Court favours insurer in case that differentiates between leasing and financing

B.C.’s public insurer is off the hook to pay for vandalism damage done to a car that was jointly owned by the driver and his finance company, because the arrangement between the two car owners was not a true lease.

In Drive Finance Company (Canada) Ltd. v. Randhawa, B.C.’s Civil Rules Tribunal heard that Drive Finance Canada (DFC) leased a 2014 Honda Civic to Harmanpreet Singh Randhawa, who failed to make payments on the car. In the process of repossessing the car, DFC could not start the car; when replacing the battery, its licensed mechanic discovered that someone had cut wires under the car’s dashboard.

“[The mechanic’s] view was that the owner [Randhawa had] likely cut wires in an attempt to deactivate a device installed in the car that could immobilize the car if payments were late,” the court decision notes.

The car was the subject of a comprehensive insurance policy issued by the Insurance Corporation of British Columbia (ICBC). ICBC records show both DFC and Randhawa were listed as the owners of the car. DFC made a $2,400 claim with ICBC to cover the damage caused by the cut wires.

ICBC denied the claim. It argued DFC was not entitled to insurance coverage because its agreement with Randhawa was a financing agreement, not a true lease, and so DFC did not have an insurable interest in the car.

The Civil Rules Tribunal agreed with ICBC that DFC’s arrangement was not a true financing agreement.

ICBC’s optional policy says it will “indemnify an insured, to the extent of the insured’s insurable interest, in respect of direct and accidental loss or damage to the vehicle […] for which the own damage coverage is provided.” The term “insured,” the court added, is defined in part as the person named as an owner in an owner’s certificate, and the lessee of a vehicle described in an owner’s certificate.

The ICBC certificate lists both DFC and Randhawa as owners. It further identifies DFC as the lessor and Randhawa as the lessee.

But that’s not definitive proof of a true lease agreement, the B.C. small claims court noted.

For one thing, the court found, the name Drive Financing Company (Canada) Limited suggests DFC is in the business of financing, which is providing money to purchase vehicles.

“This is also consistent with the evidence that Mr. Randhawa selected the car from a dealership,” CRT Tribunal Member Micha Carmody wrote in a decision released Jan. 11. “Although Mr. Randhawa did not give evidence, I find on a balance of probabilities that he likely selected the vehicle he wanted from the dealership before DFC purchased it. This is supported by the purchase documents showing DFC did not acquire the car until after the contract was signed. I find these factors indicate the contract was not a true lease.”

Moreover, the court found, Randhawa was responsible for all licensing fees, insurance, and all maintenance, repairs, and operating expenses. “The contract placed the entire risk of loss on Mr. Randhawa…. As well, the aggregate rental payments, $24,673.68, far exceeded the car’s $14,900 purchase price. These factors all indicate the contract was not a true lease.”

Another common characteristic of true leases is an excess kilometer charge to compensate the lessor for extra wear and tear on the vehicle that would reduce the market value at the term’s end. There was no excess kilometer charge in the contract.

In fact, the default terms of liquidating the contract heavily favoured DFC, suggesting a financing arrangement, and not a true lease. They included the term that, upon, not making payments, Randhawa was then obliged to pay $1,000 for the residual value of the car.

As the court observed, in a true lease agreement, the person leasing the car would have the option to purchase the car at a fair market price upon termination of the agreement.

“Here, Mr. Randhawa was required to pay the $1,000 residual value whether he wished to purchase the car or not,” the CRT found. “I find the $1,000 buyout does not reflect fair market value for the car, which I find would be somewhere around $6,000 wholesale….

“I conclude that DFC’s contract with Mr. Randhawa was a financing arrangement and not a true lease. In reaching this conclusion, I rely on the majority of factors indicating a security interest, but I place considerable weight on the requirement to pay the residual value, which was well below market value, at the term’s end.”

Feature image by iStock.com/fatihhoca