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This Document Contains Chapters 26 to 28 Chapter 26 The Legal Aspects of Credit Instructor’s Manual–Answers by Philip King and Steven Enman I. TEACHING OBJECTIVES After studying this chapter, students should have an understanding of • the legal significance of credit transactions in business • methods used by creditors to reduce risk • the difference between secured and unsecured creditors • the ways that lenders and borrowers are protected • the implications of guaranteeing a debt The major objective of this chapter is to demonstrate the significance of credit in business, whether in the form of a routine purchase on credit or a major financing transaction. Students need to appreciate how credit works from the viewpoint of the borrowing business and the lending bank. The chapter explores credit transactions in terms of the protection gained by the secured creditor and the limitations that secured credit imposes on debtors. Credit is the key application of risk management in the financial aspect of a business. The chapter demonstrates the consequences of default for the creditor, the defaulting business, and individuals connected to the business who have personally guaranteed business loans. II. TEACHING STRATEGIES • The Business Law in Practice (BLIP) is a continuation of the scenario begun in Chapter 25. It is a good vehicle for examining the need in a business for expansion financing and the ramifications of that need. The chapter explores the five aspects of credit raised in the BLIP questions: requirements to receive the loan, risk to the business, restrictions on the business, risk to individuals who sign personal guarantees, and the consequences of default. • Use the International Perspective: Credit Risk in International Trade (textbook page 659) as a basis for introducing and discussing the key issue in credit transactions—risk. Especially in deals in which the parties do not know each other well, both parties want to benefit from the deal, but they also want to manage the risk as best they can. • Question for Critical Thinking (QCT) 2 can be used to explore the regulation of consumer credit and consider the need for or effectiveness of regulating commercial credit in a similar manner. Situation for Discussion (SD) 5 discusses the issue of payday loans. • Several of the SDs relate to security for credit, which is the essence of the chapter. SD 2 and SD 3 provide useful descriptions of the credit arrangements between a business and its bank. They reinforce the points that these arrangements include several transactions over time and produce a relationship between debtor and creditor that is important to both parties. SD 1 illustrates the rules of priority, super priority, and purchase-money security interests. SD 4 deals with after-acquired property as security. • Several items can be used to explore the remedies in a credit transaction. QCT 1 emphasizes the importance of the distinction between secured and unsecured creditors. SD 1 deals with (among other issues) the claim for the shortfall of the proceeds from the secured assets. The important concept of the notice required before calling a loan and appointing a receiver can be examined through QCT 4 and SD 2 and SD 3. • Various aspects of guarantees can be highlighted through SD 2 (creditor’s right to enforce) and SD 3 (the importance of the signed agreement over oral assurances). • QCT 6 and SD 7 are useful tools for wrapping up the chapter in the context of the Business Law in Practice and for discussing the various strategies available to creditors and debtors. • Discussion can be encouraged around several emerging issues, such as payday lending (see SD 5), low interest and no interest financing offers (see Ethical Considerations: The “No Interest” Offer on textbook page 675), and the impact of the economic crisis on the availability and terms of credit (see QCT 3). III. STUDENT ACTIVITIES Task 1: Depending on students’ experience and background, consider asking them to look at the financing structure of a business with which they are familiar. Have them consider the assets of the business and how they could be used to finance the business. Apply the questions posed in the Business Law in Practice. Task 2: As a group activity, have students contact a local bank branch and request an interview with a commercial loans officer. Have them explore the process used by a bank in evaluating a credit request and structuring the security. They could also request copies of the credit documents that a typical small business would sign. Have them consider those documents from the point of view of a borrowing business. Task 3: As a group activity, have students visit two local bank branches and request copies of their forms of guarantee. Ask students to analyze and compare the terms relating to the obligations of the guarantor and the flexibility of the bank. Task 4: Have students choose one of the Situations for Discussion in the Chapter Study section and identify the factors that would affect the lender’s initial decision whether or not to extend credit. In most situations, this requires focusing on the beginning of the relationship rather than on what happens after the loan is granted. To what extent was the outcome of the situation predictable? IV. EXPLANATION OF SELECTED FEATURES Page 659 Photo caption: What legal risks arise in financing the expansion of a business? In credit financing, the legal risks stem from the risk of the failure of the business or the inability to repay the loan on the agreed terms. Consequences of default will be those specified in the credit agreement and will affect the assets of the business and the personal assets of guarantors. Page 659 International Perspective: Credit Risk in International Trade Critical Analysis: Is the letter of credit a device that could be used to manage risk in domestic as well as international transactions? Can it take the place of reputation and reliability in commercial dealings? This feature highlights the risk involved in international transactions, but can also assist in exploring the same issues in domestic transactions. Letters of credit are used in some domestic transactions as a means of compromising on the level of risk. Neither party is likely to feel perfectly secure, but a letter of credit is a vehicle that can produce the highest level of combined comfort. In domestic transactions, the parties can likely better evaluate the creditworthiness of each other before making the deal. In addition, if one party defaults, the legal system will provide better recourse, though subject to the usual problems of expense and delay. Page 669 Figure 26.1: Relationships in Personal Guarantees This figure illustrates that the contract of guarantee is between the creditor and the guarantor, not the guarantor and the debtor. This provides the guarantor with privity of contract, which is required for the creditor to be able to sue the guarantor directly in the event of default by the debtor. Page 671 CASE: Royal Bank of Canada v. Samson Management & Solutions Ltd., 2013 ONCA 313 (CanLII) Critical Analysis: Does this case illustrate the unfairness of standard form guarantee contracts? Did the court properly balance the interests of the bank and the guarantor? Guarantees raise many of the same issues as other standard form contracts. The guarantor has limited bargaining power. The terms are written by the bank and are designed to maximize the bank’s flexibility and minimize its risk. The language is broad and complex, having evolved to close gaps created when clauses were interpreted against the bank. The guarantor may not understand the meaning or the consequences of the language. The Court of Appeal applied fundamental contract law principles in this case without regard for the fact that Ms. Cusack was not involved in the business and never saw the loan agreement she was personally guaranteeing. Note, however, that it would be a challenge to develop “fair” standard form guarantees. What criteria would be appropriate? How can fairness be measured in such a context? Is it possible for one set of terms to be fair in all circumstances? Page 675 Ethical Considerations: The “No Interest” Offer Critical Analysis: Is this type of credit offer fair? Should consumers be bound by such terms and conditions? Should the “administration fee” be included in the calculation of interest, with the result that the offer would violate the Criminal Code? This feature again illustrates the balance to be achieved between consumer protection and the freedom to contract. In this case, the medium in question is advertising, and the issue is the extent to which consumers should be protected from offers that sound too good to be true but come with a lot of fine print and legal traps. Can it truly be said that an agreement has been voluntarily entered into when one party is more or less relying on a lack of understanding by the other party? To what extent should consumers be protected from themselves? Chapter 27 Bankruptcy and Insolvency Instructor’s Manual–Answers by Philip King and Steven Enman I. TEACHING OBJECTIVES After studying this chapter, students should have an understanding of • the legal aspects of business failure • the rights and obligations of debtors and creditors when a business fails • alternatives to bankruptcy • the stages in the bankruptcy process The principal objective of this chapter is to introduce students to a part of the business cycle that is often overlooked—what happens when the business is no longer financially viable. The primary focus of attention in business courses is on businesses that are going concerns. Yet a large number of businesses, particularly new ones, close their doors every year. What happens then is significant for owners, employees, and creditors. Bankruptcy and insolvency law offers a number of options to the debtor and creditors. It is important that managers know how to make optimal choices and appreciate the ensuing rights and obligations. Making the wrong choices can harm the debtor and many of those with whom it had business relationships. It is also important that students understand the difference between insolvency, which is a factual matter, and bankruptcy, which is a specific legal process. This chapter explores the choices that are available when a business faces financial difficulty or becomes insolvent. The reaction of the protagonist in the Business Law in Practice scenario is typical. Debtors often panic, they borrow from one creditor to pay another, and when things become desperate, they attempt to pay friends and family members. Because the debtor is likely unable to sort out matters in a manner that treats creditors and other stakeholders equitably, the law steps in to protect these people. These legal rules also increase certainty and predictability for people doing business with the insolvent debtor. Students should understand the operation of the bankruptcy and insolvency laws in both the legal and business contexts. They should also be encouraged to explore the effect that business failure has on the diverse group of people who may be affected. Finally, students should consider the evolution of bankruptcy and insolvency law and the reasons that those laws have come to exist. II. TEACHING STRATEGIES An effective strategy in teaching bankruptcy and insolvency law is to place it in a business context. Taught otherwise, it becomes a complex and dry set of rules. In this chapter, the Business Law in Practice scenario is an essential teaching tool. It completes the trilogy begun in Chapter 25. Refinancing and expansion have failed. This scenario puts a human face to the legal issues of bankruptcy and insolvency. Bankruptcy law must be put in its historical context. Although many students may not know Dickens, they likely know Oliver Twist and A Christmas Carol. From each novel (along with Little Dorrit), they can sense the misery of poverty in Victorian England. It is not a stretch for them to imagine what life was like for Dickens’ father in Marshalsea Prison. They begin to recognize the futility of imprisoning debtors, and appreciate the principles behind the modern laws of bankruptcy. The material can be taught in more or less depth depending on the needs of students and their stage in the business program. For general business students or those in the first years of study, it is sufficient to explain the options available to Hometown, its owners and the people who do business with Hometown, including its creditors. Students should learn the underlying roles of the different participants in a bankruptcy, especially the role of the trustee in bankruptcy. Students should focus on the choices available to the stakeholders and the possible legal and business consequences of those choices. For example, in many business insolvencies, creditors will simply walk away from the debt owed, because they estimate that the time and expense necessary to initiate proceedings and pursue collection will outweigh the amount that will likely be recovered. For students who are majoring in accounting or considering careers in finance, or for students in their last years of study, instructors can address the chapter in full. By using the Business Law in Practice scenario, students can move through the choices and events from insolvency to proposals or bankruptcy. The figures in the chapter provide the numerical detail to follow the process from beginning to end. See Figures 27.1, 27.2, and 27.3. Students can also glimpse what is involved in a career as an insolvency practitioner. Finally, it is important to stress the ethical issues that arise in insolvency and bankruptcy. Since these are often stories of people operating under conditions of extraordinary stress and facing choices that have few positive outcomes, there is a strong need for ethical and legal guidelines. Students should be encouraged to consider the implications of legitimate actions from the perspective of legal and ethical rights. Another approach is to discuss the chapter within the framework of a series of questions, such as the following: • What are the options for a debtor in financial difficulty? • What are the options for creditors regarding a debtor in financial difficulty? • How does a debtor know when it is insolvent? • What choices are available to an insolvent debtor and how should they decide among them? • What are the purposes of the BIA (Bankruptcy and Insolvency Act)? • How do bankruptcy protection and proposals work? • What is the CCAA (Companies’ Creditors Arrangement Act) and why is it used? • How does a debtor become bankrupt? • What authority does a trustee in bankruptcy have over the debtor’s assets? • To what extent can a trustee in bankruptcy investigate and reverse transactions that have occurred? • How does the trustee in bankruptcy distribute the assets of the bankrupt estate to the creditors? • How and when does the bankruptcy process end? III. STUDENT ACTIVITIES Task 1: Before students read this chapter, have them record their views and perceptions of the bankruptcy process. If done in class, this could be a group discussion. Ask them how they think the system works. What is it meant to achieve? What is the impact of bankruptcy on those who experience it? What about others who are affected by a bankruptcy? Follow this up when they have finished the chapter. Have their views changed? Task 2: Ask students to come to class prepared to discuss an insolvency or a bankruptcy in their local community or currently in the news. Have them relate the events to the legal process and trace the impact on the various stakeholders. Is the legal process meeting its goals? Task 3: Invite an insolvency practitioner to the class to talk about her role and experience in the process, along with the roles of the other players. Practitioners always have stories that help to bring the process to life. Students can ask questions relating to the two tasks above. IV. EXPLANATION OF SELECTED FEATURES Page 683 Figure 27.1: Preliminary Statement of Assets and Liabilities for Hometown Hardware Ltd. This figure shows the assets and liabilities of the retail store which is the subject of the Business Law in Practice example in this chapter. It is important for students to understand this basic financial statement, because it forms the basis of the two more detailed financial statements which follow (Figures 27.2 and 27.3). Students should understand that the company is insolvent based on the amount of its liabilities compared to the value of its assets. Students should also understand the difference between the secured creditors and unsecured creditors (discussed in Chapter 26). Page 686 Business Application of the Law: Bankruptcy Protection and Corporate Reorganization Critical Analysis: Were the interests of stakeholders, including employees and the public, adequately protected by the process described above? Should large companies be treated differently from smaller companies in the bankruptcy regime? Should the CCAA be available for companies that have no intention of staying in business? The bankruptcy protection process can be useful for both the creditors and the debtor. It provides an opportunity for the rehabilitation of debtors so that creditors may have a better chance of recovering what is owed to them than if the business became bankrupt. Proposals under the BIA and arrangements under the CCAA both potentially allow an insolvent business to avoid bankruptcy and continue to operate. However, in this case, the owners of Target had no intention of staying in business, and the CCAA process was used solely to liquidate the assets of the business in an orderly manner. It may be argued that the interests of certain stakeholders in this case, such as landlords, employees, and unsecured trade creditors, were unfairly disregarded in favour of the interests of Target’s U.S. parent company. Many people have observed that, due to the costs involved, reorganizing under the CCAA is only available to the largest companies. This may affect smaller companies disproportionately and provide opportunities to larger companies that are not available to smaller companies. Many people feel that proposals under the BIA and arrangements under the CCAA should only be available to companies who are engaged in a good faith effort to remain in business. Otherwise, it may be argued, stakeholders that the legislation is designed to protect are the losers and large corporate interests, such as DIP lenders (or in this case a parent company) are the winners. Page 686 Photo caption: What happens when a business is no longer viable? The Target saga illustrates one process that may occur when a business fails. Although Target entered the Canadian market with great optimism and fanfare, its presence in the Canadian retail landscape was short lived and many people suffered as a result. Page 688 Business and Legislation: Origins and Purposes of Bankruptcy Legislation Critical Analysis: Should individuals who make bad financial decisions be able to start over? Should companies that fail as a result of poor management decision making be entitled to a second chance? Whose interests are being protected by these laws? This box serves two important purposes. It provides historical background and lists the purposes of the current bankruptcy and insolvency legislation. These purposes form a key element of the substance of this chapter. In addition, the box highlights some of the recent amendments to the legislation. Page 693 Figure 27.2: Revised Statement of Assets and Liabilities for Hometown Hardware Ltd. This figure shows the assets and liabilities of Hometown Hardware after certain adjustments have been made prior to the bankruptcy distribution process. On the asset side, the revised values represent adjustments for goods that were repossessed by unpaid suppliers and amounts from under value transfers that were repaid. On the liabilities side, the fees relating to the bankruptcy have been added, and under value transfers that were repaid have been added back. Page 696 Case: McRudden (Re), 2014 BCSC 217 (CanLII) Critical Analysis: Does this case preserve the integrity of the bankruptcy system? Did the judge adequately balance the interests of the debtor, creditors, and the public? This case illustrates some of the checks and balances in the bankruptcy system. The court found that the debtor was not entitled to an absolute discharge, because he had not behaved honestly or appropriately. The court attached conditions to the discharge of Mr. McRudden, thus ensuring that some of his creditors would be repaid before he was able to walk away from the bankruptcy process. This case demonstrates that a discharge from bankruptcy will not always be available and, in particular, will not be available when a debtor has behaved improperly and has abused the bankruptcy process for his own benefit. Chapter 28 Insurance Instructor’s Manual–Answers by Dorothy DuPlessis I. TEACHING OBJECTIVES After studying this chapter, students should have an understanding of • the role of insurance in risk management • the nature of an insurance contract, including the rights and obligations of the insurer and the insured • the various kinds of insurance This chapter is offered as an important part of the risk management theme informing the entire textbook. An insurance policy permits a business to shift the risk of various kinds of losses from itself to the insurer. The risk transference approach to risk management—discussed in Chapter 3—has already noted that insurance is one of the best responses to many of the risks faced by business. This chapter provides more detail to such a claim. The Business Law in Practice scenario—involving a company that produces wires and provides some consultation services—contextualizes the need for the three basic kinds of insurance: • life and disability insurance • property insurance • liability insurance The chapter also introduces more specialized policies that relate to the commercial world, including comprehensive general liability insurance, directors and officers liability, and business interruption loss insurance. II. TEACHING STRATIGIES Students may have some sense of insurance since they probably drive a car. However, it is likely that their understanding of how a policy works is incomplete. . • What is insurance? What is its purpose? Question for Critical Thinking (QCT) 1, QCT 3 (page 724), QCT 6 (page 724) Another approach to this chapter is to underscore how insurance contracts differ from other types of contracts. Some of the unique features of an insurance contract include the necessity for an insurable interest, the concept of indemnity, the insured’s duty of disclosure, and the special rights of the insurer—including subrogation. This analysis gives students a chance to review the general principles of contracts in Part 2 of the textbook; recognize how insurance law is a specialized area of contract law; and, perhaps most importantly, provides a practical, business application of the law. • What are the characteristics of an insurance contract? Duty to disclose: QCT 1 (page 724), Situation for Discussion (SD) 8 (page 726), Marche v Halifax Insurance Co (page 706) Insurable interest: QCT 2 (page 724), SD 3 (page 725) Indemnity: SD 5 (page 725) Subrogation: SD 4 (page 725) One way of highlighting the risks associated with doing business—and thereby identifying the need that an insurance policy fills—is to ask students to identify the unique hazards that various businesses face. For example, gas stations face a risk that their underground tanks will leak into the ground, causing contamination to water and soil. Dry cleaners have solvents and other cleaners that require special storage and disposal. Failure to do so can result in environmental contamination and illness in employees who work onsite. A catering company may serve a meal that causes food poisoning. Patrons of a fitness club may injure themselves on poorly maintained exercise equipment. An accounting firm’s audit may be negligently conducted. A manufacturer may produce glue in defective tubing that erupts and causes injury to the user. Virtually every Business Law in Practice scenario in the textbook presents risks that have materialized and could have been insured against. • What are the major types of insurance? SD 1 (page 724) In the Business Law in Practice scenario, it is clear that WEC faces a considerable number of risks that could threaten its economic viability. Machines may break down that prevent WEC from meeting its contractual obligations, a fire could start in the plant, a potential customer may be injured while touring WEC property, and an error could be made in the advice given to a client. A list of risks WEC faces is described in the textbook on pages 711–712. The scenario thereby demonstrates why business must pay attention to its risks and purchase insurance accordingly. • What are common exclusions in insurance contracts? Canadian National Railway v Royal and Sun Alliance Insurance Co of Canada (page 710), SD 2 (page 724), Environmental Perspective: The Pollution Exclusion in Commercial General Liability Policies (page 718) • What remedies does an insured have? QCT 5 (page 724), SD 7 (page 726), Whiten v Pilot Insurance Co (page 720) III. STUDENT ACTIVITIES Task 1: The material in this part lends itself to the services of a guest speaker, such as an insurance agent or broker, or a risk manager from a large organization (including the university). Invite a guest speaker and have the students quiz the speaker. If the guest speaker is an agent or broker, the following topics can be considered: • the duties and obligation of people in their professions • challenges in the profession • new developments in insurance products. If the guest speaker is a risk manager, students can ask about the following: • the identification of risks • the calculation of premiums • loss prevention Task 2: The DVD that supports the Instructor’s Manual has a clip titled “Caller regrets genetic test for heart condition.” Have students view the segment and respond to the Critical Analysis question in Ethical Considerations: Genetic Testing and Insurance (page 705). IV. Explanation of Selected Features Page 703 Photo caption: How does climate change affect insurance? Climate change has caused more frequent and more severe extreme weather events. Blair Feltmate, chair of the Climate Change Adaptation Project at the University of Waterloo has stated that studies conducted over the last 15 years have indisputably shown that the frequency and severity of extreme weather events across the planet have increased. Canada has not been immune from weather related disasters—massive flooding in Alberta, ice storms in Ontario and eastern Canada. As a result, the yearly cost of insurable, weather-related disasters in Canada has increased from $400 million in 2009 to $1 billion in 2012 and $3.2 billion in 2013. The increase in claims has affected both the cost and availability of insurance. Intact Financial Corp, one of Canada’s largest property insurers raised premiums by 15 to 20 percent in 2013–14. The company also made changes in its insurance products as well as increasing most deductibles. The most direct effect has been on property insurance, which responds to damage but it also affects other types of insurance such as crop (climate changes can result in droughts and lower crop yields), health and life (increased respiratory ailments and distress from summer heat waves), and liability (claims of negligence against the insured for failing to take adequate precautions against weather activity). Sources: Gordon Hilliker, “Climate change heats up insurance losses in Canada,” The Lawyers Weekly (22 March 2013) 10; Joan Bryden, “‘Many, many’ Canadian homes could become uninsurable,” The Globe and Mail (25 June 2013), online: Globe and Mail ; Erika Thorkelson, “Insurance Industry calls for cooperation on climate change,” Desmog Canada (7 April 2014), online: Desmog Canada ; Romina Maurino, “Property insurance in Canada likely to arise amid increased ‘climate change risks’,” Huffington Post (8 January 2014), online: Huffington Post . Page 705 Ethical Considerations: Genetic testing and Insurance Critical Analysis: What is the problem with an outright ban on insurance companies using genetic information in insurance decisions? Are there any concerns with the two-tiered approach? The problem with not requiring disclosure of genetic information or an outright ban on insurance companies using genetic information in insurance decisions is one of adverse selection. With knowledge of negative genetic information, people who are not required to disclose this information to insurers may obtain more insurance in larger amounts. This result undermines risk assessment (insurance decisions are made without all the material information). Also as Elizabeth Adjin-Tettey explains, “There is also the potential for actuarial inequities as risk pools will no longer be made up of people facing similar risks, but rather those with low risks may be subsidizing those high risk members while the latter enjoy benefits disproportionate to their risk levels.” Elizabeth Adjin-Tettey explains how the two-tiered system raises a number of concerned such as “what constitutes basic insurance coverage, especially given the reality of different socio-economic statuses and individual family circumstances. There is also the risk that this system could perpetrate unequal wealth distribution where so-called basic insurance coverage is used for wealth accumulation rather than providing minimum financial security, while being subsidized by other policy holders. This may result from multiple basic insurance policies for different purposes and obtained from different insurers purchased by those with the financial means absent limits on the number of policies one can purchase.” Sources: Elizabeth Adjin-Tettey, “Time to write some rules for genetic risk,” The Lawyers Weekly (8 June 2012) 10; Elizabeth Adjin-Tettey, “How genetic information affects access to insurance,” The Lawyers Weekly (21 August 2009), online: The Lawyers Weekly . Page 705 Photo caption: How does genetic testing affect access to insurance? Because insurance contracts are contracts of utmost good faith, the insured has a duty to disclose all material facts that affects an insurer’s decision to sell insurance and the premium charged. If the insured has had genetic testing that shows a genetic predisposition to certain diseases or conditions, the insured has a duty to disclose this information. If the genetic predisposition results in a higher-than-average risk, the result may be a denial of coverage, higher premiums or reduced benefits. If the insured fails to disclose the results of genetic testing, there is a risk that the insurance contract will be voided for nondisclosure. Elizabeth Adjin-Tettey, “How genetic information affects access to insurance,” The Lawyers Weekly (21 August 2009), online: the Lawyers Weekly . Page 706 Photo caption: When does an insured have a duty to disclose? An insured has a duty to disclose at the time of applying for insurance and at the time of any material change to the risk. For example, a business that closes for a time, changes its product lines, or moves its operation is required to disclose this information to its insurer when the change occurs. Page 706 Case: Marche v Halifax Insurance Co, 2005 SCC 6, [2005] 1 SCR 47 Critical Analysis: The court rejected the insurance company’s attempt to deny coverage based on an alleged breach of Statutory Condition 4. What is the uncertainty created by the decision for insurers? Even though the insured had breached Statutory Condition 4 of the Nova Scotia Insurance Act, the insured were relieved of the consequences of the breach under Section 171 of the Act, which provides that a policy condition is not binding if a court holds it to “unjust or unreasonable.” The Court held that Section 171 applies to both contractual and statutory conditions. This creates uncertainty in that it threatens the reliability of statutory conditions in general. As well, the decision fails to clarify the scope of an insured’s duty to report a material change. “Far from being certain that coverage can be denied when an insured fails to report a change material to risk, insurers must consider whether enforcement of Statutory Condition 4 would lead to an unjust or unreasonable result” (Source: Barbara Billingsley, “Insurance law developments from the Supreme Court of Canada in 2005: Marche v. Halifax Insurance Company and Royal Bank of Canada v. State Farm and Fire and Casualty” (2006) 24 Can J of Ins L 1). Page 710 Case: Canadian National Railway v Royal and Sun Alliance Insurance Co of Canada, 2008 SCC 66, [2008] 3 SCR 453 Critical Analysis: How does this decision affect policyholders who suffer a loss that the insurer attributes to a failed design? In cases in which the insurer denies coverage based on the faulty design exclusion, the law is now clear. A design is only faulty if it did not meet the standard set by the state of the art at that time. A design will not be considered faulty simply because it failed to work for the intended purpose or because it failed to withstand all foreseeable risks. That said, it is important to point out that the coverage available under any policy is dependent on the specific language in the insurance contract. Also, in the future, insurance contracts may be drafted to take into consideration the decision in CNR v Royal and Sun. See Aidan L Cameron and Jennifer Chan, “The Supreme Court of Canada narrows the faulty design exclusion in all-risk property and builders risk policies,” McCarthy Tetrault (23 December 2008), online McCarthy Tetrault . Page 712 Photo caption: What are the advantages and disadvantages of no-fault automobile insurance systems? The advantages of a no-fault system are that there is a pay out for all accidents, regardless of whether anyone was at fault. The injured party is reimbursed relatively quickly by its insurance company, thus saving the party from a prolonged court case. Proponents of no fault claim that it gives increased access to rehabilitation and medical funding. The disadvantages of a no-fault system are that insurance companies still require that damages be shown, and exactly what happened still needs to be established. It places an upper limit on awards, with a set amount being determined by an insurance company. The claimant loses the right to litigate in a no-fault system; however, some no-fault systems allow a severely injured claimant to litigate if the loss is in excess of no-fault benefits. The incentive to drive safely can be minimized under a no-fault system, as both the negligent driver and the innocent victim are entitled to the same compensation. Despite promises by insurance companies, no-fault has not resulted in reduced insurance premiums. On-going entitlement to damages must be continually proven, and this can be a drawback for the seriously injured who are forced to continually claim their entitlement. Page 713 Business Application of the Law: No-Fault Insurance Systems Critical Analysis: What is the purpose of “pain and suffering” caps for minor injuries? Do you see any problems with imposing caps? What is the likely effect on the insurance industry if the caps are removed? The purpose of “pain and suffering” caps for minor injuries is to control rising insurance premiums and escalating claims costs. The problem with imposing caps for some types of injuries is that it results in differential treatment of injured people and it results in some victims not being fully compensated for their pain and suffering. The removal of the cap is a likely increase in insurance premiums. See Charles Rusnell, “Inside a crisis: how insurers got their way,” Edmonton Journal (2 March 2008) A1. Page 716 Business Application of the Law: Business Interruption Insurance Explained Critical Analysis: When should a business not purchase business interruption insurance? The purpose of business interruption insurance is to provide companies with funds to offset the loss of income during the period a business is forced to suspend operations. If a business is portable in that it can be back to normal the day after a property loss then business interruption insurance is not necessary. Businesses that invest in buildings, equipment and hold a lot of inventory are prime candidates for business interruption insurance. Other businesses such as the providers of legal services that do not invest in these assets and could easily re-establish operations in a temporary space within days probably do not need this insurance product. Source: “Business interruption can be tailored to specific needs,” Vancouver Sun (8 October 2008), online: Vancouver Sun ; Gordon Powers, “The Alberta flooding case for business interruption insurance,” MSN Money (12 July 2013), online: MSN Money . Page 717 Photo caption: How can a business use insurance to manage the risk of a natural catastrophe? A natural catastrophe may take many forms—heavy rainfall, high winds, an ice storm, a wild fire, to name a few examples. What each catastrophe has in common is the possibility of causing damage to a business. A business may mitigate the risk by having an insurance program in place that includes: • Property insurance that covers damage or loss of physical assets when an insured peril such as wind, earth movement, or the like occurs • Business interruption that compensates for the loss of income when a business is shut down following an insured loss • Specialized insurance products that cover losses not covered by the standard property insurance. For example flood insurance is available as an add-on to property and business interruption insurance. Page 718 Environmental Perspective: The Pollution Exclusion in Commercial General Liability Policies Critical Analysis: Does giving effect to the pollution exclusion clause virtually nullify the insured’s coverage? What are public policy considerations in upholding absolute pollution clauses? Giving effect to the pollution exclusion clause does not nullify the insured’s coverage. A commercial general liability policy provides coverage for a wide range of liability claims, including claims for bodily injury and damage to property. Denying coverage for pollution liability does not deprive the insured of protection for all the other risks insured against. Absolute pollution exclusion clauses are sometimes given little effect on the basis that insurance coverage should be interpreted broadly in favour of the insured and exclusion clauses strictly and narrowly construed against the insurer. The problem with this approach is that it fails to give effect to the plain meaning of the insurance contract and ignores the intentions of the parties in entering into the contract of insurance (the historical purpose of pollution exclusion clauses was to preclude coverage for the cost of government mandated environmental cleanup). The public policy consideration in upholding absolute pollution exclusion clauses is “a fear that if pollution is covered by CGL insurers, polluters will have no incentive to reduce or eliminate their polluting activities. If there is no insurance coverage for such activities, it has been suggested (perhaps optimistically) that companies, and their directors who face personal exposure, will think twice before polluting. The result of such considerations will, in theory, be a cleaner environment.” See Jonathan LS Hodes, “Pollution exclusion clauses in the CGL policy,” Clark Wilson LLP (February 2009), online: Clark Wilson . Page 720 Case: Whiten v Pilot Insurance Co, 2002 SCC 18, [2002] 1 SCR 595 Critical Analysis: The Insurance Council of Canada was an intervener at the Supreme Court. It submitted that there should be a judicially imposed cap of $25 000 on punitive damages awards. What are the arguments for such a cap? What are the arguments against such a cap? The advantage of a cap is that it helps prevent punitive damage awards that are grossly disproportionate to the gravity of the offence. The disadvantage of a cap is that it may prevent an award that is sufficient to punish the wrongdoer, denounce the conduct, and deter others from engaging in similar behaviour. The Supreme Court of Canada noted, “none of the common law jurisdictions has adopted (except by statute) a formulaic approach as advocated by the intervener, the Insurance Council of Canada in this appeal, such as a fixed cap or fixed ratio between compensatory and punitive damages. The proper focus is not on the plaintiff’s loss but on the defendant’s conduct. A mechanical or formulaic approach does not allow sufficiently for the many variables that ought to be taken into account in arriving at a just award.” Instructor Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085
