is engaged • not directly or indirectly acquiring an interest in property that the principal is seeking to sell • not using information acquired in the course of agency to advance the agent’s own interests at the expense of those of the principal • providing reasonable advice Source: James G. Edmond, “Fiduciary duties owed by insurance, real estate and other agents,” The 1993 Isaac Pitblado Lectures, Fiduciary Duties/Conflicts of Interests, at 75. • How can the principal manage the risks associated with using an agent? How can the agent manage the risks associated with acting as an agent? Risk Management Strategy After focusing on the risks associated with an agency relationship, it is useful to canvass how a manager could reduce the risk. From the perspective of the principal, it is important to • understand the nature of the agency relationship • carefully engage agents (i.e., get people that you can trust, check background) • clarify the agent’s authority • monitor the activities of the agent • inform third parties of the termination of an agency relationship An agent’s risk management strategy can be examined in relation to specific agents. For example, an insurance agent could • insist on complete and accurate information on the insured’s business or property when coverage is sought • require information on an ongoing basis (changes in the insured’s business must be brought to the attention of the insurance agent) • review policies of insurance available to the insured, including specific perils covered, policy exclusions, limits of liability, and co-insurance provisions See: Business Application of the Law: Managing the Risk of Using an Agent (page 314) III. STUDENT ACTIVITIES Task 1: Have students determine the advantages of using the services of an agent. This task can be a question about agents in general or students can be assigned a specific type of agent, such as a real estate agent, an insurance agent, or a travel agent. Task 2: As a follow-up to Task 1, have students consider the risks for the principal and the agent in an agency relationship (QCT 6, page 317). Have students evaluate whether the benefits outweigh the risks for both the principal and the agent. Task 3: After a review of the advantages of using an agent and the risks posed for both the principal and agent, have students devise a plan for managing the risk of being a principal and an agent. The plan may be in relation to agents and principals in general or in relation to a specific agent (see the discussion in the Teaching Strategies section, above). IV. EXPLANATION OF SELECTED FEATURES Page 299 Photo caption: Purchasing agents are often part of the fashion scene. What is the authority of a purchasing agent? The authority of a purchasing agent depends on the actual authority (both express and implied) bestowed by the principal to the agent and apparent authority, which is the authority a reasonable third party would believe the agent has given the conduct of the principal. Page 299 Case: Doiron v Devon Capital Corp, 2003 ABCA 336, 20 Alta LR (4th) 11 Critical Analysis: How can companies like Manulife minimize the risk of liability for the actions of its “producers” (i.e., salespeople)? How can companies gain the benefits that accrue from representation without incurring the risk of liability? Companies can minimize the risk of liability for the actions of their salespeople by being careful not to make representations that result in the salespeople acquiring apparent or ostensible authority. A company can also make clear to third parties the limitations on the agent’s authority. Methods of doing so include requiring signed agreements between agents and clients defining the scope of authority as part of the approval process, or sending letters or making phone calls to clients to ensure the agent’s authority is not being exceeded. That said, it is difficult to gain the benefits of representation without incurring the risk of liability. When a company actively markets its salespeople, it may not be possible to insulate itself from liability for the acts of its salespeople. Page 301 Case: Rockland Industries Inc v Amerada Minerals Corporation of Canada, [1980] 2 SCR 2, rev’g (1978), 14 AR 97 (Alta CA) Critical Analysis: How could Amerada have prevented this situation? Amerada could have avoided the situation by informing Rockland of the limitation on Kurtz’s authority to contract on its behalf. This case and question present an opportunity to discuss the various ways of informing third parties of the limitation on an agent’s authority, either in situations where the agent has been demoted (i.e., authority has been curtailed), his or her job has changed (i.e., transferred to new position with different duties), or he or she is no longer with the business. Examples of ways of informing third parties (and therefore limiting apparent authority) include • letters or telephone calls to customers and clients • advertisements in newspapers, trade publications, newsletters, and so on • notices on company documents indicating the approval process for contracts Page 303 Business Application of the Law: Real Estate Agents Critical Analysis: How is the authority of a real estate agent determined? A real estate agent’s authority includes actual and apparent authority. The actual authority of a real estate agent is both express and implied. Express authority is determined by the contract between the agent and the principal. Implied authority is inferred from the position of the real estate agent, is reasonably necessary to carry out the agent’s express authority, and arises by virtue of a well-recognized custom in the real estate industry. The apparent authority of a real estate agent is determined by what a third party or outsider would reasonably believe that the agent has given the conduct of the principal. Page 303 Photo caption: Does a real estate agent act for the vendor or the purchaser of property? A real estate agent may act for the vendor of property or the purchaser of property. It is also possible for the agent to work for both parties. Dual agency, as it is known, also occurs when different real estate agents work for the vendor and purchaser but both are employed by the same real estate company. For further discussion, see websites maintained by real estate agents, such as or . Page 305 Business Application of the Law: An Insurance Agent’s Duty of Care Critical Analysis: What steps should an insurance agent take to reduce the risk of liability for breaching the duty of care? In the case where the client has a specific request, “the agent or broker is not obligated to find out everything about the client’s situation; they are only obligated to exercise reasonable skill to get the coverage requested and to service the policies with reasonable diligence. If the requested coverage is not available, the broker or agent has a duty to inform the client so that he or she can take appropriate steps.” In the second scenario, the duty on the agent or broker is more onerous. The “broker or agent has a duty to gather information, to assess the foreseeable risks, and to insure the client against foreseeable risks.” If the agent or broker does not have the skills to understand the client’s business then she should not offer to provide full coverage Sources: Jean-Clause Rioux, “Common sense and a duty of care,” The Lawyers Weekly (17 August 2012) 14; see also: Monika M.L. Zauhar & Amanda Evans, “Insurance intermediaries: Fulfilling the role of an insurance expert,” Claims Canada (April 2011) online: Claims Canada . Page 305 Photo caption: What are the duties of an insurance agent? An insurance agent’s duties to an insured include • providing the insurance coverage asked for by the client • obtaining proper coverage in accordance with the insured’s needs • explaining the differences in coverage of different policies • informing himself or herself of the nature of the insurance interest and on the basis of such information providing appropriate insurance to cover such risks • exercising reasonable discretion in choosing an insurer • providing proper information and advice A helpful commentary on the duty of an insurance agent is found in Bullock v Trafalgar Company of Canada, [1996] OJ No 2566 (Ont Gen Div). There is an obligation of good faith placed on the actions of the insurer. The agent has an obligation not to do anything without reasonable justification and to nullify the reasonable expectation of the other party created by the bargained-for exchange of promises. There is a duty to act fairly and to be prompt in handling and assessing loss. There is a duty to undertake an adequate investigation and proper evaluation of a claim expediently. There is a duty to provide the insured with correct information, a fair interpretation of the policy, and prompt payment of a claim when it has merit. There is a duty to settle claims without litigation in appropriate cases. Finally, there is a duty to protect the insured against any unnecessary loss. Page 306 Case: Raso v Dionigi (1993), 12 OR (3d) 580, 100 DLR (4th) 459 (Ont CA) Critical Analysis: What are the distinguishing features of a fiduciary relationship? What consequences flow from the designation of a relationship as a fiduciary one? If Guerino Sirianni had disclosed to the Dionigis just how much money Mr. and Mrs. Sirianni had available to purchase the property, would this disclosure have been a breach of his fiduciary duty to the Siriannis? What does this tell you about the perils of acting for both parties to a transaction? The characteristics of a fiduciary relationship are described in Frame v Smith, [1987] 2 SCR 99: • The fiduciary has scope for the exercise of some discretion or power. • The fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary’s legal or practical interests. • The beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion or power. A fiduciary has a duty to act in good faith. In practical terms, absent the informed, specific consent of the principal, this • requires the agent to make full disclosure of material facts that place or may place the agent in a conflict of interest • prohibits the use of the principal’s property, money, or information for personal gain • prohibits acting for two principals If Guerino had disclosed to the Dionigis how much money the Siriannis had, this would have breached his fiduciary duty owed to the Siriannis. Guerino had a duty to disclose all material facts known to him, he was not an intermediary because he took a very active role in the transaction and was seeking a commission from the vendors for doing so. His duty to get the best possible price for the vendors placed him in conflict with his duty to his other principal. In cases of obvious conflicts of interest, the normal rule is that the agent cannot act for both the vendor and the purchaser unless both give consent after the agent gives full disclosure of the conflict. To prevent you, as the agent, from being faced with these perils of acting for both parties of a transaction, it is best to limit yourself to acting for either one party or the other. Page 308 Ethical Considerations: Compensation of Life Insurance Brokers Critical Analysis: Should there be limits or caps on compensation for brokers? Why or why not? Insurance brokers are compensated from commissions on insurance purchases and in some cases, contingent commissions based on the amount of business that the broker places with an insurer as well as other perks such as trips. The problem with contingent commissions and perks are that they provide an incentive to ‘steer’ a client to a particular insurer. Further, incentives like trips have little, if anything to do with serving the customer yet the incentive will ultimately be reflected in the price of insurance. Caps or limits on compensation would address this actual or potential conflict of interest. Brokers argue that the current compensation structure works well with few complaints from customers. They note that they are independent, work in the best interests of their clients, and that bonuses and perks do not influence their decisions. And besides, any potential conflict can be addressed by disclosure to clients. In other words, there is not a need for limits or caps on their compensation. Sources: Grant Robertson & Tara Perkins, “What your insurance broker doesn’t want you to know,” The Globe and Mail (21 December 2010) online: The Globe and Mail ; Craig Harris, “Commission controversy calling for clarity on broker compensation,” Canadian Underwriter (October 2004) online: Canadian underwriter . Page 308 Photo caption: Do you see any problems with the incentives provided to insurance brokers by insurance companies? An insurance broker works for the insured and owes the insured a fiduciary duty, which includes the duty not to place herself in the position where her interests conflict with the interests of the principal. The broker receives commissions, bonuses, and other benefits from the insurance company. As there is the risk that the incentives may factor into the broker’s decision to recommend particular insurance policies to the insured, the broker is in a conflict of interest. As noted in the text, a conflict of interest may be acceptable if there is full disclosure and consent to the conflict by the insured/principal. Upfront commissions are disclosed; however, contingent commissions and other perks may not be fully disclosed to the insured. In short, there may be a problem in the incentives provided to insurance brokers by insurance company because unless there has been full disclosure and consent, the broker is potentially in breach of her fiduciary duty to the insured/principal. Page 312 Case: Krawchuk v Scherbak, 2011 ONCA 352, 332 DLR (4th) 310. Critical Analysis: Do you think this case creates any new duties of real estate agents? Although there has been some debate about whether this case creates a new duty for real estate agents, it is arguable that the case does not create a new duty but simply applies a pre-existing duty. See Cristin Schmitz, “Agent liable for misstatement: OCA,” The Lawyers Weekly (20 May 2011) 1. The agent, in this case, was a duel agent and owed a duty of care to both the vendors and the purchasers. The Court of Appeal determined that she breached her duty of care to the purchasers in that she was required to either verify the information provided by the vendors or strongly recommend that the property be inspected before purchase. In other words, in this case, the real estate agent had a duty to verify information provided by the vendors about the property. This is not necessarily a new duty but part of the real estate agent’s duty of care in these circumstances (in this particular case, the agent was aware of facts surrounding the property). Although this case may be restricted to its particular facts and it does not create any new duties of the real estate agent, it illustrates how easily a real estate agent can be held responsible for failure to verify a seller’s statement in the SPIS form. Page 313 Photo caption: What are the risks for the agent in a real estate transaction? In real estate transactions, the agent has the risk of breaching her duties to the principal or being liable to the outsider (see Risks for Agents, above). An example of the potential liability of an agent is illustrated in Krawchuk v Scherbak, in which the real estate agent was liable for negligent misstatement. Page 314 Business Application of the Law: Managing the Risk of Using an Agent Critical Analysis: Since the agency relationship creates considerable risk for the principal, why not simply forego the use of an agent? In other words, why not eliminate the risk by not engaging the services of an agent? While not engaging the services of an agent would eliminate agency risks, a business would not be able to accomplish much without the services of an agent. For example, a corporation could not conduct business without an agent, a person could not go into partnership with another because by law, partners are agents for each other, and a sole proprietor would have to do everything for herself without the assistance of an agent. It simply is not feasible to conduct business to any extent without an agent. Page 314 Photo caption: What is the best way of managing the risk of using an agent? Because it is not possible to avoid or eliminate all of the risk because the services of an agent are often needed, and because it is not wise to simply accept the risk and do nothing, and because it may be costly or impossible to transfer all of the risk through insurance, the best risk management strategy is risk reduction—take steps to mitigate as much of the risk as possible. Instructor Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085
