Kosmopoulos v Constitution Insurance Co of Canada [1987]

Kosmopoulos v Constitution Insurance Co of Canada [1987] 1 SCR 2 is a significant decision by the Supreme Court of Canada that addresses the court's authority to pierce the corporate veil. The case revolves around the circumstances in which the court can impose liability or interest on shareholders rather than the corporate entity itself. Notably, the court emphasised that lifting the corporate veil is only justified when it is deemed just and equitable for third parties.

Mr Kosmopoulos, the sole shareholder and director of a leather goods company, sought indemnification from Constitution Insurance Co for damages caused by a fire. The insurance company denied coverage, arguing that the property was owned by the corporation, even though Mr Kosmopoulos was the sole shareholder. This denial aligned with the precedent set by the House of Lords in Macaura v Northern Assurance Co Ltd [1925]. The key issue was whether Mr Kosmopoulos, as a shareholder, could recover damages for the company's assets covered by the insurance.

Under common law, corporations are considered separate legal entities from their owners, as established in the landmark case Salomon v Salomon [1896]. The decision in Salomon v Salomon was based on the clear language of the statute under which the corporation was created, such as the Companies Act 1862 (UK). Although business corporations are creatures of statute, they are recognised as separate legal entities.

At the trial level, the judge ruled that Mr Kosmopoulos could not recover damages as the owner of the business assets, which belonged to the company. However, he could recover as the insured party due to his insurable interest in the building.

The Supreme Court of Canada upheld the lower courts' rulings, rejecting Mr Kosmopoulos's arguments. The court first determined that the situation did not warrant lifting the corporate veil. The decision to lift the veil involves examining whether doing so would be just and equitable. The court clarified that the principle of separate legal entities is set aside only when it would produce a result too flagrantly opposed to justice, convenience, or the interest of the Revenue.

The court dismissed the owner's claim that he acted as a bailee of the company's assets, as the company still maintained possession of the assets. However, the court recognised that the owner, as the insured party, held an insurable interest in the assets. Rejecting the Macaura principle, which limited insurable interest to those with legal or equitable title, the court applied the factual expectancy test. This test considers whether the insured party has a relationship or concern in the subject of the insurance that may be affected by the insured perils, irrespective of ownership or title.

In summary, Kosmopoulos establishes that insurable interest can be determined by the factual expectancy test, allowing recovery for damages even without legal or equitable title to the insured asset.
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