Who Pays First? The Rise of the Priority Flip in Automobile Insurance

Written by Monika M.L. Zauhar, Partner and Stephanie Charlton, Associate, in Fredericton.

It is well established that the owner of an automobile is vicariously liable for the negligence of those who drive the vehicle with the owner’s consent.  Further, insurance legislation across Canada recognizes that more than one insurance policy may cover a particular loss.  When multiple policies apply, the standard rule is that the owner’s automobile policy responds first, [i.e. the ‘first loss’ insurer], and that the driver’s insurance only responds after the owner’s coverage is exhausted, [i.e. ‘excess’ insurance].

As the owners of large fleets of automobiles, rental and leasing companies have traditionally been held responsible for the negligent acts of renters and lessees, drivers over whom they had no control and whom they could not rate accurately from an insurance perspective.  This imposed a significant financial burden on the car rental and leasing industry.

Therefore, in recent years, several provinces have re-examined and modified the conventional framework, particularly in the context of vehicles owned by rental and leasing companies, introducing what is often referred to as a ‘priority flip.’  These legislative changes were intended to alleviate the burden on the rental industry and were designed to cure what was considered to be unfairness to such companies through the application of the traditional rule.  Ontario was the first province to formalize this change, and Alberta and Nova Scotia have since followed suit.

This concept was discussed recently in the Alberta case of Tokio Marine & Nichido Insurance Company v Security National Insurance Company, 2020 ABCA 402 [Tokio Marine].  In that case, it was noted at paragraphs 217 to 222 of the decision that a significant catalyst for legislative change in Canada was a $12 million damage award settlement by a leasing company in Ontario in 2004, as a result of the negligence of a driver of a leased car.  The car rental and leasing industries pressed for legislative changes, to which the Ontario legislature responded in 2005 by amending its Insurance Act, adding a provision related to the priority flip.  According to the jurisprudence, the purpose of that provision was to relieve the rental company’s insurer from being the first loss insurer, where other insurance is available to the renter/driver.

The following was stated at paragraph 219 of Tokio Marine, ibid:

The policy rationale behind such a transfer is that it is unfair that the owner’s insurance coverage is first loss payable when accidents are being caused by the negligence of the drivers of rented or leased vehicles. A driver’s or lessee’s insurance, where available, should be first loss payable because their insurers would be better situated to evaluate the risks involved and charge a premium commensurate with that risk.

The Court further highlighted that a comparable regime had officially gone into effect in Alberta in 2011. The relevant statutory provisions include subsection 277(1.1) of Ontario’s Insurance Act, RSO 1990, c I.8; subsection 596(4) of Alberta’s Insurance Act, RSA 2000, c I-3, together with section 7.1 of the Miscellaneous Provisions Regulation, Alta Reg 120/2001; and section 148D of Nova Scotia’s Insurance Act, RSNS 1989, c 231, together with the Non-Owned Automobile Insurance Liability Regulations, NS Reg 186/2013.

A ‘priority flip’ regime changes the order in which insurers respond; in such a regime, the policy of the lessee or renter is typically first loss, and the rental company’s policy falls to excess coverage.  Further, where the driver of the automobile was not the renter, the driver’s personal automobile policy may also respond before that of the owner.  Some of these regimes have also imposed a cap on an owner’s vicarious liability for the negligence of a lessee or renter.

These legislative changes have important practical implications for insurers, brokers and others involved in underwriting or managing claims for rented or leased vehicles.  The following considerations are key in determining the priority of insurance:

• Confirm the nature of the arrangement and applicable regime. More specifically, whether the automobile is rented or leased, and whether a priority flip framework applies in the province where the claim arises.
• Assess whether the vehicle was rented in the “ordinary course of business.” In this regard, Alberta Courts have ruled that a courtesy vehicle provided by a dealership did not trigger the priority flip because the leasing/renting of vehicles was not the dealer’s ordinary business.  See: Tokio Marine, supra.
• Confirm the availability of separate insurance coverage to the driver and/or lessee/renter. If such coverage is absent or insufficient, the owner’s policy may still be required to respond.
• Consider limitations related to monetary caps or claim categories, i.e. bodily injury versus property damage claims.

The priority flip is reshaping automobile insurance across Canada, replacing the longstanding owner-first rule with a model that is more favourable to car rental and leasing companies.  With several provinces having adopted this approach and others potentially considering similar reforms, staying informed about these developments and recognizing jurisdictional variations is essential for those involved in the insurance and rental/leasing sectors, in order to make informed decisions and avoid surprises.