Absolute liability is the obligation of an insurer to indemnify an innocent third party who was injured by an insured, while the insured was in violation of the insurance policy. Under the absolute liability provision of the Insurance Act, RSNB 1973, c I-12, [the 'Act'], the insurer may deny coverage to the insured for the breach of the policy; however, the insurer remains responsible for indemnifying the innocent third party up to the statutory limits, which is $200,000 in New Brunswick. In other words, the innocent third party is not prejudiced completely from recovery by the insured's violation of the insurance policy, except to the extent of statutory limits.
Absolute liability arose out of concerns for the innocent third party driver - it was held to be contrary to public policy to deny recovery to an innocent third party who was injured in an accident when that party had no way of knowing or preventing the insured's violation of the policy.
The absolute liability provision is found in section 250 of the Act. It is section 250(1) of the Act that provides injured third parties a right of direct recourse against the insurer once a judgment has been recovered against an insured person entitled to indemnity under the automobile liability policy. As per section 250(11), when the policy provides for coverage in excess of this limit, as the majority of policies do, the insurer is entitled to avail itself of any defence it has against the insured, notwithstanding section 250(4). This means that the insurer may deny claims made by the injured third party in excess of $200,000, on the basis that the insured violated the policy and is therefore not entitled to coverage.
When Does Absolute Liability Apply?
Absolute liability applies in the following circumstances:
Section 230(1) of the Act lists various statutory conditions, which are deemed to be a part of every automobile insurance contract. The two Statutory Conditions, which trigger the absolute liability provision of the Act, pertain to material change in risk [#1] and prohibited use of the automobile by the insured [#2]. If an insured violates either or both of these Conditions, the insurer is absolutely liable to any injured innocent third party.
Statutory Condition 1
In Patriquin v Gogo, 1 the insured's failure to disclose a new driver with an impaired driving conviction [a material change in risk], triggered the absolute liability provisions of the Insurance Act and reduced the obligation of the insurer to the statutory limit of $200,000.
Statutory Condition 2
With respect to the prohibited use of the automobile by the insured, a policy breach by the insured may include driving while not "authorized by law"; while not qualified; while prohibited by a Court Order; while under the age of 16; for an illicit/prohibited purpose; and/or while in a race. In such a case, the insurer is absolutely liable to indemnify the injured innocent third party, as per the Act.
However, what is meant by "authorized by law," thereby triggering the absolute liability provisions, has been the subject of much discussion. In Kereluik v Jevco Insurance Co, 2 the impaired insured was involved in an accident in which he injured a third party. He was charged with impaired driving and breach of an Undertaking [as he was under a Court Order to abstain from the possession and consumption of any alcoholic beverages]. The insured had a valid Ontario driver's licence at the time of the accident. The third party commenced an action against the insured; the insurer defended the insured for several years. However, once the insurer became aware of the insured's breach of an Undertaking, it stopped funding his defence. The insurer argued that by breaching the Undertaking, the insured was not "authorized by law" to drive and thereby in breach of a Statutory Condition. The Court of Appeal upheld the decision of the application judge and concluded that the insured was entitled to a defence and to indemnification from the insurer.
It was held that the insured was actually "authorized by law" to drive, because he held a valid Ontario driver's licence, he was in compliance with the terms of that licence, the licence contained no alcohol-related condition or prohibition and the licence was in good standing. With respect to the meaning of "authorized by law," the Ontario Court of Appeal stated that this condition pertains to the validity and terms of an insured's licence to drive at the time of the accident. 3 It was ruled that the legal authority.