Law – Insurance Law - Prof. Elizabeth Adjin-Tettey
FOUNDATIONS OF INSURANCE LAW
DEFINITION OF INSURANCE
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1. Undertaking by one person (Insurer)
2. To indemnify another person (Insured)
Usually, insured is purchaser of insurance and person whom insurance proceeds are payable to
However, some insurance Ks distinguish between:
1. Named Insureds
Mentioned by name in K as persons to whom insurance proceeds are payable
Typically the purchaser of insurance
2. Unnamed Insureds
Not mentioned by name in K but are entitled to receive insurance benefits because they fall w/in a
particular class of person covered by the K
i.e. automobile liability insurance policies usually provide coverage for both named owner of
the vehicle and anyone operating it w/ the owner’s consent
3. For an agreed consideration (Premium)
Fee paid to the insurer in exchange for promise of indemnity
4. From loss or liability in respect of an event (Risk)
The subject matter of the insurance
The causes of loss, or perils, which are covered by the K
5. The happening of which is uncertain
Can be a happening that either:
a) May not necessarily occur (i.e. fire or flood), or
b) Will definitely occur but at an unpredictable time (i.e. someone’s death)
INSURANCE LAW DISTINGUISHED FROM GENERAL K LAW
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Purpose of insurance K: risk
1. Duty of Utmost Good Faith
Importance of open and frank communication
Maintaining the integrity of the system
Insurer not to exploit vulnerability of insured
2. Fortuity
Random losses – uncertainty re which insured will suffer losses or when they will occur
3. Indemnity
Recovery limited to insured’s actual losses (except in non-indemnity Ks)
4. Consumer Protection
Regulation and principles designed to protect consumers and public generally
5. Compensation
Ensure compensation for victims, especially in 3P policies
ENSURING SOLVENCY & MEETING INSURED’S REASONABLE EXPECTATIONS
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Solvency of insurers essential to loss spreading
Other mechanisms to ensure adequate compensation:
1. Reinsurance
Insurer transfers some risk to other insurers
Reinsurers typically multinationals that only operate in reinsurance market
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Worldwide operations help to spread risk
Legal consequences:
No privity of K b/w insured and reinsurer
The arrangement of choice for life insurance
2. Subscription Policy
Insured has large risk to be insured, not realistic for single insurer
Separate insurance Ks w/ multiple insurers re same object for specific amounts
Typical in property and casualty insurance
Privity of K b/w insured and each insurer
Potential problem: insured must file multiple claims for loss
INSURANCE DISTINGUISHED FROM WAGER
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Insurance:
Anterior risk
Need for insurance for cushioning in event of loss
Insurable interest in object of insurance
Interested in object’s continued existence, risks prejudice from loss or destruction
Wager:
Risk arises from speculation on outcome of an event
Parties otherwise neutral to happening of event but for the wager
BCIA, s. 6: Prohibits wagering and gaming
Rationale for Aversion to Wagering and Gaming Ks:
Public policy
Moral hazard
Support for Wagering From Insurance Industry?
Promotional events willingly supported by insurance industry
i.e. hole-in-one golf tournaments, “Let it Snow” promotion of itravel2000
REGULATION OF THE INSURANCE INDUSTRY
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The Need for Regulation of Insurance:
Power imbalance b/w insurer and insured
Potential exploitation of the vulnerable party
Solvency of insurers and protecting loss spreading goals of insurance
Ultimate goal: consumer protection and confidence in insurance system
Insurance Industry Regulated in Two Ways:
1. Formation and Operation of Insurance Companies
To ensure that companies are solvent and fiscally capable of fulfilling their obligations to pay for insured losses
2. Content and Enforceability of Insurance Ks
Encompasses three primary issues:
A) Substance of Insurance K’s
B) Obligations of parties to the K
C) Qualifications and responsibilities of intermediaries (agents and brokers) involved in K formation
CONSTITUTIONAL LIMITS ON REGULATION OF INSURANCE
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Insurance Regulation and the Division of Powers
1. Provinces have exclusive authority to legislate re insurance Ks and operation of insurance industry w/in each
province (via property and civil rights)
2. Fed government has exclusive authority to legislate re incorporation of national insurance companies
3. Fed insurance companies subject to provincial legislation re operation in the insurance industry
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In other words, federal legislation regulates the status of a company, but provincial legislation regulates
companies’ insurance operations
4. Within its own areas of legislative jurisdiction, federal government can pass laws that incidentally impact upon
provincial insurance companies or insurance operations
5. Federal government has jurisdiction to legislate w/ respect to marine insurance (shipping and navigation)
Insurance Regulation and the Charter
To extent that insurance agreements reflect private contractual arrangements, they are not subject to Charter scrutiny
Limited Applicability of Charter:
To insurance legislation (b/c it is enacted by government)
Public insurers
Because underwriting involves categorizing people according re personal risk factors, Charter s. 15(1) may be engaged
s. 15(1) prohibits government from discriminating against any person or group of persons based on one or
more designated personal characteristic or analogous grounds
Leading case is Miron v. Trudel
Where statutorily authorized, provision of insurance benefits to some groups and not others is
subject to s. 15(1) review
Discriminatory insurance practices and policies exempt from application of human rights legislation if based on
reasonable and bona fide distinctions (BC Human Rights Code, s. 8)
Can insurers rely on exemptions to shield discriminatory practices and policies?
Depends on the following factors:
1. Type of policy in question
2. Nature of discriminatory practice
3. Are distinctions in question legitimate or unavoidable?
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Nature of Insurance K’s
GENERAL CONSIDERATIONS: INDEMNIFICATION
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Two Elements of Indemnity:
1. Insurable Interest
Insured has a stake in the subject-matter of the insurance
Focuses on whether insured will suffer a genuine detriment if the risk insured against materializes
2. Loss suffered is capable of being accurately valued or quantified
Underlying Principle: Indemnity (insured should not profit from loss, proceeds should restore insured to pre-loss position)
INDEMNITY INSURANCE KS
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Valuation of insurance proceeds linked to actual value of loss
Principle of subrogation applies (Glynn)
General Principle: Insurance Ks shall be construed as Ks of indemnity (Glynn)
Exception: If terms demonstrate express intention of parties not to enter into indemnity K
Words must be scrutinized w/o regard to label attached to policy
Purpose: Replace loss on happening of insured peril
Precise values can be difficult to quantify so approximations often relied upon
Also, insurance K’s often require insured to bear some burden of the loss (i.e. through a deductible) or obligate the
insurance company to benefit insured (i.e. by replacing old item with a new one)
Requirements (unless contrary provisions): (Glynn)
1. Happening of Insured Peril
2. Insured’s Loss Due to Happening of that Event
NON-INDEMNITY INSURANCE KS
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Pre-determined value paid upon proof of loss (Glynn)
Proceeds not linked to actual value of loss
Payment either offsets or counterbalances the loss or injury (b/c impossible to be a reinstatement)
Paid regardless of whether insured can prove they suffered a pecuniary loss
No right of subrogation (Glynn)
Exception: Terms of K may explicitly give insurer right of subrogation (Mutual Life v. Tucker)
Requirement:
1. Happening of Insured Peril
HOW TO DETERMINE WHETHER AN INDEMNITY OR NON-INDEMNITY INSURANCE K
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Insurance Ks presumed to be Ks of indemnity (Gibson)
No requirement to contain a specific subrogation provision
For principle of subrogation to be excluded, exclusionary provisions must be clear in doing so
Can show not a K of indemnity if expressly excluded as evidenced by express intention of parties
Test to Distinguish:
In addition to proof of occurrence of insured risk, proof of the amount of loss also necessary (Tucker)
If yes: K of indemnity
If no: K of non-indemnity
Policies should be judged according to their substance, not form (Tucker)
Examine the terms of the K, not the formal designation/label by parties (Glynn)
AVOIDING WINDFALL FOR INSURED RE NO-FAULT BENEFITS IN AUTOMOBILE INSURANCE
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Ont. Insurance Act, s. 267(1): Tort recovery reduced by amounts that insured entitled to through other benefit schemes
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B.C. Insurance (Vehicle) Regulations 447/83, ss.81-83: Tort recovery reduced by amount entitled to under other schemes
VALUE OF LIABILITY POLICIES
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Insured: Protection from liability
Claimant/Victim: Guaranteed source of compensation
K can provide 1P and 3P benefits
i.e. “No fault automobile” insurance: see definition of “insured” in Insurance (Vehicle) Regulations, BC Regs. 447/83, Pt.
7, s. 78
FIRST PARTY INSURANCE
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Protects interests of insured
Benefits paid to insured
THIRD PARTY INSURANCE
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Protects insured against liability to others
Payment triggered by insured’s liability to 3P
Benefits paid to 3P
No privity of K b/w insured and injured person
Beneficiaries not identified by name
Duty to defend and indemnify insured
1P VS. 3P INSURANCE
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Some critics argue 1P insurance superior to 3P liability insurance b/c 1P preferred source of compensation for losses
Arguments in favour of 1P policies:
Simply deal w/ one person – your own insurer
Arguments in favour of 3P liability insurance:
Affordability: If we to get comprehensive policies to cover us for all possible losses, then insured’s would pay huge price
and this would be unaffordable
Need for 1P insurance exclude those not fortunate enough to pay for such benefits
If people supposed to pay for their own losses, why should others be careful in relation to them then?
Undermines deterrence
Equity concerns:
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Classification and Interpretation of Insurance Ks
CLASSIFICATION: OBJECT DEFINED OR PERIL DEFINED
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Object Defined:
Characterized by subject matter of the policy (i.e. aircraft, automobile, boiler and machinery, life, etc.)
Peril Defined:
Characterized by insured risk (i.e. fire, accident and sickness, hail, liability, legal expense, etc.)
CLASSIFICATION: MULTI-RISK POLICIES
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To determine if statutory provision applies to given insurance K, must first classify K according to legislatively defined categories
Modern Norm: Multi-Peril Policies
Combine 1P and 3P insurance
Cover loss by fire as well as other risks
i.e. Comprehensive homeowner’s policy for theft, property loss, vandalism, fire, etc.
Common b/c convenient and efficient
Militate against separate insurance policies for every risk relating to a single property
Problem w/ Current Classification Legislation: Interpretation of Insurance Ks
Typical Problem: applicable limitation period for claims or proof of loss
Different insurance classes w/ different limitation periods
Limitation period expired for some classes of insurance
i.e. Limitation Period: BCIA s. 22, 126, stat. cond. 14 (one year from time of loss to file claim))
Most frequently litigated classification issue relates to one-year limitation period imposed by provincial insurance on
commencement of legal action by insured to enforce a fire insurance K
Question is if limitation period applies to claims brought under multi-peril property insurance policies
Multi-peril policies problematic b/c do not easily fit into risk-based classification system and the
associated “fire insurance” category employed by provincial legislation
BCIA gives no clear guidance to if a multi-peril policy intended to be governed by fire insurance part of the Act
Interpretive gymnastics rejected: (KP Pacific Holdings)
Rejected attempts to resolve issue by holding fire insurance limitation period did not apply if:
1. Policy covered any other risk
2. Loss was not caused by fire, or
3. Non-fire risks were more than incidental to the main coverage
What counts as fire policy is unclear:
Approaches to classifying multi-peril policies and why they are inadequate (KP Pacific)
1. Pigeon-hole it into a category ex post facto (depends on type of risk that materializes)
Problem is that you cannot tell beforehand what you are dealing w/
2. Dominant and incidental risk
Something will be classified as a fire policy if fire the primary risk insured against, but if it
incidental then it not to be classified as fire policy
3. Treat fire as incidental in all multi-risk policies to take them out of fire part of the Act
4. Categorize all multi-risk policies as fire policies to bring them w/in Part 5 of the Act
Problematic b/c policy may cover other risks than fire (such as business losses which may
take longer to assess than the 1 year limitation period permitted under Part 5)
Not practical to limit them to provisions of Part 5, b/c rarely insured separately
BCIA s. 119 a solution to multi-risk policies re fire?
Part 5 (fire): applicable to Ks of fire even if insurance also covers other risks
Specific Ks excluded from fire insurance – aircraft, automobile, boiler and machinery, inland transportation,
marine, plate glass, sprinkler, leakage, theft, rent/s/charges/loss of profits and nuclear risks insurance
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Pt. 5 inapplicable where fire is incidental peril to coverage provided (s. 119(c))
QUESTION: Does s. 119 adequately address potential problems w/ multi-risk policies?
s. 119 (Part 5) based on outmoded paradigm of discrete categories of insurance policies (not on
perils) and is incapable of coherently addressing modern multi-peril policies
Principles:
In the absence of specific legislative provisions to the contrary, multi-risk policies governed by the general part (Part 2)
of the legislation and not the fire part (Part 5), even if fire is one of the risks covered (KP)
Limitation periods imposed by statute serve as floor of protection under which insurance Ks cannot drop (Churchland)
Fire part only applicable to policies limited to loss by fire (KP, Churchland)
Single policy not subject to multiple parts or different regimes
CASES
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K.P. Pacific Holdings Ltd. v. Guardian Insurance (SCC, 2003)
Facts:
Insured claimed fire loss under multi-peril policy
Claim made more than one year after loss occurred but w/in one year of filing proof of loss
Arguments:
Insurer: No claim b/c applicable limitation period is one year from date of loss as per Part 5 of the BCIA
Insured: Policy falls into Part 2 of BCIA and applicable limitation period is one year from filing proof of loss
Held:
Applicable limitation period is Part 2 and insured’s claim is not statute-barred
Neither the language of s. 119 in Part 5 nor history of provision support conclusion that legislature a multi-risk
policy to fall w/in Part 5
s. 119 (Part 5) based on outmoded paradigm of discrete categories of insurance policies (not on perils) and is
incapable of coherently addressing modern multi-peril policies
Since insured’s policy does not fit into a specific category, it governed by Part 2
However, Part 2 does not represent ideal solution for multi-peril comprehensive policies and Legislature
should amend BCIA to specifically address these policies
Fact that the K specified limitation period of one year from loss cannot oust longer limitation period in Part 2
(one year from filing of proof of loss) b/c s. 3(a) of BCIA precludes insurer from substituting contractually
harsher terms than those imposed in Part 2
OUTSTANDING QUESTIONS FROM KP & CHURCHLAND
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1. Does the principle that multi-peril policies are not subject to the limitation period contained in fire insurance statutory
conditions (the “KP Principle”) apply in other provinces, or does the KP Principle apply only to the BCIA? (Applicability of KP
to classification of multi-risk policies outside of BC)
Inconsistent response
“It is imperative that Canada’s Insurance Acts specifically and unambiguously address how these statutes are to
operate and the rules by which comprehensive policies are to be governed”
Absent clear and express legislative direction to the contrary, statutory fire insurance provisions should not be applied
to multi-peril policies
2. If, as a matter of legislative interpretation, multi-peril policies are not subject to the limitation period contained in fire
insurance statutory conditions, can this limitation period be incorporated into multi-peril policies as a matter of K?
Notion that parties can agree to K provision identical to the on-year statutory fire insurance limitation period rejected
in KP and Churchland
However, this based on fact that BCIA expressly prohibits insurers from employing K terms harsher than those
imposed by applicable section of the statute (BCIA s. 3)
So, if provincial insurance legislation does not do so, is this possible?
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Issue is whether parties to insurance K can be bound to a limitation period shorten than the statutorily prescribed
period if the limitations legislation is silent or unclear as to the effect of such a K provision
Cases leave this unclear
3. Is the reasoning in KP restricted to the statutory fire insurance limitation provision, or does it apply to the entire fire
insurance part of affected insurance statutes?
Are multi-peril policies free from all statutory provisions contained in the fire insurance part of insurance legislation?
It applies to the entire fire insurance part of the affected insurance statutes (Audioworks)
Cases:
Casey v. Federated Insurance (Manitoba)
Facts:
Concerned insured’s application for leave of the court to bring claim against his multi-peril
homeowner’s insurance policy in 2004 for hail damage occurring in 1996, but to which he first
became aware of in 2003
Arguments:
Insured: Claim subject to two-year limitation period prescribed by fire insurance statutory conditions
in MIA and that this limitation period subject to extension pursuant to discoverability provision in
Manitoba’s Limitation of Actions Act
Insurer: Claim barred by one-year limitation period that had been expressly written into the K and
that the discoverability provision in Limitation of Acts Act applied only to statutorily imposed
limitations period and therefore was inapplicable to limitation period agreed upon as term of K
Held:
Multi-peril homeowner’s policy subject to statutory fire insurance conditions b/c policy included
coverage against fire
o Was primarily a policy of fire insurance
Discoverability provision applied to every statutorily imposed limitation period, even if that limitation
period subsequently included as a term of the insurance policy
o Insurer cannot K out of limitations legislation
Audio Works Production Services Ltd. v. Canadian Northern Shield Insurance (Manitoba)
Facts:
Insured brought claim against CNSI for damage sustained to sound equipment owned by the insured
Equipment damaged while in transit in motor vehicle
Insurer refused to pay for loss
Arguments:
Insured: Application for insurance requested in transit coverage and such coverage therefore
incorporated into K by s. 140 of Manitoba’s Insurance Act, found w/in the fire insurance part of the
statute
Insurer: All-risk policy issued to Audio Works did not include coverage for property damage while in
transit
Held:
Fire insurance provision does not apply to this multi-risk policy b/c here, like in KP, fire not the
primary peril insured against
o Direct contradiction of same court in Casey (decided one year post-Casey)
Fenrich v. Wawanesa (Alberta)
Facts:
Claimant’s father named insured under multi-risk policy issued by Wawanesa
Claimant suffered personal property damage as result of flooding in his father’s house and
commenced legal action against Wawanesa to recover compensation under father’s multi-peril policy
Wawanesa argues claimant has no standing to sue on policy, so claimant seeks leave of court to
amend pleadings so as to add his father as plaintiff in the action
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Arguments:
Insured: Limitation period in the fire insurance part of the AIA applies to the multi-peril policy
Insurer: Proposed amendment runs contrary to one year limitation period set out in the fire part of
AIA which, they argued, governed the multi-peril policy
o Also argue that remedial provision of Alberta’s Limitation’s Act, which provided authority for
the amendment, inapplicable to the fire insurance limitation period because the Limitations
Act expressly prohibited the remedial provision from applying to a limitation period
prescribed by another statute
Held:
Fire insurance limitation period applied to flooding claim only by operation of K and not by operation
of statute
The fact that the contractual limitation provision contained language similar to the mandatory fire
peril condition did not transform it into a statutory limitation
o So, unnecessary to determine if KP Principle applies in AB because the one-year limitation
period at issue arose from K rather than statute
 Court also stated that if the claim in question related to a fire loss, the statutory fire
insurance limitation period may apply to a multi-peril policy
B/C original lawsuit commenced w/in on year of date of loss, court found it unnecessary to determine
if one-year fire insurance limitation period could be incorporated by K to cover non-fire losses
Burry v. Co-Operators (Newfoundland)
Facts:
Insured’s house covered by multi-peril policy issued by Co-operators
Insured bring legal action against insurer to recover for a fire loss, but action commenced after expiry
of one-year limitation period in province’s Fire Insurance Act
Arguments:
Insured: Limitation period does not apply b/c multi-peril policy
Insurer:
o a) Claim time-barred by statutory limitation period b/c difference in wording b/w
Newfoundland and BC legislation means that KP Principle restricted to its facts
o b) Even if the KP Principle applies and fire insurance section of statute applies to the K, the
fire insurance limitation period had been incorporated into the policy by agreement and is
binding on the insured
Held:
No significant differences b/w NFLD legislation and BC legislation in KP
KP Principle applies here
No evidence that the one-year limitation period incorporated into the K b/c the parties had
specifically agreed to this term
o Limitation period included in the insurance K b/c insurer thought its inclusion required by
law
Overarching Conclusions:
1. Absent clear and express legislative direction to the contrary, statutory fire insurance provisions should not be
applied to multi-peril policies
Offers clear recourse to legislators if their intention is otherwise
Can amend legislation to state that all or some of the fire insurance provisions apply to multi-peril policies or
create separate legislation for multi-peril policies
2. Accepting that multi-peril policies should not be shoe-horned into fire insurance part of legislation for purposes of
limitation periods, there no reason why situation should be different for any other statutory provision particular to
fire insurance K’s
However, this can lead to considerable uncertainty about what legal principles DO govern a multi-peril policy
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GROUP VS. INDIVIDUAL INSURANCE KS
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Group Insurance Ks:
Coverage for classes of individuals w/ common characteristics
i.e. Employer, members of trade union or professional association
Beneficiaries not identified by name in policy
No privity of K between insurer and beneficiaries
Coverage for direct benefit of beneficiaries, not nominal insured
Direct claims against insurer permitted despite lack of privity
Insurability of individual beneficiaries may not be required; policies written on non-medical basis
Contract not void for lack of insurable interest by insured
i.e. BCIA s. 36(2)(a): life; s. 95(2): accident and sickness
Contract is open ended – beneficiaries include present & future members
Individual Insurance Ks:
Coverage for one or many individuals, named or unnamed
Privity of K between named insureds and insurer
Proof of insurability required
Insured to have insurable interest in life insured
Question:
Are there potential equity implications re eligibility for group insurance compared to individual contract?
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Insurable Interest
CHARACTER & TIMING OF INSURABLE INTEREST
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Insurable Interest:
Connection b/w insured and object of insurance
Required for valid insurance K
Distinguishes insurance K from wager
Rationale for Insurable Interest Requirement:
1. Preserves Public Policy Against Wagering
Distinguishes wager from an insurance K
2. Preserves Principle of Indemnity
BCIA, s. 7(1): Recovery limited to value of insured’s interest
Exception: BCIA, s. 7(2) Life insurance
3. Avoids Moral Hazard
Prevents insured from being tempted to destroy insured property or otherwise intentionally bring about
materialization of the insured risk
4. Promotes Public Safety
Insurable Interest & Stolen Property:
Cannot have insurable interest in stolen property
Once person knows (actual or construed, ask: would a reasonable person in your situation have known the property
was stolen?) property is stolen, but chooses to turn blind eye, then not insurable
If no knowledge, then insurable interest if you have possession unless and until you come aware it belongs to another
TWO-STEP FACTUAL EXPECTANCY TEST
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Insurable Interest if Insured Would: (Kosmopoulos)
1. Benefit from continued existence of the subject matter of insurance, and
2. Suffer pecuniary detriment from loss of subject-matter or from occurrence of insured-against risk
Application:
Assess insurable interest on case-by-case basis, examining relationship b/w individual and item or risk insured
Flexible: allows courts to recognize new or developing types of property interests and provide individualized justice
BUT: Comes at cost of certainty b/c hard to predict what relationships will give rise to insurable interest
General Guidelines About Nature of Insurable Interest:
1. Insured must have a pecuniary interest in subject-matter of insurance
Purely sentimental or emotional attachment to property does not constitute insurable interest
2. Must be real or presently vested in the insured
Mere hope of obtaining property in the future does not give rise to insurable interest
3. Is not established by legal title alone
Legal title only as presumption of insurable interest, rebuttable where pecuniary interest is lacking (Rider)
Conversely, legal title and possession of insured property not necessarily required to establish pecuniary
interest (i.e. if you purchase car and insurance, but car stolen before you take possession(in transit)) (Laratta)
4. Sole director and shareholder has insurable interest in corporate property (Kosmopoulos)
5. Ordinary shareholders & unsecured creditors may have insurable interest in Company’s assets/debtor’s property
given substantial interest in its preservation
Unresolved Issues:
1. Whether a shareholder can have insurable interest in corporate assets
2. Whether an unsecured creditor can have an insurable interest in a debtor’s assets
STATUTORY MODIFICATION OF INSURABLE INTEREST DEFINITION
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Life insurance (non-indemnity K) b/c payout is not linked to pecuniary loss
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Consequently, FET does not fit w/ life insurance
Every person has insurable interest for life insurance in (relationships presumed to give rise to insurable interest):
i) His/her own life
ii) The lives of his/her child, grandchild, or spouse (or equivalent)
iii) The lives of employees
iv) Anyone paying for his/her education or support or in whose life s/he has a pecuniary interest
Note: This list not necessarily closed
Life insurance K not invalidated by lack of insurable interest if person whose life is being insured has consented to placement of
insurance on his/her life
PROVING INSURABLE INTEREST
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Burden and Standard of Proof:
Burden on insured on BOP
Timing of Insurable Interest:
Depends on type of insurance in question
General Rule: Insurable interest required to exist on date of loss
Exceptions:
1. Some insurance necessarily contemplates insurable interest arising after insurance K formed
i.e. crop insurance: insured crops generally not grown or in existence when insurance K signed
Similarly, inventory insurance designed to cover property which insured will obtain in the future
2. Sometimes, insurable interest need only be in existence at time K takes effect, so if insurable interest is
subsequently lost the K remains enforceable
i.e. Life insurance or accident and sickness insurance
BCIA Legislation:
Insurable interest presumed in some specified relationships (no proof required other than of the relationship)
Life Insurance: BCIA, s. 37: a person has an insurable interest in his or her own life and in the life of the following:
(a) his or her child or grandchild;
(b) his or her spouse;
(c) any person on whom he or she is wholly or in part dependent for, or from whom he or she is
receiving, support or education;
(d) his or her employee;
(e) any person in the duration of whose life he or she has a pecuniary interest
Accident & Sickness Insurance: BCIA, s. 94: A person has an insurable interest in his or her own life and wellbeing and
in the life and wellbeing of the following:
(a) his or her child or grandchild;
(b) his or her spouse;
Can continue to have insurable interest in ex-spouse unless they actively seek cancellation
Even for ex-spouses, insurance money considered part of family assets and can be seen as benefiting
children when bread-winner is no longer around
(c) any person on whom he or she is wholly or in part dependent for, or from whom he or she is receiving,
support or education;
(d) his or her officer or employee;
(e) any person in whom he or she has a pecuniary interest
Rationale:
Presumption of loss, even if not quantifiable in economic terms
Likelihood of moral hazard minimized, especially regarding relatives (won’t kill your spouse, kids?)
Contract void if person outside specified relationships
BCIA, - Life s. 36(1); Accident & sickness s. 95(1)
Exceptions:
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Insurable interest not required for group insurance, BCIA, s. 36(2)(a); s. 95(2)(a)
Person consents in writing to be insured, BCIA, s. 36 (2)(b); s. 95(2)(b)
If under 16 years, parental consent required, BCIA, s. 36(3); s. 95(3)
CONSEQUENCES OF LACK OF INSURABLE INTEREST
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Non-Indemnity Ks:
Contract void ab initio
Insured entitled to return of premium unless fraud involved
Indemnity Ks:
Contract not void; claim simply fails
Insured not entitled to recover premiums paid w/o mistaken belief re object of insurance (i.e. re ownership of
property)
So, if honest mistake then you are entitled to return of premiums paid
Based on principle of indemnity
If one has no actual loss, then they have no business making claim
INSURING THE INTERESTS OF OTHERS
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Insuring the Interests of Others
It is possible to have insurable interest in only part of the subject matter of insurance
Where purchaser of insurance has some insurable interest in subject-matter of insurance, s/he can obtain insurance for
the insurable interest of someone else, provided that:
1. S/he intends to obtain insurance coverage for the other person’s insurable interest, and
2. The insurance K allows for such coverage
When loss occurs, purchaser of insurance paid full amount of loss
This person not over-indemnified b/c s/he then considered to hold such part thereof as did not relate to his
own interest in goods as trustee for the other person(s) interested
Partially unpaid vendor continues to have insurable interest in the property being sold and extent of his insurable
interest is equal to his outstanding beneficial interest in the property (Keefer)
BCIA Legislation:
Part 5: Fire Insurance
s. 126: Effect of Statutory Conditions
Statutory Condition 1 – Misrepresentation: If any person applying for insurance falsely describes the property
to the prejudice of the insurer, or misrepresents or fraudulently omits to communicate any circumstance
which is material to be made known to the insurer in order to enable it to judge of the risk to be undertaken,
the K is void as to any property in relation to which the misrepresentation or omission is material
Statutory Condition 2 – Property of Others: Unless otherwise specifically stated in the K, the insurer is not
liable for loss or damage to property owned by any person other than the insured, unless the interest of the
insured in it is stated in the K
Question: Does this provision impact on the ability of a party w/ a limited insurable interest in
property to obtain insurance coverage for the full value of the property?
Courts: No, notion of “owned” refers to insurable interest, not strict legal title
Stat. Cond. 2 complied w/ so long as purchaser of insurance has some insurable
interest in the insured property
Justification: Narrow definition of ownership would mean that, after loss or
damage, insurance companies could evade their obligations whenever the insured’s
interest is not that of an owner and has not been stated in the policy, w/o having to
show any prejudice
This a problematic interpretation
i) Equating “ownership” w/ “insurable interest” inconsistent w/ plain reading of
provision
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Legislators could have substituted “owner” w/ “insurable interest holder”
if that is what they had intended
ii) Equating ownership w/ insurable interest makes Stat. Cond. 2 redundant
At c/l, insurer not obliged to pay for loss if insured does not have insurable
interest
So, as interpreted by the courts, Stat. Cond. 2 merely codifies this principle
On other hand, a prima facie interpretation means that the provision would relieve
the insurer from its obligation to pay for a loss if the insured does not have title to
the insured property and if the absence of title was not disclosed to the insurer
Would impose disclosure duty on insured, allowing insurers to presume
purchaser of fire insurance coverage the property owner unless otherwise
stated
Also ensures insurer knows who owns property, a matter which may be
material to insurer’s risk assessment
SPECIFIC PROBLEMS RELATED TO INSURABLE INTEREST
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Insuring the Interest of Others
Can you insure property that you have limited interest in?
Insured has partial interest in object of insurance
Joint interest: Common for multiple people to have interest in same property
Entire property can be insured for benefit of others
Rationale:
1. Efficiency
Avoids duplication of insurance Ks
2. Simplified claims process
Insurer deals with only one party
3. Access to Insurance (Equity dimension)
Those unable to obtain insurance protected
People who lack legal capacity or pecuniary means who would otherwise be unprotected can have
their interests insured
Joint Ventures, Contractors, & Subcontractors
Underlying Principle:
Subrogation cannot be obtained against the insured himself
In case of true joint insurance, interests of joint insureds so inseparably connected that several insureds are to be
considered one (making subrogation impossible)
Rule:
All parties whose joint efforts have one common goal have insurable interest
Can insure entire property even if your interest is limited
Rationale: (Commonwealth)
Possibility of damage to property of other trades people or entire site inevitable
Insurable interest in entire project and trades people avoids litigation
Simplified coverage for complicated projects (cost effective)
Consistent with legal principle re bailment
Guaranteed compensation to rebuild in event of loss
Three Requirements: (Base Fort Security)
1. Insured has some (at least a partial) insurable interest in property
2. Insured intended to insure interests of others/the entire property
i.e. Intend to insure entire value of property for benefit of the others
3. Permitted under terms of K
Question to Ask:
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Did the various trades have, prior to the loss, such a relationship w/ the entire works that their potential
liability constituted an insurable interest in the whole
Disclosure
QUESTION: Should insured w/ partial interest trying to insure whole property disclose limited interest of
others in property at time of K?
Duty of Utmost Good Faith
At time of insurance K formation, insured required to disclose circumstances material to risk
Rationale: Help insurer determine insurability and/or premium
Unless required by policy, no obligation to disclose limited interest; policy valid provided insured has
insurable interest in insured property (Keefer)
Multiple persons working on project
i.e. a construction site
Single policy (i.e. a Builders’ Risk Policy)
Everybody covered under this policy
The premium is factored into the K price
Insureds are those persons w/o whose contribution to the project in its entirety the project itself could not be
completed (Base Fort Security)
This for the most part trades
Covers those whose contributions are integral and necessary to the construction process itself are w/in and
not those whose contributions are collateral or parallel to the process
Where expansion or addition to an existing structure, the trades and sub-trades involved in the expansion have
insurable interest in the entire interconnected structure and not merely the new addition they working on (MHC)
Each party working on a portion of the project have an insurable interest in the entire project
Does not include a party whose services parallel to but not w/in mainstream of construction activities
Each party - contractor, sub-contractor, trades people - has insurable interest in entire project
Becomes relevant when loss has been caused to the property of another person or the project itself caused by
one of the people working on the project
Insurer typically pays out claim for loss and then goes after the person who caused the loss via subrogation
However, insurer cannot claim subrogation against party who has insurable interest in the whole of a project
Identification of Family Interests (Scott)
Coverage for named and unnamed insureds
Named insured tends to be owner of policy
Unnamed insured fit certain description noted in policy
i.e. homeowner’s policies cover named insured and members of households not named
Named and unnamed insureds have insurable interest in property
Rationale:
Pro-consumer position
Furthers reasonable expectation of parties
When people take out these kinds of policies they typically believe the policy to cover
everyone and everything w/in the home
Protects unnamed insured from possible subrogation claim by insurer
B/c both named and unnamed have insurable interest, and when you have insurable interest
you cannot have claim for subrogation launched against you by insurer
Insurable interest of parents and children inseparably connected (Scott)
QUESTION: Consider the approaches of the majority (joint interest – claim excluded) and dissent (several
interests – claim not excluded)
Several Interest Argument
Father’s claim as named insured should not be excluded and not intended by liberal meaning
of insurable interest
Problem here is that, if interests of father and son are separated, then insurer would
possibly have right of subrogation against son
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SO, even if insured paid father under policy, father would likely end up paying out of pocket
to cover expenses owed back to insurer if insurer’s subrogation claim successful
So, a waste of time b/c money going to father then straight back to insurer?
Automobile Insurance
Vehicle registered and insured by person other than true owner (i.e. father registers and insures car for son)
True owner may be youth, novice driver or has bad driving record
Arrangements often intended to obtain cheaper rate
QUESTION: Does nominal owner/insured (i.e. father) have insurable interest in vehicle?
No insurable interest if insured only a nominal owner
If you have absolutely nothing to do w/ the car other than putting your name on the registration, you
may not be able to collect the insurance
Insurable interest: arrangement legitimate
i.e. insured paid some/entire purchase price; owner obligated to repay
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FORMATION OF AN INSURANCE K
NEGOTIATION OF INSURANCE KS
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Insurance company typically determines terms and conditions under which it will provide coverage
Insurance Ks usually standard form policies
Negotiation focuses on premium cost, coverage limits, coverage duration, or endorsements that alter the coverage
Depending on type of insurance, legislation may restrict insurer’s freedom of K by:
i) Requiring inclusion of specified terms and conditions
ii) Deeming specific coverages to be included in particular insurance Ks, and
iii) Requiring insurer`s to have their standard form policy wordings approved by a government official
Purpose: Consumer protection
INSURANCE POLICY VS. INSURANCE K
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Insurance Policy:
No legal obligations created by mere existence of a written insurance policy
May form part of the evidence proving existence of an insurance K and its terms
Insurance K:
Legally binding agreement by insurer to indemnify particular insured against specified risks
Tend to be written, but not required
BCIA, s. 1: contemplates oral insurance Ks
BCIA, s. 32(1) (life) and s. __ (accident and sickness): Insurance K must be written to be binding
Three Principles:
1. Insurance Ks can be formed on basis of an oral agreement
2. Written policy may evidence the K terms agreed on but is not always determinative of agreement’s substance
Where evidence establishes that the written policy does not accurately reflect the agreed upon intentions of
the parties, court enforces intentions of the parties over written terms of the policy
3. Mere possession of an insurance policy does not create an insurance K b/w possessor and insurance company
REQUIREMENTS FOR CREATING A VALID INSURANCE K: OFFER & ACCEPTANCE
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Common Law:
Communication of offer and acceptance need not be express and can be inferred by conduct of the parties
Creation of Initial Insurance K:
Offer into K is made by the insured
Insured accepts by sending completed application form to insurer
Either directly provides to insurance company or to insurance agent or broker
Insurer accepts by issuing insurance policy or certificate to insured verifying requested coverage
Renewal of an Existing Insurance K:
Offer to renew typically made by insurer
Prior to expiration, insurer tells insured coverage can be extended for a certain period of time beyond the
natural termination of the existing contract if they pay a designated premium before a specified date
Insured can accept by paying premium w/in specified time period
Insured can reject by letting time period lapse
Modification by Statute:
Delivery Provision: When policy is delivered, K is binding on insurer as if the premium had been paid (all insurance)
Exception: Life insurance
Rationale:
Prevent insurers from making existence of insurance K conditional on receipt of premium payment
Problem: Unclear if c/l requirement for parties to agree on fundamental terms of an insurance K negated
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Canadian case law unclear on answering this question
Does not completely nullify requirement of offer and acceptance of essential terms of an insurance K
Would bind insurers to provide coverage where it mistakenly delivered a policy to the wrong party or
where an insured retained possession of a policy after the insurer validly terminated the K
Most Reasonable Interpretation:
If insurer delivers a policy to an insured to signify intention to be bound to insurance K on terms
agreed to by the parties, insurer cannot subsequently avoid K by arguing K never been formed b/c
insured had not paid the premium
Unless legislation clearly states otherwise, pink card alone does not create obligation to insure (Gallant)
Focus on Intention: (Gallant)
Intention of parties is what determines whether there has been offer and acceptance
Must analyze facts to determine if parties intentionally entered into K via conscious process of offer and acceptance
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REQUIREMENTS FOR CREATING A VALID INSURANCE K: CONSIDERATION (PREMIUM)
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Consideration from Insurer: Promise to indemnify insured for any loss falling w/in the coverage parameters of the insurance K
Consideration from Insured: Promise to pay premium
Promise to pay (not actual payment) sufficient if premium amount has been agreed to by the parties
Tendering premium payment may be sufficient to indicate insured’s acceptance of insurer’s offer to provide coverage
Even where payment transaction not completed
BCIA, s. 14: Payment of premium not essential for valid K
Statutory Exception:
Life Insurance - BCIA, s. 38(1): Life insurance K does not take effect until:
1. First premium has been paid/tendered
2. Premium must be cashed/transacted
Premium usually matter of negotiation b/w insurer and insured:
Sometimes regulated by statute (i.e. Provincial legislation establishes a mandatory premium amount of automobile
liability insurance coverage for automobile insurance and provides a mechanism for assigning basic premium rates)
An act which is the result of administrative oversight not an intended act (McCunn)
To act erroneously is inconsistent w/ acting knowingly
Implications:
Policy delivered constitutes acceptance
Binding K absent payment of premium
Obligation to pay loss claim before premium paid
Insurer has right to sue for unpaid premium or reduction in claim amount
REQUIREMENTS FOR CREATING A VALID INSURANCE K: AGREEMENT TO ESSENTIAL TERMS
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Parties Must Mutually Agree To All of the Following: (Davidson)
1. Nature of Risk
Who is insured and what perils are insured against
Consideration provided by insurer
2. Duration of Risk
Period of time when the insurance agreement is to operate
Consideration provided by insurer
3. Amount of Premium Payment Required from the Insured
Consideration provided by insured
4. Policy Limits
Value or amount of insurance coverage provided by the insurer
Consideration provided by insurer
Question of whether these elements agreed to a matter of facts of each case
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DURATION OF THE INSURANCE K
INTERIM COVERAGE
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Can be established orally, but usually a temporary insurance certificate is provided to insured by insurance agent
Purpose:
Give immediate effect to the insurance
Key Principles:
1. Duration:
Generally less than full term generally less than full term
Remains in effect until:
i) Full policy issued
ii) Termination by insurer or insured (or both)
iii) Expiry of agreed-upon time
iv) Expiration of reasonable time
Courts assess on case-by-case basis based on context of situation the time period during
which insurer reasonably expected to decide whether to accept insured’s application
Rationale: Temporary coverage agreed upon in order to provide insurer w/ adequate time to
assess the risks involved in providing full coverage
2. Premium:
Generally less than for a full policy
3. Applicable Terms & Conditions:
Typically governed by terms of insurer’s relevant standard insurance policy
Either by agreement or statutory authority
No obligation on insurer to issue full policy
4. Coverage Amount
Less than full K amount
COMMENCEMENT
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If all essential elements have been agreed upon, K may take effect even though no premium paid
Exception: In case of life insurance, K does not take effect until:
1. Policy delivered by insurer
2. First premium has been paid
3. No changes have occurred re insurability
TERMINATION
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Brings end to mutual obligations of insured and insurance company
Once terminated, insurer not responsible for losses suffered by insured and insured not obligated to make premium payments
Three Ways to Terminate Insurance K:
1. Expiry of Specified Time Period or Event
Duration a matter of negotiation
Unless renewed, K automatically terminates upon expiry of specified time frame
Sometimes an event is agreed to b/c specifying time does not make sense in some situations (i.e. delivery of
goods in transit)
2. Mutual Agreement (Ellis)
No prescribed form in which termination should occur
Parties must each clearly intend and agree to terminate the agreement
Intention a question of fact to be determined on case-by-case basis
In Ellis, insurer demanded return of policy and insured complied by cashing premium rebate cheques
3. Unilateral Procedure
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By either insured or insurer
Only where expressly permitted by K itself or relevant legislation (no c/l right)
Legislatively Authorized:
Accident & Sickness: s. s. 89, Stat. Cond’s 5 & 6
Fire: s. 126, Stat. Cond. 5
Automobile Insurance: BC Reg 447/83 schedule 10, stat. cond. 10
Note: Permit insured to immediately terminate K upon giving notice to insurer
Termination by Insured:
Notify insurer
Registered mail to head office or chief agent in province (e-mail insufficient)
Termination effective upon receipt by insurer of notification
Entitled to refund of unused premium
Subject to agreed-upon minimum retained premium
Termination by Insurer:
Terminate w/o reason
Must give insured a specified period of advance written notice of termination date
Termination notice must be sent to last known address (by hand) or registered mail
Not responsible to ensure actual receipt of notice by the insured
Rationale: Gives insured opportunity to obtain replacement coverage
Must refund any unused premium
Subject to agreed-upon minimum retained premium
Must refund premiums w/in statutorily required time frame or else no termination
Termination effective after reasonable statutory period
5-15 days, BCIA s. 89, stat. cond. 6; 126(2) stat. cond. 5
Usually 5 days if delivered by hand
10-15 days when delivered by mail
Accident & Sickness = 10 days (if sent by registered mail)
Fire = 15 days (if sent by registered mail)
Purpose: Insured needs enough time to obtain replacement coverage
Question: Can termination at will jeopardize insured’s need for protection?
Both insurer and insured have duty of utmost good faith
Good argument that, even in absence of express statutory limitation on grounds for which insurer can
unilaterally terminate, its ability to effect unilateral termination must be circumscribed by its duty to
treat insured w/ utmost good faith
Insurer should not be allowed to unilaterally terminate a K simply to avoid a likely claim
i.e. Insurer agrees to provide fire insurance on house in middle of forest
Coverage is provided w/ full knowledge of the risk of forest fire and insurer
charges premium that reflects this
If a forest fire breaks out during the duration of insurance K, insurer should
not then be able to unilaterally terminate coverage
Unconscionable for insurer to utilize unilateral termination procedure to avoid paying for the
very loss contemplated by the insurance K
Insured may have trouble arranging replacement coverage w/ another insurer
Even if statutory unilateral termination provisions do not expressly prevent insurer from
cancelling K in such a situation, unilateral termination in these circumstances seems to run
afoul of the insurer’s obligation to treat insured w/ utmost good faith
RENEWALS
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Extends duration upon paying premium
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Renewal process depends on:
1. Nature of Original Policy
i) Continuous Policies
Primarily life insurance Ks
Provide further extension of terms of existing K
Renewal automatic
Renewal process contemplated at time of original K formation
Accident and Sickness:
Effective until insured reaches certain age
Renewal extends original K duration
No new K upon each renewal
Seamlessly extends duration of existing K for a further period of time
Unilateral renewal
Once payment of a further premium, coverage renewed
Advantage:
Insurer cannot discontinue coverage (i.e. if you are sick and lack insurability)
Usually sets out renewal procedure in terms of the K
i.e. K provides for extension for specified period if insured pays renewal premium by set date
ii) Non-Continuous/Renewal Policies
All policies other than life insurance
No automatic right of renewal
Once insured period ends, up to insurer to renew or not
Will send insured an offer to renew
Renewal by mutual consent
Bilateral agreement b/w insurer and insured
Offer by insurer to insured
Acceptance by insured by payment to the insurer
Renewal creates new K
Although, it is usually based on similar terms
Does not specify renewal procedure and courts must look to facts of each case to determine whether
a K renewal has been properly achieved
Disadvantage:
Insurer can discontinue coverage (i.e. if you are sick and lack insurability)
2. Renewal Procedure
Two Ways to Renew:
i) One Step Process
Step 1:
Insurer mails actual renewal certificate and premium notice in a single mailing
Once insured pays premium, insurer need not send insured anything else
Once premium paid a binding K formed
B/c you already have certificate of insurance, coverage may attach sooner than
two-step process
So, must always consider what type of renewal process insurer is using
ii) Two Step Process
Step 1:
Insurer mails renewal offer
Step 2:
Certificate of insurance/renewal receipt issued by insurer to insured after premium
has been paid
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Process for Determination:
To determine if non-continuous K properly renewed, must first decide if insurer followed one-step or two-step process
Must then assess facts to determine if requirements of the relevant process were, in fact, fulfulled
Consider Patterson v. Gallant
Insured sent pink card but not certificate
Offer to renew stated that coverage would not be renewed unless renewal premium paid
So, couldn’t say that a one-step process b/c certificate not delivered until after payment of premium
Incontestability:
s. 42(2) Life & s. 78 (A&S): You have obligation to disclose or insurer can void K
Where insured for 2 years, insurer loses right to void K unless non-disclosure or misrepresentation fraudulent
So, if you have a continuous policy you are saved from incontestability after 2 years
But, if you have a non-continuous policy that starts afresh, say every year, then your coverage begins
afresh every year (even if you’ve been w/ an insurer for 10 years) and you are not saved from
incontestability
Grace Periods:
Period b/w expiry of original policy and due date for renewal premium
K presumed effective so long as payment of premium w/in stipulated grace period
Presumption of termination on original expiry date absent payment w/in grace period
Grace period discretionary (insurer can choose to offer or not)
Exception: BCIA, s. 40(2): Life Insurance
30 day mandatory grace period
If insurer stipulates longer grace period, then the longer period prevails over statutory minimum
Commencement:
When old K expires (regardless of if weekend, statutory holiday, etc.)
Termination:
Next business day if falls on weekend or stat. holiday (Tiller)
Reinstatement of Lapsed K
Failure to renew by expiry date or K terminated
Reinstatement at discretion of parties
Parties enter into new insurance K, but on same terms and conditions as the original
Life Insurance:
s. 47(2): Statutory obligation to renew
Mandatory reinstatement if insured applies for reinstatement w/in 2 years of K lapse, provided:
1. Overdue premiums, interest, and other debts are paid, and
2. Health and insurability are proven
Timing of Commencement:
No retroactive reinstatement unless otherwise stated (Parker v. Constitution Insurance Co. of Canada)
Unless clear evidence that this a term of the offer to the insured by the insurer
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DUTY OF UTMOST GOOD FAITH & OBLIGATION OF FULL DISCLOSURE
INSURED’S DUTY OF DISCLOSURE
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Duty of Disclosure: Forthright communication about nature of risk
No misrepresentation or non-disclosure
Insured has duty to disclose all information that will affect insurer’s decision making
Caveat emptor is inapplicable
Not just about answering questions asked honestly, but also disclosing anything not asked that insurer should know
Insured must disclose material facts (everything reasonable insurer would want to know making underwriting decision
Rationale:
Accurate risk assessment
Do not want insurer’s to take on more risk than they should
Do not want insurer’s to subsidize risk of people who bring more risk to the pool than they have paid for
Facts not accessible to insurer (i.e. house lined w/ asbestos)
Is there a continuing justification for disclosure duty given enhanced accessibility to information today?
Yes, there are still significant barriers to access to information (especially re personal insurance Ks)
Yet, w/o knowing what insurer is looking for, it may force insured to disclose more information than necessary
More economically efficient for customer who knows information to disclose it to insurer than insurer having to dig
SCOPE OF INSURED’S DISCLOSURE DUTY: COMMON LAW
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Insured’s c/l duty of disclosure traceable to Lord Mansfield’s judgment in Carter v. Boehm (1766):
Disclosure limited to material facts, not opinions or speculation on future events
Insured owes absolute duty to insurer to fully disclose all material facts w/in insured’s knowledge
Rationale:
i) Insurers base their risk assessments on the personal characteristics and behaviour of the insured, and
ii) Insurers necessarily rely on insured to provide information about these matters
Insured’s disclosure duty applies only until K is formed
REQUIREMENT 1: MATERIAL FACT
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Reasonable Insurer (Decisive Influence) Test: (Ontario Metal Products)
Anything a reasonable insurer would have liked to know to make an underwriting decision
Material fact IS one that would have adversely affected a reasonable insurer’s decision to underwrite the risk at the
stated premium at K formation
Irrelevant if cause of loss unrelated to undisclosed facts (Henwood)
Had there been proper disclosure, K would not have come into being and such claim would never have arisen
Materiality determined at time of K formation
Objective Standard in Two Ways:
1. Court must view non-disclosure through eyes of a reasonable or prudent insurer
Not through eyes of actual insurer or actual insured in the case
2. Provides clear criteria to determine if non-disclosure was critical to the formation of K
Undisclosed criteria must be such that, if disclosed, coverage could have reasonably been refused or
a higher premium could have reasonably been charged
What Materiality Is NOT:
Undisclosed information not material if it would have:
1. Lowered the premium
2. Had no effect on the premium and the decision to provide coverage, or
3. Merely delayed the formation of K
NOT what a reasonable insured would have considered material
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Materiality of a fact should not depend on whether the actual insured or a prudent insured would have
considered the information to be relevant to the K because the materiality or otherwise of a
misrepresentation or concealment must be considered in relation to the insurer’s acceptance of the risk
NOT automatically all questions asked by insurer in insurance application form
Unfair to insured b/c would have to guarantee veracity of the most irrelevant information asked by insurer
REQUIREMENT 2: WITHIN INSURED’S KNOWLEDGE
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Insured’s disclosure obligation applies only to facts that:
i) Insured knows, or
ii) Insured reasonably ought to know
Refers only to awareness of facts and not insured’s appreciation of significance of facts to insurance K
Irrelevant whether insured knew that particular facts material to the insurer’s underwriting decisions
Insured has no obligation to disclose facts that are: (Carter v. Boehm)
i) Already known to insurer
ii) Insurer has waived knowledge of or undertaken to find out by other means, or
iii) That are matters of common knowledge or general facts relating to nature of the insured risk
Common knowledge w/in relevant industry, facts in public domain discoverable through research, etc.
Test: Whether reasonably competent insurer in the industry would have known the facts (objective standard)
What Knowledge Can Be Presumed: (Johns-Manville)
Matters known to general public and facts available and customary or well known in field which it
insures (Johns-Manville)
Insurer cannot fault insured for failing to disclose all detailed information in its possession where
picture open and well known to reasonably competent insurer substantially represents the facts
(Johns-Manville)
Failure to disclose accident record not good faith breach if information is publicly available (Taku Air)
When K for benefit of 3P, insurer has to be more alert to potentially material facts (Taku Air)
Extent to which insurer must conduct due diligence investigation of material facts may
depend on:
1. Whether insurance coverage is provided for benefit of a non-K party and,
2. Whether the information provided by insured raises questions which would
prompt a follow-up by a reasonable insurer
Summary:
Insured’s disclosure duty may be limited by what an insurer ought to know
What an insurer ought to know may depend on inquiries a reasonable insurer would have made in the circumstances
Responsibility of insurer to discover undisclosed facts should be narrowly construed (Pereira)
Rationale:
Insurers rely on insureds to provide information needed for underwriting purposes
If insurer already knows about a particular circumstance, insurer does not rely on insured’s advice about it
Implications:
Narrow duty for insured in information age
Insurer should avail self of anything obtainable in public domain and not rely on insured
Expertise in relevant areas
Insurers to stay informed in areas of service
Incumbent on insurer to stay informed on nature of risk
Not simply knowing about what risks were 20 years ago, must keep abreast of new developments
Cost to insurer and insured
Off-loading governmental responsibility for regulating particular industries onto insurers
Saying insurers should be gate-keepers for ensuring these companies doing what they supposed to be doing
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But, if governmental regulators had pulled plug on Taku due to their horrific safety record, then insurer does
not have to even worry about taking on Taku as an insured
This an example of government off-loading responsibility onto private sector?
Limited Scope of Insurer’s Duty to Investigate:
Greater scope may undermine insured’s disclosure duty (Hamilton Township Famers’ Mutual Fire)
Disclosure duty primarily on insured
Insurer’s duty to make further inquiries narrowly construed
Arises only in exceptional circumstances where necessary
K Variation of Disclosure Duty: Warranties
Equivalent of condition in ordinary commercial K
Requires strict compliance regardless of materiality
Effect of Breach:
Insurer entitled to void K
Materiality not required
Effect of Warranties
Limit insurer’s risk exposure
Insignificant facts converted into material
Future conduct of insured relevant
SCOPE OF INSURED’S DISCLOSURE DUTY: MODIFICATION BY STATUTE
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BCIA, s. 126: Effect of Statutory Conditions
Stat. Cond. 4: Material Change: Any change material to the risk and w/in the control and knowledge of the insured voids the K
as to the part affected by the change
Unless the change is promptly notified in writing to the insurer or its local agent
Unspecified Classes of Insurance:
BCIA s. 12: Terms and conditions intended to bind insured to be in writing
BCIA s. 13: Warranties of truth abolished
Materiality required for non-disclosure or misrepresentation to make a K void or voidable
Most significant statutory modifications occur w/ respect to:
i) Fire Insurance:
BCIA s. 126(2) stat. cond. 1: Insured not to:
Falsely describe subject property insurer’s prejudice
Misrepresent material facts
To what extend does stat. cond. 1 change the c/l?
Insurer’s duty cannot be expended by warranties
Misrepresentation must relate to material facts
Difference b/w Omissions/Non-Disclosure and Misrepresentation:
Misrepresentation:
Statement meant to mislead insurer and relied on to its detriment (Taylor)
Requires a positive act to mislead which is actually relied upon by insurer
Intention of customer irrelevant
Misrepresentation need not be fraudulent
Omissions/Non-Disclosure:
Intention of customer must be fraudulent (to mislead) (Taylor)
Requires subjective awareness of materiality of facts omitted
Disclosure duty extends for duration of the insurance K
Insured has ongoing duty to advise insurer of any changes of material facts
Insured must report any change material to the risk and w/in insured’s control and knowledge
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Must report changes in facts which are known or reasonably ought to be known to insured and which
would cause a reasonable insurer to refuse the risk or charge a higher premium
Insured only obliged to report changes w/in his/her control
Changes insured physically brought about or could have reasonably physically prevented
Relevant Intention:
An insured is in breach of disclosure duty if, in completing the insurance application, the insured
misrepresents or fraudulently omits to communicate any material circumstance which is material
Meaning of “fraudulently”:
Insured’s disclosure duty applies only to intentional or purposeful withholding of information (Taylor)
While at c/l an insured breached this duty by failing to divulge all material facts whether or
not this failure was intentional, the inclusion of the word “fraudulently” in the statute means
than insured is only culpable for non-disclosure if the insured purposefully withholds
information
Insured’s intentions relevant to omission of information but not misrepresentation (Bowes)
Insured breaches its disclosure obligation if s/he misrepresents material facts on a fire
insurance application (even if misrepresentation is unintentional)
Scope of an insured’s disclosure duty varies depending on whether information is withheld
entirely or provided inaccurately (Bowes)
Two problems:
1. Often difficult to clearly characterize non-disclosure as an omission or a misrepresentation
i.e. Assume insured admits to having made four previous insurance claims when, in
reality, insured had six claims. Has insured omitted two claims or misrepresented
the number of claims?
2. Seems inappropriate for insured’s disclosure duty to be narrowed solely for omission
Insurer not able to rely on insured for information they do not purposefully w/hold
Insured not liable for forgetting or negligently failing to obtain all requested info
ii) Automobile Insurance
Disclosure duty extends for duration of the insurance K
Insured has ongoing duty to advise insurer of any changes of material facts
An insured must report “any change in the risk material to the K and within his knowledge”
Must report changes in facts which are known or reasonably ought to be known to insured and which would
cause a reasonable insurer to refuse the risk or charge a higher premium
Relevant Intention: Insured breaches disclosure duty if s/he knowingly misrepresents or fails to disclose
“Knowingly” modifies both a misrepresentation and a failure to disclose
“Knowingly” encompasses fraudulent intent but does not require a fraudulent intent (Sleigh)
Signing completed application form indicates insured “knew” the misrepresentations made (Sleigh)
Insured cannot rely on own failure to read completed application form to avoid responsibility (Sleigh)
B/c insured ought reasonably to be aware of the information contained therein
Insured can “knowingly” misrepresent information w/o necessarily intending to deceive the insurer
Insured “knowingly” misrepresents information when: (Sleigh)
1. Insured aware (i.e. from filling out application form or reading the completed application
form) or ought reasonably to be aware of the information in the application form, and
2. Insured is aware that the information provided is inaccurate or incomplete
Note: Beyond these two requirements, insured’s intentions are irrelevant
So, insured can misrepresent information w/o intention to deceive insurer
Completely innocent misrep by insured will not constitute breach of disclosure duty (Sleigh)
Insured who provides inaccurate info but genuinely believes it to be true is not in breach
iii) Life Insurance
Disclosure duty does not extend beyond date the K takes effect
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A life insurance K only takes effect when:
1. The policy has been delivered to the insured
2. Payment of the first premium has been made to the insurer, and
3. No change has taken place in the insurability of the life to be insured b/w the time the application
was completed and the time the policy was delivered
Insured has duty of disclosure re any changes in insurability up to the point of the policy being issued
K fails to take effect if a change in insurability occurs in the stated time frame
Does not matter whether this change is known to, or reported by, the insured
Change of insurability b/w application date and policy delivery date means K does not take effect
Exception: If insurer agrees to cover the new risk w/ the change in insurability
Relevant Intention: Insured and applicant must disclose all material facts within their knowledge
Insured has absolute duty to disclose all relevant information which they know or ought to know
If insured provides incomplete or inaccurate info material to K, they breach the disclosure obligation
even if failure to disclose is innocent, in good faith, negligent, forgetful, mistake, or misjudgement
This obligation is broader than the insured’s statutory obligation not to “knowingly misrepresent”
information in context of automobile insurance b/c life insurance provision does not require that the
insured be aware that the information provided is incomplete, untrue, or inaccurate
If insured provides incomplete/inaccurate info in or ought to be w/in their knowledge, then breach
Fraudulent or knowing misrepresentations are encompassed, but not required, for this broad duty
Incontestability provisions common to life insurance policies offset harsh absolute duty of disclosure:
Once a policy in effect for two years, insurer cannot rely on breach of disclosure obligation unless
insurer can prove the breach was fraudulent (i.e. a purposeful misleading of the insurer)
Articles:
Adjin-Tettey, “How Genetic Information Affects Access to Insurance” (2009)
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PROVING BREACH OF INSURED’S DISCLOSURE OBLIGATIONS:
INTRODUCTION
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General Rule: Where proven that insurance K entered into, insured presumed to have complied w/ its disclosure obligation
Burden on insurer to prove on BOP that insured breached duty of disclosure
Insured must show:
1. Insured failed to fulfill its disclosure obligation, and
2. Insured’s failure prejudiced the insurer
PROVING BREACH OF INSURED’S DISCLOSURE OBLIGATIONS: NECESSARY ELEMENTS OF THE BREACH
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Four Requirements – Insurer must establish that:
1. Insured failed to fully or accurately disclose particular facts
2. Undisclosed or misrepresented facts were material to the insurance K
3. The true facts were known to the insured, and
4. Omission or misrepresentation was committed w/ the degree of intent required by law
INSURED PROVIDED INACCURATE INFORMATION
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To prove insured misinformed insurer, must produce signed application form containing inaccurate information
This can be complicated if:
a) Application form completed by intermediary (insurance agent) based on information verbally provided by insured, or
b) Questions asked on the application form are unclear
ROLE OF INSURANCE AGENTS AND SIGNED APPLICATION FORMS
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General Rule: Prima facie, an insured who signs an application form is bound by the information therein regardless of who
wrote the answers on the form and regardless of whether the insured read the completed form before signing it (Sleigh)
Exceptions:
1. Insurance agent fills out application form (Stone)
2. Insurance company denies/limits insured’s opportunity to read completed form or takes risk of misrepresentation
upon itself (Blanchette)
Key Consideration: Degree to which insurance company and its agent, by their behaviour, assume the insured’s responsibility
for full disclosure of material facts
Roadmap Summary of the Law: To avoid a policy on the ground of misrepresentation of one or more material facts in the
application or other written material, insurer must show that:
1. Applicant filled out the form inaccurately or incompletely and signed it, or
Applicant bound by the answers
2. Agent, being required by the insurer to fill out the form, did so and correctly recorded false or incomplete answers
given to him by the applicant and verified by the applicant’s signature, or
Applicant bound by the answers, whether or not s/he read the document
3. Agent, required by insurer to fill out the form, did so and incorrectly recorded true and complete answers given by
the applicant, who then verified the form by signing it
Applicant bound by the answers, whether or not he read them
Exception: Applicant not bound if insurance agent fills out application form and insurance company denies or
limits applicant’s opportunity to read the completed form or took risk of misrepresentation upon itself
CLARITY OF QUESTIONS ON THE APPLICATION FORMS
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Where question asked by insurer on application form is unclear
How to evaluate insured’s response:
How reasonably intelligent Canadian in applicant’s position would have understood question
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Intended meaning of insurer in asking the question is irrelevant to whether insured provided an accurate response
PROOF OF MATERIALITY
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Undisclosed or misrepresented information material if reasonable insurer aware of the information would have increased the
premium or refused to provide coverage
Objective Test:
Best evidence insurer can lead is an objective source who can testify as to the standard insurance industry practices
Courts may accept uncontradicted subjective evidence of insurer as reflecting reasonable insurance practice
Not certain to satisfy test if insurer relies solely on testimony of its own employees to establish materiality (Henwood)
Unless legislation states otherwise, fact that an insurer asks a particular question in the application form does not
automatically make the answer to that question material (Henwood)
Fact that insurer does not ask specific question does not make answer to that question immaterial
Absence of the question may limit the disclosure obligation of the insured
PREJUDICE TO THE INSURER
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Once established that insured breached disclosure duty, insurer must also prove that breach caused prejudice
Must show that non-disclosure would have had a material effect on its own underwriting decision
Prejudice established if insurer would have:
1. Denied the risk, or
2. Charged a higher premium
Best evidence for insurer to provide is subjective: (Nuvo Electronics)
Testimony from own underwriters describing how full disclosure of the facts would have affected decision to cover
Objective evidence of reasonable insurer can only be considered IF NO SUBJECTIVE EVIDENCE
Irrelevant if objective evidence that reasonable insurer would have been prejudiced by misrepresented facts if
subjective evidence that particular insurer would not have changed its decision
ARTICLE: ADJIN-TETTEY, “REFORMING THE DISCLOSURE DUTY IN INSURANCE KS”
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New methods of filling out applications (i.e. online) increase risk of breach of disclosure duty b/c applicants do not have
assistance of intermediaries or opportunity to ask questions before submitting the application
In response to this, prudent insured test should be adopted to replace prudent insurer test
Knowledge about what insurers consider material may not be readily available to average person seeking insurance
Reasonable insurer test holds many prospective insureds to normative standard they cannot be realistically expected to meet
Law should adopt a modified objective test that focuses on what a reasonable insured would have done in the circumstances
Already considered in interpreting questions in application process and how person would have understood question
Should also be used to determine questions of materiality
Focus on what reasonable person in insured’s place would have considered relevant in underwriting proposed risk
Relevant factors:
i) Prospective insured’s experience w/ insurance K’s
ii) Nature of the proposed risk
iii) Circumstances in which coverage is sought
iv) Insurance amount
Would strike fair balance b/w interests of insured and insurer by ensuring onerous disclosure duty not imposed on
applicants to disclose information that reasonable person would not have appreciated relevance in the circumstances
Prospective insureds will have to disclose what a reasonable person would consider relevant in the circumstances, even
if that information is not specifically requested
EFFECTS AND CONSEQUENCES OF THE BREACH OF THE INSURED’S DUTY OF DISCLOSURE
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Insurer Has Three Options:
1. Repudiate K on basis of the breach
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K void ab initio (subject to obligations owed by insurer to 3Ps)
In case of policy renewal:
Breach of disclosure duty on original application entitles insurer to repudiate original and renewal K
Breach of disclosure duty on renewal application entitles insurer to repudiate renewed K
Insurer must tell insured of decision to repudiate and refund premiums paid by insured from date of breach
Failure to do so or misleading insured to believe K in effect notwithstanding the breach, insured may
successfully argue that insurer waived its right to repudiate or that insurer is estopped from doing so
Insurer may not have to return premiums where insured’s non-disclosure or misrepresentation fraudulent (i.e.
intended to deceive the insurer)
Possible that punitive damages imposed where insured’s fraudulent breach particularly egregious
Based on fact that punitive damages have been awarded against insureds for particularly
reprehensible and high-handed breaches of the duty of utmost good faith
Rationale: If only consequence of insured’s behaviour is forfeiture of claim, then deterrence not
achieved b/c he is no worse off than if he had been truthful in the first place
Statutory limits on insurer’s ability to repudiate:
Fire Insurance: Insurer entitled to repudiate only the part of the K relevant to the misrepresentation
Automobile Insurance: Insured’s breach renders their claim invalid and forfeits their right to recovery
2. Treat K as valid and subsisting despite the breach, or
3. Treat K as valid despite breach but cancel in accordance w/ statutory provisions authorizing unilateral termination
Even where insurer’s ability to repudiate K restricted by statute
Life Insurance: If K in effect for two years, insurer cannot repudiate K unless breach is fraudulent
If breach re actual age, insurer must adjust insurance proceeds in accordance w/ insured’s real age
CAUSATION, FAIRNESS, AND THE INSURED’S DISCLOSURE DUTY
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No causal link required b/w information insured is expected to disclose and loss ultimately claimed
Where breach, insurer entitled to deny coverage regardless of if loss was caused by the undisclosed or misrepresented fact
Insured Perspective Argument: Insured’s obligation to report all material changes might be too onerous
Insurer Perspective Argument: Waiting to see whether a particular change leads to an insured loss imposes significant
uncertainty on the insured regarding the extent of the insured’s disclosure obligation
Insurer Perspective Argument 2: Insurance fundamentally about providing protection against contingencies
In most cases, premiums paid for protection against losses which never occur
Not unfair to require insured to report information which is material to the contingencies covered and to pay higher
premiums for increased adverse contingencies, whether or not any loss actually results from the contingencies
Outside the fire insurance context, question of if a material change in risk must be causally linked to the loss can be avoided by
contractual terms that clearly restrict the circumstances under which insurance coverage is provided
Rationale: Obligation is part of insurer’s broad duty of utmost good faith and this duty pertains to the proper formation of an
insurance K as well as to the claims stage of the insurance relationship
Insurer entitled to know all relevant facts, regardless of whether they prove relevant to a given claim under the policy
Note: Insurer’s ability to deny coverage on basis of non-disclosure or misrep not causally related to loss raises issue of fairness
If loss would have occurred anyway, what harm has insurer suffered in providing coverage w/o knowledge of that fact?
Leading Case: Marche v. Halifax
Dissent (Bastarache J.): (p. 125)
Ignorance of obligation to disclose or failure to appreciate its materiality will not excuse the insured
Except in unusual circumstances, the insurer will not otherwise become aware of a change in the risk.
Insurer’s ability to asses risk and to decline or make adjustments to coverage is an essential feature of
the underwriting aspect of insurance
Pursuant to doctrine of good faith, regardless of if material change is related to loss or has been
cured at time of the loss, insured’s duty to report material changes is absolute and fair b/c insurer is
entitled at all times to full disclosure of information pertinent to its underwriting decisions
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LEGAL LIABILITY OF INSURANCE AGENTS/BROKERS
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Agents can be personally liable to insureds where there a problem re existence or adequacy of coverage provided in insurance K
Private insurance agents and public insurance employees owe DOC to provide adequate information to insureds
Reliance: Key principle for imposing legal liability on insurance agent for inadequately covered losses suffered by insured
Private Insurance Agents vs. Public Insurers: (Fine’s Flowers, Fletcher)
Private Insurance Agents:
Info about available coverage and what meets customer’s needs, including gaps in coverage (Fine’s Flowers)
Private agents licensed professionals
Provide professional and individualized services
Opportunity to assess customer’s needs and advise accordingly
Commission
Public Insurance Agents:
Accurate information about all available coverage, including optional coverage (Fletcher)
Employees not licensed agents or alleged experts
Employees work in institutional setting
No opportunity for private and individualized attention to customers
Fixed salary
Nature of information that must be provided varies:
Private insurance agents have a much more onerous obligation than public insurance employees b/c private
insurance agents have to be licensed and are professionals whereas public insurance employees are not
Service provided by a public insurance employee is more sales and clerical than that provided by a
private insurance agent (Fletcher)
Existence and extent of DOC hinges on degree of reliance reasonably placed on insurance agent or employee
DEFENCES
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Does insured have obligation of due care to ensure s/he has necessary coverage requested?
Contributory negligence
To extent that intermediary’s liability premised on negligence, failure to exercise that due care for their own interest
may result in defence of contributory negligence
What are the consequences of failure to exercise due care? (CIA Inspection)
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Interpreting Insurance Ks
POLICY INTERPRETATION
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Central goal is to seek interpretation that most fairly reflects the parties’ intentions
Insurance Ks typically take form of standard form policies drafted by insurance companies in advance of any K negotiations
Heavy burden on insurers to clearly reflect their intentions in policy wording to not take unfair advantage of insureds
TWO-STEP CONSOLIDATED BATHURST INTERPRETIVE FRAMEWORK
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Step 1: Search for Intention
To promote true intention of the parties at the time they entered into the K
Principles:
i) Undefined words should be given their plain and ordinary meaning
ii) Give undefined word w/ two meanings more reasonable reading in promoting intention of the parties
iii) Interpret K as a whole, keeping in mind that reasonable protection of insured risk is the presumed purpose,
or general intention, of any insurance K
Objective of the K should not be negated by a technical application or an interpretation that would
result in a windfall to the insurer or an unanticipated recovery to the insured (Brisette)
Note: If application of these principles results in conflict b/w two reasonable but differing interpretations, the K is
ambiguous and court must move to step 2
Step 2: Resolve Ambiguity
i) Contra Proferentum
Construe ambiguous K terms against insurer (drafted the agreement) and in favour of insured (Brisette)
Insurer draws up K of insurance
Insurer determines the clauses that will go into a standard form of K
That standard form of K is offered to people in all walks of life on a take-it-or-leave-it basis
Does not apply to statutory conditions b/c they not drafted by the insurer
ii) Broad Coverage/Narrow Exclusions
Broadly construe coverage provisions
Narrowly construe exclusionary provisions
iii) Reasonable Expectations
Construe insurance Ks in a manner consistent w/ reasonable expectations of the parties
Started in US (to ensure that insurance policies provide coverage the insured can reasonably expect to receive)
US courts have applied in three ways:
1. Resolve ambiguities by interpreting K in accordance w/ insured’s reasonable expectations
Only approach endorsed in Canada (refers to expectations of both insurer and insured)
2. Presume that insured is entitled to all coverage s/he could reasonably expect K to provide
3. Irrefutably presume that insured is entitled to all coverage s/he could reasonably expect K to afford
OTHER CONSIDERATIONS
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Concern that insureds should not suffer unfair disadvantage b/c insurance policy drafted by sophisticated insurers
Contextual concerns should not override the application of established principles of interpretation (Jesuit Fathers)
Public policy considerations do not and should not trump foundational principles of interpretation (Jesuit Fathers)
Need not apply principles of interpretation to protect an insured
May refuse to apply an unreasonable K provision
May draw on equitable doctrine of estoppel
LOSS CAUSED BY ACCIDENT
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Insurance Ks exclude coverage for expected losses (i.e. losses purposely caused by insured or caused by ordinary wear and tear)
Insurance Ks usually expressly describe provided coverage by reference to loss caused by “accident” or “accidental” means
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Accident: Defined according to its plain, ordinary meaning, but has generated debate
Many losses are neither entirely purposeful caused nor entirely random, so can be plotted on continuum b/w them
Encompasses much of continuum while falling short of providing coverage for intentionally caused losses
Loss caused by accident not intended or expected by insured, regardless of activity insured engaged in at time of loss
Martin Test: Did insured expect or intend for loss to occur?
Ascertain from subjective perspective of insured based on evidence surrounding the loss
If insured expected loss to occur then it does not fall w/in ordinary definition of accident
If evidence does not provide clear answer, examine from perspective of reasonable person in insured’s position
Due to the unusually dangerous or risky nature of the activity
Natural Causes of Loss vs. Accidents:
Martin test does not apply to loss from natural causes (Martin)
Is restricted to situations where insured’s actions led to loss (Wang)
A person’s death by natural causes would not in ordinary and popular language be referred to as an accident
A disease is not an accident, but an accident can cause a disease (Kolbuc)
Mosquito bite triggering insured’s illness an accident w/in scope of martin decision
It an unforeseen and unexpected event caused by an external source
Insured had no reasonable expectation that he would get West Nile virus from activity he engaged in
LOSS CAUSED BY INTENTIONAL/CRIMINAL ACTS
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Insurance policies often expressly exclude coverage for losses intentionally caused by insured
Obviously captures purposeful acts (i.e. arson) designed to bring about a particular loss
Difficulty as to if situations where insured’s deliberate actions lead to consequences which, while not purposely intended by the
insured, should have been foreseen by insured also encompassed
Difficulty in defining “intentionally caused loss”
Loss is “intentionally caused” where an insured takes action w/ the purpose of causing some loss or harm (Saindon)
Focuses on both deliberate act and its results (Scalera and Sansalone)
Applies even if insured did not intend the extent or degree of harm actually caused, where: (Scalera and Sansalone)
1. Insured intends to cause some harm, or
2. Insured’s actions by definition will result in harm
Fact that actual damage more extensive than insured contemplated does not entitle insured to indemnity (Lombard)
Intent not synonymous with “desired end” or “objective”, but refers to a more general intent to cause harm
Fact that insured intended some measure of harm is sufficient to ensure that intentional loss exclusion clauses do not
relieve insurer from its obligation to provide coverage for losses caused by insured’s negligence (RDF)
Further points on interpretation of intentional loss exclusions:
Intentionally Caused Loss: Deliberate act committed by insured w/ intention of causing some degree of harm or loss
To prove if insured had intention to cause some harm or loss, look for evidence of insured’s subjective intent
If this does not work, may apply a subjective-objective analysis based on circumstances of the loss
Test is NOT one of “substantial certainty”
Test is not that loss is intentionally caused when it is a substantially certain result, and not merely a
possible outcome, of the insured’s deliberate act
By expansively defining both “accidental loss” and “intentional loss”, SCC risks incongruous results
Since insurance policies usually include accidental loss in insuring agreements and then limit them w/ exclusion clauses
re intentionally caused loss, liberal construction of both terms means policy coverage and exclusion clauses may work
against each other, not together, to set out specific area of coverage
Also, expanded definition of “intentionally caused loss” seems to contravene fundamental interpretive principle of
narrowly construing exclusion clauses
Eric Knutsen, “Why Insurers Should Rethink the Criminal Conduct Exclusion”
Page | 33
PUBLIC POLICY RESTRICTIONS
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General Rule: Public policy nullifies coverage where completion of the K would violate the social or moral values of society
Public policy rules of particular relevance:
1. Prohibiting recovery for losses arising from insured’s criminal activity, and
2. Prohibiting payment of life insurance proceeds in event of the insured’s suicide
CRIMINAL ACTS: SUMMARY
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Valid K, Loss Caused by Criminal Act:
Question as to whether insured should be entitled to recover
Typical situation: life insurance policy, insured dies from illegal activity
Payment to beneficiaries not precluded in K
Beneficiaries’ claim unaffected by insured’s criminal activity (Oldfield and Goulet)
Beneficiary not participant in criminal act
Payment not for benefit of guilty insured
Rationale:
Sympathy for innocent survivors
No recovery where claimant intentionally caused loss:
Insured deliberately caused loss (i.e. arson (Scott))
Beneficiary caused insured’s death (Brisette)
Statutory Modification re Criminal Forfeiture Principle:
Criminal bar abolished
No forfeiture unless insured intended to cause damage or loss (BCIA, s. 28)
Insurance K may specifically override statutory provision
Preclude recover re loss caused by insured’s criminal act regardless of intention to cause harm
Exclusion:
Life Insurance: Criminal forfeiture applies
Auto: 3P claim unaffected by insured’s criminal activity (BCI(Veh)A s. 76(6)(c))
CRIMINAL ACTS: COMMON LAW
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Criminal Forfeiture Principle: Criminals should not benefit from crime
Rationale:
1. Avoidance of criminal activity
2. Preservation of principles of justice
Particularly Relevant Where a Person:
1. Arranges insurance coverage for an illegal activity, and
2. Commits a criminal act that causes loss otherwise covered by an insurance K
Public policy operates independently of the rules of K (unless modified by statute) (Oldfield & Goulet)
Purpose is to protect social values over individual intentions, so rules not constrained by K
Public policy does not impact legal status of the K to render it void or invalid b/w the K parties
Instead, public policy renders a valid K unenforceable on moral grounds
Can avoid application of public policy rules by expressly including K terms that operate consistently w/ public policy
considerations and address circumstances in which public policy principles might otherwise apply
Insurance Ks designed to cover illegal activity unenforceable (Oldfield & Goulet)
Refers to insurance Ks that expressly cover an illegal activity
Criminal forfeiture principle extends to criminal’s estate and, at present, to anyone claiming through the estate
B/c, at law, the estate’s claim is equivalent to a claim brought by the criminal
Although this an accurate statement of current law, it suggested in obiter that the rule should be reformed in terms of
its application to prohibit recovery of insurance proceeds by a criminal’s estate
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Concern about unfairness of allowing named beneficiary of insurance policy to recover insurance proceeds
despite criminal act of insured while not allowing insured’s estate to recover under the same circumstances
Innocent Beneficiaries: (Oldfield & Goulet)
Criminal forfeiture principle does not apply to innocent beneficiary not claiming through the estate
Based on distinction b/w criminal’s relationship to insurance policy and innocent beneficiary’s relationship to the policy
Criminal’s estate stands in shoes of criminal but a beneficiary under an insurance policy does not
Beneficiary’s entitlement is independent from the actions of the criminal or the criminal’s estate
Where beneficiary innocent of wrongdoing, s/he is entitled to proceeds of insurance policy, regardless of criminal act
Criminal forfeiture rule applies to relationship b/w contracting parties and does not affect the rights or interests of 3Ps
Allowing recovery by innocent beneficiaries consistent w/ rationales underlying criminal forfeiture principle:
Recovery by innocent beneficiaries does not encourage crime b/c beneficiaries have not committed a crime
Payment of insurance proceeds to innocent beneficiaries does not violate public policy b/c beneficiaries not
participants in criminal acts in question and b/c payment to beneficiaries does not benefit guilty insureds
Justice is served b/c innocent parties are not punished
To deny coverage would penalize victim for insured’s anti-social behaviour
CRIMINAL ACTS: MODIFICATION BY STATUTE
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Strict application of criminal forfeiture rule can result in unfairness to those otherwise entitled to insurance proceeds
While this outcome may be justified where insurance proceeds are payable to the person who commits a criminal offence, the
result is manifestly unfair where the proceeds are payable to 3P claimants or beneficiaries who are innocent of wrongdoing
To avoid such unfair results (i.e. withholding payment of proceeds to 3P claimants or beneficiaries innocent of wrongdoing),
statutes typically modify application of the c/l criminal forfeiture rule by providing:
1. Insured’s criminal act will not result in forfeiture of insurance proceeds unless insured intended to bring about loss
or damage (BCIA s. 28)
Restricts CFR to circumstances where insured commits criminal act w/ intention of bringing about claimed loss
Can circumvent this rule by expressly agreeing to the c/l application of the CFR
Note: Does not apply to life insurance
2. Automobile liability insurer cannot deny payment to 3P claimant based on insured’s criminal act (BCIA s. 76(6)(c))
LIFE INSURANCE PROCEEDS & SUICIDE
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Rule: Life insurance proceeds not payable if insured’s death results from suicide
Rationale:
Insurance protects fortuitous loss
Implied exclusion re loss caused by predictable events
Life insurance: death certain but timing uncertain
Suicide intentional act
Common Law:
No payment re death by suicide
Rationale:
1. K Interpretation
Suicide not w/in scope of insured risk
Consistent w/ intentional injury exclusion
2. Contrary to public policy
Decriminalization irrelevant
Statutory Modification:
Permits, does not require, insurers to provide insurance benefits for suicide
BCIA s. 46(1): Terms Permitting Recovery Where Insured Commits Suicide Lawful & Enforceable
Sympathy for beneficiaries
Freedom of K
Page | 35
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Suicide or Self Destruction Provision
Payment for death by suicide w/in specified period excluded or benefits reduced
Implied term to pay after stated period
Reinstatement: Relevant period from last reinstatement (BCIA s. 46(2))
Rationale:
 Prevents persons contemplating suicide from obtaining/reinstating life insurance
 Unlikely insured will defer suicide plans for that long
Presumption of Operation of C/L:
If life insurance K silent re suicide, c/l suicide forfeiture prevails (Husak)
Main K: suicide exclusion w/in 2 years
If a life insurance policy expressly covers suicide, then the K is enforceable according to its terms (Husak)
Quebec: Civil Code of Quebec c. 64 Article 2441
Presumption of validity
Life insurance not voided by suicide
Insurer entitled to exclude payment for suicide as K term
Suicide exclusion provision ineffective after 2 years of K
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THE CLAIMS PROCESS
MAKING A CLAIM: INSURED’S OBLIGATIONS – NOTICE OF LOSS
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Timely notification of loss and intention to make claim
Notice of Loss Clauses:
Included in most policies
Require insured to report losses w/in a prescribed time frame
Insurer must prove on BOP that insured failed to comply w/ notice obligation
Insured who fails to report a loss as required by terms of the policy forfeits any entitlement to insurance proceeds for the loss
Unless principles of relief against forfeiture or waiver and estoppel apply
Time Limits Clauses:
Statutory condition
All designed to require timely notice from insured, but wording can vary depending on type of coverage involved
May be either a specified period or expressed in general terms
Accident & Sickness: Notification – 30 days; POL – 90 days (BCIA s. 89, stat. cond. 7)
Fire: Written notice “forthwith” (BCIA s. 126(2), stat. cond. 6)
Automobile: “Promptly” give written notice (BC Ins. (Vehicle) Reg. 477/83, s. 169, stat. cond. 4 & 5)
Rationale: Avoids prejudice to insurer
i) Timely investigation
ii) Determine grounds to contest claim
iii) Preserve insurer’s salvage interest
Triggering Factors/Notification Obligation: (Marcoux)
Depends on context
Notice obligation must be interpreted in context of circumstances surrounding the loss
Date of loss or when reasonable person may have reason to believe claim possible
Objective assessment
Standard that of a reasonable person in position of the insured
No relief if reasonable person would have known duty arises
Insured’s subjective belief irrelevant
Acting in good faith irrelevant
Insured’s good intentions irrelevant
Consequence of Breach: Claim forfeited (Marcoux)
No forfeiture absent prejudice to insurer (Bissett)
Fulfillment of the Obligation
Whether insured reported the loss w/in specified time frame from the triggering event
Where Clause specifies deadline insured must meet in providing notice, fairly simple to determine if insured has
fulfilled its obligation once the triggering event has been identified (i.e. “w/in 30 days”)
Can be challenging where Clause provides requirement for notice to be “prompt”, “immediate”, or “ASAPracticable”
No standard definition assigned to such terms
Interpret according to circumstances of case and ordinary & reasonable understanding of such a requirement
Attempt to interpret the generally described time frames relative to one another (i.e. “immediately” more
stringent than “promptly”, which is more stringent than “as soon as practicable”)
MAKING A CLAIM: INSURED’S OBLIGATIONS – PROOF OF LOSS
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Insured must prove occurrence of, and value, of insured loss
Insured must establish on BOP that:
1. A valid insurance policy exists
2. A loss has occurred
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3. The loss occurred during the time period covered by the policies
4. The loss falls w/in the coverage of the policy, and
5. The amount of the loss
Proof of Loss Clause (POLC):
Requires insured to provide insurer w/ proof of loss w/in a specified period of time
Purpose:
Enable insurer to assess and validate claim expediently and w/o having to go to court
Insured who fails to comply w/ POLC forfeits right to recover insurance proceeds for the loss
Unless forfeiture or waiver and estoppel apply
NOL and POL Distinguished:
NOL:
Alert insurer of claim
Narrower obligation than proof
POL:
Specific details of the claim (nature and value of the loss)
Broader obligation than NOL
Proof may amount to notice, but mere notice is not proof
Fulfillment of the Obligation:
Determined on facts of each case, w/ regard to wording of the POLC and circumstances surrounding the claim
1. Time Frame Compliance, and
Whether insured provided proof of loss w/in the required time frame
Few problems where POLC specifies deadline for compliance
However, problematic where POLC prescribes a time frame in general terms (i.e. as soon as practicable)
POL provided several years after happening of the loss is not provided “as soon as practicable”
2. Sufficiency of Information
Whether information provided by the insured was sufficient to satisfy the proof of loss requirement
Determined on reasonableness standard
Requires insured to provide information about the loss in its possession or that can be reasonably obtained
Insured must provide information reasonably expected by insurer to usefully evaluate the insurance claim
Consequence of Breach:
Claim forfeited
Overarching K remains valid
MAKING A CLAIM: INSURED’S OBLIGATIONS – DUTY TO COOPERATE
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Insured must provide insurer w/ NOL and POL as part of general good faith duty to cooperate w/ insurer
Obliges insured to willingly assist to the best of his judgment and ability
Duty to cooperate may include other elements depending on type of insurance
Liability Insurance:
Holds special Importance: w/o insured’s assistance in securing and giving truthful evidence and obtaining
attendance of witnesses, the insurer may not be able to mount an effective defence
Insured not to assume liability in 3P action
Insured must assist insurer in defending 3P claim
Insured must provide necessary information for settlement
What Constitutes Breach:
Insured’s conduct, or lack thereof, must be material and substantial to constitute a breach of the duty to cooperate
Trivial lack of cooperation by insured will not entitle insurer to deny coverage
Consequence of Breach:
Forfeiture
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FRAUD BY THE INSURED
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Post-loss obligations informed by duty of good faith
No wilful concealment of material information or misrepresentation
Proving Fraud:
Burden of proof on insurer
Must provide proof of actual fraud
Inadvertence, mistake, or omission not sufficient
Higher standard of proof
Burden technically on a BOP, but is heightened due to serious nature of the allegation
Must prove fraud to “higher degree of probability than if considering whether negligence were established”
Presumption of Fraud:
Where insured makes grossly overvalued claims/misrepresentation
Presumption rebutted: Honest mistake
Materiality:
For insured’s K rights to be forfeited, insurer must prove that insured’s fraud was material
Must show that misinformation was capable of misleading insurer by affecting their management or payment of claim
Fraud Established Where Insured:
Knowingly (w/o an honest belief in the truth of the representations) or recklessly (w/o caring whether the
representations are true or not) makes false representation(s) to insurer
i.e. non-existent property, how loss occurred, inflated value of loss, etc.
Consequences of Finding Fraud:
Common Law:
Claim forfeited
K voidable by insurer
Premiums not Returned
Statutory/K Modification:
Narrows insurer’s c/l rights
Only claim is forfeited, K remains valid (Fire: BCIA, s. 126(2) stat. cond. 7), Automobile: Ins (Vehicle)
Act, s. 75 (subject to unilateral termination))
Amount of fraudulent claim irrelevant
Claim may exceed policy limit
Fraud is material to loss despite fact that amount of insurance contents claim exceeds coverage limits
A wilfully false statement voids the entire claim
No relief against forfeiture (Swan Hills)
Punitive Damages
Preconditions for Insured’s Recovery of Insurance Amount
Insured’s personal obligation
May be delegated
Insured unwilling: interested 3Ps (i.e. mortgagee)
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EXCUSING THE INSURED’S BREACH OF K
INTRODUCTION
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Justice or fairness not always served by strict enforcement of K terms
May not be fair to allow one K party to void an agreement by relying on breach of K committed by other if that breach
is minor, technical, or previously condoned by the party now seeking to escape the agreement
RELIEF FROM FORFEITURE
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Equitable doctrine that excuses insured’s breach where forfeiture of coverage would be unfair to the insured
Key: Whether insured’s breach of K has caused prejudice to insurer
Purpose: Prevent insurer from denying benefit to insured b/c of a technical breach not substantively prejudicial to the insurer
Discretionary Power, based on Two Factors:
1. Legal Threshold: Is Relief from Forfeiture Available?
Deals w/ scope of court’s authority to grant relief from forfeiture
Depends on 3 factors:
i) Source of Court’s Discretion
a) Insurance Statutes (Specific Power): relief for imperfect compliance
BCIA General Provisions, Part 1, s. 10
Accident & Sickness: BCIA, s. 89, stat. cond. 7(2)
Life Insurance: No statutory (specific) relief provision
But, discretion under general power (Sask. River Bungalows)
b) General power where court finds that such relief is fit or just
Law and Equity Act, RSBC 1996, c. 253, s. 24
ii) Type of insurance involved
Ameliorative provision should be broadly interpreted (Falk Bros. Industries Ltd.)
Statutory reference to “another matter or thing required to be done” mean specific
relief provision applies to both ordinary contract terms and statutory conditions
Specific relief power applies to all types of insurance Ks
Unless relevant insurance legislation expressly states otherwise (i.e. life insurance)
iii) Nature of Insured’s Breach
Specific Relief Power Available Where:
Insured’s breach constitutes imperfect compliance (not non-compliance) w/ a
statutory condition or K term and where it relates to insured loss
Principled distinction b/w a breach constituting imperfect compliance and
one constituting non-compliance difficult to find
Insured fails to provide timely notice or proof of loss
Specific Relief Power Not Available Where:
Insured fails to commence litigation on the K w/in the prescribed limitation period
Breaches relate to preconditions for the existence of an insurance K, as distinct
from preconditions for insured’s ability to claim for a loss
i.e. automobile insurance: specific relief power inapplicable to insured’s
failure to maintain valid registration required by automobile legislation and
insured’s failure to maintain valid driver’s license for purposes of insurance
Note: General relief power does not apply to a wider range of breaches than the specific
relief power (no application to matter of non-compliance w/ a condition precedent to the K)
2. Circumstances Relief from Forfeiture to be Granted:
Once determined that relief from forfeiture can apply, decision to grant relief lies in discretion of court
Specific Relief Power – Two Factors:
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i) Has the insurer been prejudiced by the imperfect compliance?
ii) Would it be equitable to hold the insured to strict compliance w/ the relevant obligation?
General Relief Power – Three Factors:
i) Conduct of the claimant
Was the conduct of the plaintiff reasonable in the circumstances
ii) Gravity of the breaches, and
Was the object of the right of forfeiture essentially to secure the payment of money
iii) Disparity b/w the value of the property forfeited and the damage caused by the breach
Was the disparity substantial?
Relief From Forfeiture Not Granted Where:
i) Insured intentionally or maliciously breached an obligation
ii) Insured’s unreasonable conduct led to the breach
iii) Insured lied about circumstances giving rise to the breach
iv) Insurer unduly prejudiced by insurer’s breach
Prejudice caused by insured’s delay in notifying insurer of loss (impair insurer’s ability to
investigate claim or mitigate the loss)
Ask: Would the insurer have acted differently had the delay not occurred?
Conditions for Exercise of Courts’ Discretion: Falk Brothers & Industries Ltd. v. Elance Steel Fabrication Co
Contractual and statutory conditions
Nature of Breach: Imperfect compliance with post-loss duty
Excluded: pre-loss breaches or non-compliance
Valid insurance contract
Non-payment of premiums (Pulzak)
Vehicle registration
Expired limitation period for initiating action; statutory or contractual term (National Juice Co.)
Nature of Insured’s Breach and its Effect on Insurer
Unintentional breach and no prejudice to insurer
WAIVER AND ESTOPPEL
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Insurer’s conduct signals intention not to enforce a K right
Broader than Relief from Forfeiture:
No distinction b/w imperfect compliance and non-compliance
Not limited to post-loss technical or minor breaches
Cover all kinds of K duty (i.e. timely payment of premiums, limitation periods for filing claims, etc.)
Are substantive legal doctrines (i.e. not in court’s discretionary power)
Prejudice to insurer is irrelevant
Waiver and Estoppel Distinguished:
Waiver:
Doctrine of K law
Promise or consent, akin to K
No detrimental reliance required
Written – BCIA s. 11(1) – life, fire; miscellaneous; Accident & Sickness – s. 89, stat. cond. 1(2); Auto: Insurance
(Vehicle) Act, s. 85
Limited use of waiver BCIA s. 11(2) – not possible re proof, valuation, & adjustment of los
Estoppel:
Rule of evidence
Imposed duty akin to tort
Detrimental reliance required
No writing requirement
Overlap between Waiver & Estoppel:
Waiver may result in estoppel
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Scenario: Insured reports a loss to insurer’s agent promptly. Agent tells insured to take her time in filing proof
of loss and that claim will be covered even if proof not filed within the specified time. Insured procrastinate
with filing proof and eventually does so one month after expiry of the prescribed time for doing so.
How would you characterize this situation regarding waiver and estoppel?
Waiver but no estoppel
Scenario: Insured phones insurer two days after expiry of prescribed time for filing proof of loss, saying he
missed the time limit. Insurer tells insured not to worry and that he should still go ahead and file proof of loss
Can insurer subsequently resist claim as being forfeited?
How would you characterize this situation and why?
WAIVER
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Purposeful decision by insurer not to hold insured to a particular K obligation
Intentional alteration of a K term that can occur before or after the K term is breached
Implicit Recognition:
Waiver amounts to variation of K terms
Justification:
No consideration moves from the party in whose favour a waiver operates
An overly broad interpretation of waiver would undermine the requirement of K consideration
Three Requirements: (Saskatchewan River Bungalows)
1. Insurer knowingly abandons rights
Must have full knowledge of rights
2. Insurer unequivocally and consciously communicates abandonment to insured
Demonstrating intention to abandon
May be proven by express words or implied by action
3. Unfair for insurer to retract promise of abandonment
Insurer entitled to retract waiver w/o notice but notice is required after reliance
Reliance by Insured NOT Required: (Sask River Bungalows)
But, once waiver established, insured’s reliance on waiver is relevant to insurer’s ability to retract the waiver
Can retract waiver if reasonable notice to party in whose favour it operates, but b/c purpose of reasonable notice is to
protect party relying upon the waiver, reasonable notice not required where no reliance
If insured knows of and relies upon insurer’s waiver, insurer cannot retract waiver w/o giving reasonable
notice to the insured
Conversely, if insured does not know of or rely upon insurer’s waiver, it can be retracted w/o notice
Statutory Rules:
Read narrowly to avoid potentially harsh impact on insureds
Because provisions expressly refer only to waiver, an insured can still rely on estoppel
1. No term or condition of a K is deemed to be waived by the insurer in whole or in part unless the waiver is stated in
writing and signed by a person authorized for that purpose by the insurer
2. Neither insurer nor insured is deemed to waive any term or condition of a K by any act relating to the appraisal of
amount of loss or delivery and completion of proofs or to investigation or adjustment of any claim under the K
Written documents relating to the insurer’s investigation and adjustment of the loss are not by themselves
sufficient to demonstrate waiver
Modification by K:
Parties can agree to extend reach of statutory provisions or restrict c/l application of waiver and estoppel
ESTOPPEL
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Equitable doctrine that prohibits party from acting inconsistently w/ representations it made, where it would be unfair to do so
Requirements:
1. Insurer represents to insured that K term will not be enforced (re existing facts or future intention)
2. Insurer relies on the representation to its detriment (not required by waiver)
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Two Theories of Estoppel:
1. Promissory Estoppel (Maracle)
Insurer makes representation (promise) about future events to insured
i.e. insurer promises insured not to refuse coverage on basis of future default by insured
Insurer must have intended to affect its legal relations w/ the insured
Duty on party relying on doctrine to establish that other party has, by words or conduct, made a promise of
assurance intended to affect their legal relationship and to be acted on
Claimant must also establish that, in reliance on the representation, he acted on it or changed his position
2. Estoppel By Representation
Insurer makes representation of fact about present situation to the insured
i.e. insurer advises insured that coverage is provided for a particular loss or that existing breach of K
by insured will not invalidate coverage, accepts premium after the due date, accepts proof of loss
filled after prescribed period, provides defence absent obligation to do so, etc.
Possible overlap w/ waiver:
Breach already occurred
No detrimental reliance
Differences:
Key: Nature of the representation made by the insurer
But, similar in that focal point of both is detrimental reliance by insured on insurer’s representation
AVOIDING WAIVER AND ESTOPPEL: RESERVATION OF RIGHTS LETTERS AND NON WAIVER AGREEMENTS
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Insurer’s Dilemma:
Reason to believe insured in breach or K invalid
Breach or invalidity yet to be determined
Insurer risks breach for failing to respond
Potential prejudice for lack of, or untimely, response
Reservation of rights/waiver agreement
Insurer responds to claim w/o prejudice
Insured’s consent not required
Unequivocally communicated to the insured
Provide insured w/ written notice that insurer not intending, by its subsequent actions, to forfeit its right to withhold coverage
Purpose:
Prevent insured from later arguing it understood or relied on insurer’s actions as verifying coverage
Permits insurer to suspend its decision to deny coverage for a given loss, while permitting insurer to continue its involvement in
investigating and potentially resolving the claim
Act only as shields for the insurer and not as swords for the insured
Do not create coverage where non would otherwise exist
i.e. an insurer’s decision to send a reservation of rights letter or obtain a non-waiver agreement cannot in
itself be taken as an admission of coverage by the insurer
B/c purpose of both to preserve insurer’s option to deny coverage, once coverage denied the documents are no longer effective
Reservation of Rights Letter:
Insurer unilaterally informs insured of their intention to preserve its right to deny coverage
Must clearly set out rights reserved to insurer
Non-Waiver Agreement:
Insurer and insured mutually acknowledge and agree to insurer’s reservation of rights
Advantages (from insurer’s perspective):
1. B/c insured is party to the non-waiver agreement, this document provides strong evidence that insured
knew it should not interpret insurer’s actions as confirming coverage
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2. Being a bilateral K, a non-waiver agreement can impose additional rights and obligations on insurer and
insured not necessarily provided for by underlying insurance K
i.e. in context of liability insurance, non-waiver agreements authorize insurer to defend a 3P action
brought against insured, to settle the claim if possible, and to later recover from insured both the
cost of defending the claim and the settlement amount
Must clearly set out rights reserved to insurer
Will not be enforced if terms or relevance of it misrepresented by insurer or otherwise misunderstood by insured
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OBLIGATIONS OF INSURANCE COMPANY RESPONDING TO A CLAIM
GOOD FAITH RESPONSE
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General Rule: To meet obligation of good faith, insurer must:
1. Treat Insured Fairly
Investigate and assess the claim objectively and on proper grounds
Vulnerability not to be exploited as negotiating tactic (Whiten)
Must not deny coverage or delay payment in order to take advantage of the insured’s economic vulnerability
or gain bargaining leverage in negotiating a settlement (Fidler)
2. Conduct Diligent Investigation and Timely Resolution, and
Act w/ reasonable diligence during each step of the claims process to see the claim resolved in a timely way,
and
3. Pay on Timely Basis
If no reasonable grounds for denying coverage or payment, must pay claim on a timely basis
Insurer that acts unreasonably responding to insured’s claim is in breach of duty of good faith
Reciprocal obligation on insurer and insured to deal w/ one another in utmost good faith
Rationale:
Mutual reliance and vulnerability
Enhanced vulnerability of insured after loss
Insurer to further purpose of insurance
Peace of mind (Whiten v. Pilot Insurance)
Timely response to claims
Duty of good faith response broader than duty to pay:
Good faith duty triggered w/ notice of loss
Encompasses all of insurer’s conduct from when insured advances claim up to and including payment of claim
Duty to pay triggered w/ satisfactory proof of loss and post-loss obligations
Either or both duties may be triggered in a particular situation (Fidler)
Requires timely and diligent investigation, and notification of decision (Hosseini)
Difference B/W Duty of Good Faith and Obligation to Pay
Duty of Good Faith Response:
Arises from existence of insurance K regardless of if K provides coverage for the loss claimed
Inherent part of every insurance K
Triggered once claim advanced under the K, regardless of if the policy provides coverage for the claim
Duty to Pay:
Based on policy wording as applied to the loss
Arises when insured demonstrates a loss falling w/in policy coverage has occurred
Narrower than duty of good faith
Relates only to payment
See Fidler, where question of bad faith was litigated even AFTER the insurer had paid all insurance proceeds
owing to the insured (duty to pay fulfilled, but DOGF in question)
Refusal to pay not necessarily breach of duty of good faith response: (Fidler)
No strict liability; denial of benefits must be reasonable
In good faith if:
Balanced and reasonable assessment of merits of claim
Refusal based on reasonable interpretation of insured’s contractual duties
Refusal based on reasonable interpretation of its own (insurer’s) K obligations
Insurer not to strategically exploit insured’s vulnerability
Insurer need not be correct re decision to dispute or deny payment
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So, mere denial of claim that ultimately succeeds is not, in itself, bad faith
CONSEQUENCES OF BREACHING OBLIGATION TO PAY FOR LOSS AND DUTY OF GOOD FAITH:
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Consequences of Breach of Duty to Respond in Good Faith:
1. Pay claim (Scenario 2)
2. Aggravated Damages (Fidler) (Scenario 1 & 3)
3. Punitive Damages (Whiten) (Scenario 1 & 3)
Three Scenarios:
1. Insurer liable on both counts
Occurs when insurer errs in denying coverage and in a manner or on a basis that is unfair or unreasonable
Also occurs where insurer acts reasonably, but mistakenly, in denying coverage but treats insured unfairly in
other aspects of the claim (i.e. in investigating the claim or communicating w/ the insured)
2. Insurer liable for breaching obligation to pay for loss but not breach its good faith obligation
Occurs where insurer acts promptly, fairly, and reasonably in responding to insured’s claim, but simply errs in
concluding that it is not contractually for the loss
3. Insurer liable for breach its good faith obligation but not for breach its obligation to pay for the loss
Occurs where an insurer ultimately pays for the loss, but unreasonably delayed its decision to do so or
otherwise acted egregiously toward the insured when processing the claim
Theoretically, should also be the case where insurer correctly refuses payment for a loss b/c it does not fall
w/in policy coverage, but treats insured unfairly or unreasonably in course of investigation or denial of claim
Key factor is the manner of the insurer’s conduct, whether there turns out to be coverage or not
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INSURER’S OBLIGATIONS UNDER LIABILITY INSURANCE POLICY
OVERVIEW
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Purpose of Liability Policy:
Protect insured against financial loss/liability to 3P
Two-Tiered Process:
1. Is insured liable to a 3P?
2. Is insurer liable to indemnify?
Duty to Defend Distinguished from Duty to Indemnify
Duty to Defend:
Contingent on duty to indemnify
Distinct and broader than duty to indemnify (Great West Steel Industries)
Not affected by “no action clauses”
Duty to Indemnify:
“No action clauses” preclude indemnity claim until insured’s liability determined, does not affect duty to
defend
OBLIGATION 1: DUTY TO DEFEND
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General Considerations:
Insurer owes duty to insured to pay for and instruct legal counsel in defending insured against 3P claim
Low threshold to trigger insurer’s defence obligation
Both a K right and obligation
Put in issue before the merits of the claim determined
Broader than duty to indemnify b/c insurer may be responsible for defending 3P action which, if successfully defended,
insurer will not be obliged to provide indemnity
Mutual benefit to insurer and insured:
From insured’s perspective:
Advantageous to have legal costs of defending a 3P action paid for by insurer
From insurer’s perspective:
Desirable to have control of the defence of the 3P action
Can attempt to prevent liability being imposed on insured or minimize the judgment against insured
Reduces financial impact of insurers obligation to indemnify
If able to settle claim before trial, may reduce financial burden of defence and indemnity obligations
Triggering Insurer’s Duty to Defend:
Pleadings Rule: (Nichols)
Insurer must defend 3P claim on behalf of insured when allegations pleaded, if proven to be true, would fall
w/in policy coverage
Merits of the allegations not to be considered/are irrelevant
Examine pleadings holistically: (Scalera)
Pleadings to be read w/ regard to substance of the allegations, rather than the literal wording
Addresses concern that 3P might intentionally draft its pleadings to trigger the duty to defend
Relevant question in determining a duty to defend is whether the substance of the pleadings against
the insured gives rise to a duty to defend
To determine substance of allegations: (Scalera)
Look at which can be supported by factual allegations and which are merely derivative of others
Courts may also review extrinsic evidence explicitly referred to in the pleadings
Where multiple allegations are made against an insured in a 3P action, the insurer’s K duty to defend extends
only to claims which would fall w/in policy coverage (McBride, Nichols)
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So, defence of a 3P lawsuit is divided b/w insurer and insured
Manipulating Pleadings to Trigger Duty to Defend: (Scalera)
Concern that 3P might intentionally draft its pleadings to trigger the duty to defend
Key to duty to defend is interpretation of the liability insurance K
Full question is whether K, taken as a whole, is properly understood as providing indemnity for the substance
of the claims set out in the pleadings, assuming that they are proven to be true
Ordinary principles for interpreting insurance Ks apply
Pleadings Rule itself may be overcome by explicit language in the policy
Ambiguous Pleadings: (Monenco)
No clear duty to defend from pleadings
Duty to defend if inference of coverage reasonable from pleadings
Insured entitled to benefit of doubt (Monenco) (p. 231)
Where pleadings not framed precisely enough to determine if claims covered by policy, insurer’s duty to
defend is triggered where, on a reasonable reading of the pleadings, a claim w/in coverage can be inferred
Extrinsic evidence expressly referred to in pleadings:
May be used to determine substance of pleadings
Not to be used to prematurely resolve underlying issue
Extrinsic Evidence that should NOT be considered: (Monenco)
Evidence pertaining to an issue that is disputed in the 3P lawsuit
Court will only accept very narrow exceptions, if any, to the Pleadings Rule
Three-Step Process:
1. W/o attempting to determine the merits of the claims and assuming that all claimant’s factual allegations
are true, court must determine which legal assertions contained in the pleadings could potentially be
supported by the factual allegations
2. Where multiple claims are properly pleaded, the court must determine whether any of the claims are
entirely derivative of another
A claim is derivative of another if it arises from the same actions and causes the same harm
3. Having identified the properly pleaded, non-derivative claims, court must determine whether any of
these claims, if proven would require the insurer to provide indemnity
Court applies Pleadings Rule to the properly pleaded, non-derivative claims
Only claims which satisfy the final threshold give rise to the insurer’s duty to defend
In determining the duty to defend, a court is entitled, at minimum, to look at any extrinsic evidence
which is expressly referred to in the pleadings (Monenco)
But, authority to review extrinsic evidence must not be used to prematurely resolve the underlying
litigation (Monenco)
Courts should look to extrinsic evidence only where a review of it simply illuminates the
substance of the pleadings
What documents constitute “pleadings” for the purposes of the Pleadings Rule?
General Rule:
Pleadings Rule should be restricted to pleadings filed by the 3P claimant
Restricted to pleadings issued against the insured
Rationale: (Wi-Lan Inc.)
1. Reference to the Statement of Defence could make the duty to defend wholly dependent upon whether
such a statement had been filed
2. Consideration of the Statement of Defence to determine the “true nature” of the claim may involve court to
consider the merits of a claim, which is contrary to the principle established by the Pleadings Rule
3. Reliance on the Statement of Defence may undermine good faith relationship b/w insured and insurer by
encouraging insured to file a defence designed to promote insurance coverage rather than advance the best
liability position in the 3P action
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So, potentially unfair to both insurer and insured if coverage can be triggered (or lost) by filing a
strategic defence pleading
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Exception:
In limited circumstances (i.e. where defence pleadings include admissions of fact as opposed to mere denials)
Impact of Insured’s Breach of K on Insurer’s Duty to Defend:
Pleadings Rule presumes that a valid K of liability insurance is in place
If insurance K voided by breach of disclosure obligations, etc., insurer owes no K obligations to the insured and has no
duty to defend them
But, not always possible for a court to make this determination prior to the resolution of the 3P lawsuit
So in the absence of a non-waiver agreement, a practical problem arises as to how the insured’s defence
should be conducted in the meantime
Point in Time Court Should Assess Insurer’s Duty to Defend:
Question arises as a preliminary matter (Monenco)
B/c defence of the 3P action is a necessary step in deciding the merits of the 3P lawsuit
But, nothing says question must be answered then
Where no issues are raised w/ respect to the validity of the liability insurance policy, the insurer’s defence
obligation can be determined at the outset of the 3P action by application of the Pleadings Rule
But, preliminary ruling on the duty to defend not always possible where insurer is relying on insured’s alleged
breach of K or on a policy exclusion as a basis for refusing to defend the insured
Should be determined on case-by-case basis, including the relative strength of the positions asserted by
insurer and insured and the necessity and urgency to furnish the insured w/ a separate defence
Remedy for Breach of Duty to Defend
Declaration: insurer required to defend
Breach of K; defence cost; and indemnification
Insurer cannot resist indemnification b/c it did not control proceedings
Out of Court Settlement: (Stevenson)
Condition precedent for indemnification:
Insured not to accept liability or settle before liability determined
Insurer unreasonably refuses to defend:
Not entitled to deny indemnification for reasonable settlements
Insurer deemed to have waived right to insist on compliance w/ K conditions
OBLIGATION 2: DUTY TO INDEMNIFY
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Insurer must pay any judgment against the insured (or any settlement in lieu of judgment) to the 3P
Arises only after merits of the 3P action have been determined by a court
DUTY TO SETTLE W/IN POLICY LIMITS (WHERE 3P CLAIM EXCEEDS POLICY LIMITS)
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Rule:
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Insurer to make best efforts to resolve claim w/in policy limits if real risk that judgment will exceed limits
Insurer has duty to disclose to insured all material information touching on insureds’ position in the litigation and
settlement negotiations so that insured is fully aware of insurer’s strategy in the 3P action and risks the insured faces
Rationale:
Insured’s interests at risk b/c judgment may exceed policy limits (insurer and insured both to pay portion of judgment)
Ensures insured does not jeopardize insurer’s interest
Insurer appoints counsel, conducts litigation, settlement, etc.
Good faith and fair dealings required in defence & settlement
3P Claims Within Policy Limit:
Insured not at risk of financial liability to 3P
Only insurer’s financial interest at stake
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3P Claims Exceeding Policy Limit:
Financial interest of insurer and insured engaged
Insurer not to unreasonably refuse settlement offer within policy limit (Shea)
Nature and Implications of Duty (Shea)
Insurer-insured relationship commercial
Special rights and duties beyond duty of honesty but not fiduciary standard
Insured vulnerable in settlement process
Insurer to give equal consideration to its own and insured’s interests
Advise insured of conflict of interests; adverse positions; advise insured to seek independent counsel
Minimize insured’s damages liabilities
Timely defence and settlement
3P Judgment Against Insured Exceeds Policy Limit:
Not necessarily indicative of breach of good faith duty to settle w/in policy limit
Insurer only required to act fairly and openly (Frederikson)
Statutory Duty to Mediate:
Insurer’s duty to settle expeditiously
Mandatory duty to mediate
Examples:
Ontario: Ins. Act s. 285.6: Auto insurance claims; one party requests
BC: Mandatory mediation for parties and insurers in auto vehicle injuries-related claims (BCI(Veh.)A, Notice to
Mediate Regulation, BC Reg 127/98 s. 3)
Rationale:
Failure to mediate may expose insurer to indemnity cost in favour of plaintiff 3P (Keam)
Defendant’s insurer declined to mediate; viewed P’s injuries as below threshold for compensation; P
successful at trial; D sues insurer for indemnity cost
Substantial indemnity cost against D’s insurer for failure to mediate as statutorily required
Consequence of Breach:
Insurer liable for entire judgment amount (both insured and uninsured portions of the 3P judgment) (Dillon)
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VALUATION
INTRODUCTION
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Valuation must be done on case by case basis
General Rule: Valuation of loss under a property insurance policy requires examination of three factors:
1. Type of policy in question
2. Valuation method identified in the K
3. Extent of the insured loss
TYPE OF INSURANCE POLICY: VALUED VS. UNVALUED
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1. Valued Policies:
Amount payable by insurer specifically identified in insurance K (Art Gallery of Toronto)
Value of loss determined at time of K formation, not when loss occurs
2. Unvalued/Open Policies (Policy Limit or Actual Cash Value):
Insurance K only identifies maximum payment limit (Art Gallery of Toronto)
Insurer must pay the actual loss suffered, as bound by the maximum cap
Amount payable determined after loss occurs
How to Determine:
Apply standard interpretation principles to wording of the K
Inclusion of an assigned value for insured property is necessary, but insufficient, to create a valued policy
Central Question: Whether the parties intended the K to be a valued or open policy
Must be answered w/ specific reference to the policy wording as a whole
UNVALUED/OPEN POLICY VALUATION METHODS: ACTUAL CASH VALUE VS. REPLACEMENT COST
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Actual Cash Value:
The value that has been taken from the property of the insured (Raymond)
Methods:
1. Replacement Cost Less Depreciation
Cost of buying or making replacement for insured item, w/ deduction for degree new item is “better”
than the insured item
2. Market Value
Dollar amount that purchaser would reasonably pay for insured item in its depreciated condition
prior to the loss
3. Tax Assessment Value
Dollar amount assigned to insured item for tax purposes
4. Rental Value
PV of the net revenue that the insured property could have generated in rental value from the date
of loss forward for its remaining lifetime
5. Investment Value
Capitalized value of income generated from date of loss forward for the lifetime of the property
Note: No one correct method to determine ACV, must determine on case-by-case basis
Replacement Cost:
Definition: The lower of the cost to repair or cost to replace, w/o deduction for depreciation
Technically violates indemnity principle b/c provides insured w/ greater value compensation than loss actually suffered
Valuation using replacement cost must be specifically agreed upon by insurer and insured
Accomplished by adding a replacement cost provision in insurance K in exchange for increased premium
Three Requirements:
1. Insured Replaces/Rebuilds the Insured Property
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Once satisfied, insurer may have to finance insured’s replacement efforts by providing immediate
cash value payment, followed by top up to replacement cost (Folk)
2. With Due Diligence
Insured not responsible for delay in replacing or rebuilding insured property where the delay resulted
from insurer refusing to promptly confirm coverage for proposed replacement (Olynyk)
3. With Materials of Like Kind and Quality
Satisfied if insured rebuilds to different specifications (Carlyle) or on a different site in order to meet
requirements of building or planning by-laws (Commercial Union Assurance)
Note: Once insured has replaced the property and received replacement cost from insurer, insured under no
obligation to keep replacement property unless K states otherwise (Barke)
Interpretation: In favour of insureds b/c pay increased premium in exchange for benefit of replacement coverage
Differences from optional repair clauses:
ORC commonly included in fire insurance and automobile insurance policies by statutory condition
1. Replacement cost clauses are included in insurance Ks as a matter of express agreement to provide insured
w/ coverage for depreciation
ORC are statutorily required to protect the insurer from liability to pay full pecuniary value of the loss,
if the loss can be more cheaply made good otherwise
2. Replacement cost clauses give insured choice of having the loss resolved by repair or replacement rather
than cash settlement
Optional repair clauses give this choice to the insurer
3. Under replacement cost clause, insurer’s obligation to replace property is governed by policy limits
Under optional repair clause, when insurer exercises its option of repairing or replacing property the
insurer is liable for all costs involved in restoring the property, even if those costs exceed policy limits
OTHER GAUGES OF LOSS
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Loss of Market Value
Loss of Commercial/Productive Value
Institutionalized Appraisal
FUTURE CONTINGENCIES
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For both ACV and replacement cost, proper valuation should not take into account possible future events
Principle against considering future contingencies (increase or decrease in property value) in valuation assessment depends on
courts interpretation of event as future contingency or certainty (Leger)
Stated intention to do something not necessarily a certainty
Intrinsic value cannot be diminished or enhanced by a potential, but uncertain, future event
OTHER ISSUES IN THE CLAIMS PROCESS
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Assessing Value of Partial Loss in Valued Policies
Where insured property is only partially damaged, insurer’s obligation is to reimburse insured for only the portion of
the property which has been lost
Proceeds calculated w/ reference to value assigned to insured item under the K (Art Gallery of Toronto)
Where Cost of Repair Exceeds Cost of Replacing the Whole Property – Two Options:
Constructive Total Loss/Write-Off:
Compensate insured for whole property (indemnify insured as if property completely destroyed)
After payment, insurer can use doctrine of salvage to take possession of the damaged property
Salvage:
Prevents insured from being over-indemnified by ensuring that insured does not keep damaged property
while receiving insurance proceeds for the full property value
BCIA s. 126(2), stat. conds 9, 10, 11:
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LIMITS ON LIABILITY IN OPEN POLICIES: DEDUCTIBLES
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Definition:
Portion of a loss that insured agrees to bear before insurer’s obligation to pay arises
If insured loss lower than deductible:
Insurer is not required to compensate insured
If insured loss higher than deductible:
Insurer required to compensate insured for value of the loss up to policy limits less amount of the deductible
Likelihood of insurer being obliged to pay any amount for loss inversely related to amount of deductible:
The lower the deductible, the more likely the insurer will have to pay
The higher the deductible, the less likely the insurer will have to pay
Rationale:
Counter-balance the transfer of financial responsibility from insured to insurer
Relationship Between Deductibles and Insurer’s Right of Salvage:
Insurer entitled to claim salvage while enforcing insured’s obligation to pay deductible
Rationale: If insurer forced to assume responsibility for deductible to obtain salvage rights, then:
1. Windfall for insured b/c premium payments calculated w/ regard to the non-deductible portion of
insurance coverage only
Insured would receive coverage for deductible portion of coverage w/o paying premiums for it
2. Business efficacy of calculating insurance premiums w/ reference to size of deductible would be lost
An individual who paid lower premiums in exchange for a policy w/ a higher deductible would obtain
the same benefit as an individual who paid higher premiums in exchange for a lower deductible b/c
the insurer would be forced to pay the deductible to exert salvage rights over the property
3. Incentive for insurer to leave damaged property in hands of insured to avoid having to pay the deductible
Would unfairly impose on the insured burden of dealing w/ salvaged property and could pose a
danger to the public (i.e. insured property is a dangerously damaged vehicle)
LIMITS ON LIABILITY IN OPEN POLICIES: CO-INSURANCE CLAUSES
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Contractual provision
Requires insured to maintain a set level of insurance coverage on insured property
If insured fails to maintain required level of coverage, co-insurance clause makes insured liable for proportion of any loss
Must be clearly drawn to the attention of the insured
LIMITS ON LIABILITY IN OPEN POLICIES: SUE & LABOUR CLAUSES
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Contractual provision
Obligate insured to take reasonable steps to protect insured property from further loss or damage when partially damaged
Rationale:
Insured often in best position to take steps in immediate aftermath of loss to safeguard against further damage to
insured property and provides insured with incentive to do so
Importance:
Mitigates against further damage that would otherwise be payable by insurer under the policy
Preserves insurers’ potential salvage interest in insured property
Insurer must pay for all or some of cost of insured’s preservation efforts
Whether or not insured successful in preventing further damage
Insurer can refuse to pay for further damage to insured property if insured fails to fulfill its sue and labour responsibility
Insured can only recover sue and labour costs if their expenditures satisfy three criteria: (Benson & Hedges)
1. Costs must relate to a loss falling w/in policy coverage
Insurer not responsible for costs incurred by insured in preventing loss which not covered by the policy
2. Expenses must be reasonable
Determined by comparing sue and labour costs w/ cost insurer would pay if further loss occurred
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3. Costs must have been incurred to prevent further damage from a materialized risk (Benson & Hedges)
Insurer liable for mitigation expenses, not costs of general preventative measures
Distinction is b/w obligation to minimize an occurred loss vs. obligation to minimize a risk yet to materialize
Damage to be mitigated must result from contingency that has occurred as opposed to being the
consequence of another contingency yet to occur
BCIA s. 126(2), stat. cond. 9: Sue and labour clauses mandated by provincial legislation in context of fire and auto insurance
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OBLIGATIONS OF 3PS TO MITIGATE THE INSURER’S FINANCIAL BURDEN
INTRODUCTION
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Multiple insurance policies for same risk
CONTRIBUTION
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Relevant 3P:
Insurer who provides coverage for the same loss under a separate insurance K
Life Insurance and Other Non-Indemnity Ks:
No issue of contribution
Cumulation is permitted
Indemnity Ks:
Multiple policies covering same interest in same subject matter against same risk
How Overlapping Coverage Can Arise:
Inadvertence
Deliberate
Added security (i.e. comprehensive plus specific policy for particular items)
Policies by different insureds
Insured can claim full indemnification from one insurer subject to policy limit
Insured can choose the policy under which to claim indemnity
Insured not entitled to collect under all policies (indemnity principle)
Insured entitled to full indemnification from insurer(s) subject to policy limit
Doctrine of Equitable Contribution:
Indemnification by other insurer’s no defence
Right of Contribution:
Right of an insurer, upon indemnifying the insured up to policy limits, to seek reimbursement from other insurers for a
portion of the money paid to the insured
Insurer is entitled to enforce this right by commencing an action, in its own name, against other insurers
Requires insurer to reimburse another insurer for some of value which latter insurer required to pay to its insured
Rationale:
Contribution an equitable, not K, right
Claim warranted as a matter of fairness
Insurer cannot recover where their own actions make recovery unfair (Continental)
Threshold Criteria for Overlapping Coverage: (Halwell, McKenzie)
1. Same property
2. Same insurable interest
3. Same risk
4. Same insured
5. All policies in force at time of loss
6. No policy excludes contribution
Determining Contribution Amount:
Where threshold requirement met, next question is how to apportion loss b/w the relevant insurers
Two Main Options: (Lombard)
1. Independent Liability
Prevailing Canadian position
Each insurer contributes equally up to its policy limits
Each insurer must share equally up to the lower policy limit, regardless of relative limits of each policy
Insurer w/ higher limit pays any outstanding amount
2. Maximum Liability
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Each insurer contributes proportion that its coverage limits bear to total of insurance limits available
Amount of each insurer’s contribution based on percentage of insurance coverage provided by that
insurer relative to the total insurance coverage provided by all overlapping policies
Applicable Method Depends On:
(i) Type of insurance
(ii) Wording of policy
(iii) Nature of protection under the various policies
Statutory Modification – Fire & Automobile Insurance:
1. Rateable Proportion
Overlapping policies re loss
Indemnification obligation limited to insurer’s rateable portion subject to express agreement b/w
insurers (BCIA s. 127(1): fire; BC Ins. (Vehicle) Act, s. 80(1): auto re optional primary policies)
Wording in policy to the contrary is irrelevant (BCIA, s. 127(2))
Effect:
No joint and several liability
Instead of insured recovering entire loss from single insurer, each insurer pays only its share
of loss in the initial instance
Insured bears burden of pursuing each insurer for the portion of loss payable by the insurer
Notice of Co-Insurance:
Notice of other insurance and amount required at time of claim
Fire: BCIA s. 126, stat. cond. 6(1)(b)(iv)
Auto: BC Ins. (Vehicle) Act, s. 80(2)
2. No Overlapping Coverage re Some Types of Insurance
Fire:
Items specifically identified and insured in policy
Items also insured under another policy issued to same insured re same interest and same loss but
items not identified
No overlapping policy
Policy w/ identified items primary to others
Irrelevant if one or all policies contain “other insurance” clauses (BCIA s. 127(6))
Auto Insurance:
Two owners’ certificates:
Certificate of car involved in accident primary (Ins. (V) Reg. 447/83, s. 77 (3rd party liab.); s.
104 (accident benefits))
Basic compulsory policy primary and optional coverage excess (Ins. (V) Reg. 447/83, s. 149(1))
Exception:
Loss from nuclear energy hazard covered by nuclear energy hazard policy, auto policy is
excess (Ins. (V) BC Reg. 447/83, s. 175(1))
Garage vehicle certificates (Ins. (V) BC Reg. 447/83, s. 150.1)
3. Contribution Formula
Fire:
Policies w/ deductibles (BCIA s. 127(4))
One policy has deductible:
Pro-rata contribution determined w/o reference to deductible
Deductible applied to insurer’s contribution
Several policies w/ deductibles:
Pro-rate contribution w/o reference to deductibles
Highest deductible pro-rated among insurer’s w/ deductibles
Auto:
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Where gov’t insurers not involved, each insurer’s rateable proportion of loss determined on equal
basis for policies having same limit, and on equal basis up to lower policy limits where different limits
Modification by K
1. Rateable Proportion
Insurer may modify contribution principle re overlapping policies
Limits insurers indemnity obligation to pro rata share (i.e. several liability)
Co-insurer not required to make full payment
No right of contribution where insurer exceeds rateable proportion
2. Redefining Policy Coverage in Event of Other Insurance
Strategy for avoiding overlapping coverage
May excuse insurer from indemnification where loss covered by another policy
“Other Insurance” Clauses/Primary and Excess Policies:
“Other insurance” clause may make coverage excess in event of overlapping policy
Primary policies converted into excess
Insured risks non-recovery
If both policies contain exclusionary clauses: (Lombard)
Clauses inoperative
Each policy considered primary
Each insurer liable for rateable proportion of loss
Court to endeavour to uphold other insurance clause if insured can still be protected (McKenzie)
Applications:
Change coverage to excess insurance coverage if another policy applies to the loss
Excuse insurer from indemnity obligation for loss covered by another policy
Excuse insurer from indemnity obligation if insured purchases overlapping insurance
coverage w/o notifying insurer or w/o first obtaining insurer’s approval
Exclusion clauses:
Coverage excluded where loss covered by another policy
If both policies contain exclusionary clauses: (Lombard)
Clauses inoperative
Each policy considered primary
Each insurer liable for rateable proportion of loss
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SUBROGATION
GENERAL CONSIDERATIONS
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Relevant 3P is someone legally responsible for causing the insured loss
Permits insurer to recoup from 3P all or some of insurer’s cost of indemnifying insured
Insurer pursues recovery from 3P in name of insured, but claim is brought at insurer’s expense and for their benefit
If insured indemnified by 3P, insurer can claim any insurance proceeds already paid if insured’s total recovery from the insurer
and 3P exceeds the value of the insured loss
Cumulation is not permitted (Glynn)
Two Purposes: (Somersall)
1. Preserve Principle of Indemnity & Minimize Moral Hazards
Ensuring that insured receives no more and no less than full indemnity
Otherwise, insured could double recover, obtaining payment from insurer and damages from the 3P
Reduces moral risk of dishonesty by insured, by passing to insurer all rights of recovery against the 3P
2. Legal Accountability of 3P
Ensures that loss falls on person legally responsible for causing it
Insurance not intended to relieve 3P of legal liability
Indemnity principle: insured fully indemnified
No incentive to pursue 3P
Insurer succeeds insured’s rights against 3P
Principle of subrogation re indemnity Ks:
Right of subrogation need not be expressly stated (Somersall, Glynn)
OPERATION OF SUBROGATION
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Works in one of three ways:
1. Insurer indemnifies insured; insurer sues 3P in insured’s name; insured entitled to excess recovery
2. Insured fully paid by 3P; no right of recovery from insurer; no loss to insured (Glynn)
3. Recovery from both insurer and 3P; insured to reimburse insurer (Castellain)
Castellain: Insured received full purchase price notwithstanding damage to house prior to completion as per
terms of sales K. Insurer recovered insurance settlement for loss already paid to insured. Insurer entitled to all
insured’s rights, legal or equitable, whether fulfilled or unfulfilled
PRECONDITIONS FOR SUBROGATION
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Insurer fully pays insured’s loss
Insurer steps into insured’s shoes to enforce latter’s right of action against 3Ps, whether fulfilled or unfulfilled
Irrelevant payment from 3P independent of insured risk
Irrelevant insurer not entitled to compel payment from 3P for default
Payment from 3P intended to satisfy insured loss
Exception:
Gifts or Ex Gratia Payments (i.e. cash and in-kind contributions from friends and family; state subsidy)
Rationale:
No legal right to money/benefit
Not intended to benefit insurer
SCOPE OF THE RIGHT: COMMON LAW
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Full Indemnity
No right of subrogation until insured fully indemnified (Somersall)
Policy limit irrelevant absent statutory/K modification
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Full indemnification required only re insured object/loss
Subrogation right unaffected by non-compensation for uninsured losses/objects (Willumsen)
Building and land subject to purchase agreement
Building damaged
Shortfall in purchase price
Only the building insured
Partial indemnity for building
No subrogation right until full indemnity for building
Shortfall in value of land has no effect on subrogation
Insured fully indemnified when s/he receives full compensation for the insured loss
Includes reasonable recovery costs (i.e. legal fees) paid by insured in pursuing compensation from the 3P for an
insured loss (Causton)
Partial indemnity by insurer
Insured recovers from 3P for loss
No reimbursement unless net recovery from 3P and insurer exceeds insured’s actual loss
Rationale:
Subrogation preserves indemnification principle
No risk of windfall absent full indemnification
Statutory Modification:
Insurer’s subrogation rights preserved notwithstanding settlement w/ or release of 3P by insured
Auto: BC Ins. (Vehicle) Act, s. 84(6): A settlement or release does not restrict the rights of the insured or the insurer
under this section unless the insured or insurer, as the case may be, concurred in it
Does not abolish single action rule re auto insurance (Dwyer)
Unfairness to 3P if insurer can disregard release or settlement
Contrary to underlying principle re subrogation
Discourage settlement w/ 3Ps
Codifies insurer’s right of action against insured if latter disregards former’s subrogation interest in
settlement
Entitles insurer to assert right of recovery against insured
Where insurer fully indemnifies insured, insurer entitled to exercise right of subrogation if they made payment pursuant to
its K obligation
If insurer honestly believed it was liable to indemnify insured pursuant to terms of the K, a 3P cannot successfully
defend insurer’s subrogated claim by arguing that the insurer was not, in fact, obligated to pay for the insured loss
(Wellington Insurance Co. v. Armac Driving Services)
In subrogation claim, insurer can be in no better position against 3P than the injured party would be
An insurer cannot subrogate against its own insured (Imperial Oil Ltd. v. Commonwealth Construction Co.)
Upon fully indemnifying the insured, the insurer is entitled to exclusive control of the subrogated recovery action against a 3P
Ihe insured has a duty to cooperate w/ or assist the insurer in advancing a subrogated claim
SCOPE OF THE RIGHT: MODIFICATION BY STATUTE
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Legislative changes to doctrine of subrogation interpreted narrowly and restrictively
Any statutory alteration must be clearly spelled out
Requirement that insurer must fully indemnify insured to exercise subrogation rights commonly modified
Entitle insurer to exercise subrogation rights upon payment of any or part of insured’s loss
Generally accompanied by further provision that provides that if net recovery from 3P is insufficient to completely
indemnify insured, net recovery is shared proportionally b/w insurer and insured
Sometimes, specify which party (insured or insurer) has control over the subrogation action against a 3P
Statutory Modifications:
Partial indemnification: Insurer’s subrogation right even absent full indemnification
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Fire: BCIA, Pt 5, fire - s. 130
Auto: BC Ins. (Vehicle) Act, s. 84(1)
Subrogation
130 (1) The insurer, on making any payment or assuming liability therefor under a contract of fire insurance is
subrogated to all rights of recovery of the insured against any person, and may bring action in the name of the insured
to enforce those rights
(2) If the net amount recovered after deducting the costs of recovery is not sufficient to provide a complete indemnity
for the loss or damage suffered, that amount must be divided between the insurer and the insured in the proportions
in which the loss or damage has been borne by them respectively.
Who controls subrogated claim where insured not fully indemnified?
May be statutory – Auto: BC Insurance (Vehicle) Act, s. 84(3)(4)
Insured’s interest limited to damage to vehicle or loss of use: insurer controls
Insured’s interest outside these areas and parties can’t agree: court decide based on what is reasonable
Fire: No clear answer from s. 130: See (Farrell Estates Ltd)
Silent; Common Law prevails; Insured controls claim
Insured to act in good faith
Prorating amount recovered where indemnity partial
Each party recovers percentage of loss borne
E.g. Insurer pays 80% of loss; Insured absorbs 20%
Insurer: 80% of damages recovered in subrogated claim
Insured: 20% of damages recovered in subrogated claim
Illustration
Policy Limit $80,000
Value of loss $100,000
Insurance amount - $80,000 (80% of loss)
Insured’s personal liability - $20,000 (20% of loss)
Amount recovered from 3rd party: $50,000
Insured receives 20% of $50,000:
$10,000
Insurer receives 80% of $50,000:
$40,000
Insured’s total recovery: $80,000 + $10,000 = $90,000
SCOPE OF THE RIGHT: MODIFICATION BY K
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Indemnity K: Insurer can renounce or waive statutory or K right of subrogation by the terms of insurance K
Non-Indemnity K: Can create a right of subrogation
K modification of equitable doctrine of subrogation must be clearly and specifically set out
Terms to be carefully scrutinized and narrowly construed
INSURED’S DUTY TO PRESERVE/PROTECT INSURER’S SUBROGATION RIGHT
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Single Cause of Action Rule:
Only one cause of action exists as between the same parties for multiple heads of damage caused by the same factual
incident
Insurer usually barred from recovering from 3P if insured’s cause of action against 3P has already been resolved
As long as insured has control of the cause of action against 3P, insured is in a position to prejudice insurer’s subrogation right
by resolving claim against the 3P w/o regard to the insurer’s interest
Insurer is interested in outcome of 3P action due to potential prejudice to their interests
Only one action against 3P
Settlement less than actual losses
Failure to claim some damages (i.e. insured losses)
Huge legal costs
Extent of insured’s obligation to preserve insurer’s subrogated interest usually an issue where loss is only partially insured
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Insured may obtain full compensation by recovering from insurer for insured portion of loss and by claiming against
responsible 3P for uninsured damages
If insured fully resolves its right of action against 3P w/o including the insured portion of the claim, the insurer is left
w/o recourse against the 3P w/ respect to the insured portion of the claim
Preserving Insurer’s Subrogation Rights (Truedell)
Insured obliged to pursue claim diligently and in good faith
Claim against 3P not limited to difference b/w loss and insurance amount
Insured must claim full amount possible from 3P
Test for due diligence and in good faith:
Did insured claim less than what they honestly and in good faith believed was wise to accept in the
circumstances?
Insured liable to insurer for failure to settle loss against 3P for full amount
No presumption of bad faith where insured settles for less
Insured’s motivation relevant
MacRitchie (p. 348-9)
Is settlement w/in limits of 3P liability insurance contrary to insurer’s subrogation rights? (Somersall)
No dishonesty or malice in limiting claim to limits of 3P liability insurance
No breach of duty to act in good faith to preserve insurer’s subrogation right
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AUTOMOBILE INSURANCE
LOSS CAUSED BY “USE OR OPERATION” OF A MOTOR VEHICLE
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Basis of Recovery:
BC Ins. (Vehicle) Act, s. 7: Loss or injury from the use or operation of a motor vehicle
Two-Part Test to Interpret “Use and Operation” (Amos)
1. Purpose Test
Did the accident result from the ordinary and well known-activities normally associated w/ use of a motor
vehicle?
Focus: Whether insured vehicle being used for a purpose typically associated w/ a motor vehicle
Met if vehicle was being used as a motor vehicle when the loss occurred
Determines purpose of activity giving rise to loss or damage
Satisfied re normal or ordinary use of vehicle at time of accident
Irrelevant if conduct was illegal
Test the same re no-fault benefits and indemnity claims (Citadel)
2. Causation Test
i) Is there some nexus or causal relationship (not necessarily a direct or proximate causal relationship) b/w
insured’s injuries and ownership, use or operation of his vehicle, or
ii) Is the connection b/w injuries and ownership, use or operation of vehicle merely incidental or fortuitous?
Requires causation b/w use of vehicle and loss claimed/accident
Use of vehicle must be crucial for accident, not merely incidental
Chain of Causation:
Requisite degree of connection depends on nature of claim
No Fault Coverage:
Vehicle use must be more than fortuitous
Connection b/w injury and use and operation of motor vehicle need not be direct
Injury need not arise from negligent use of vehicle
Sufficient for injury to arise from tortious conduct but need not involve negligent
use of vehicle
Indemnity Insurance:
Tortfeasor at fault as motorist
Requires unbroken chain of causation b/w use of vehicle and injury/loss
Criminal nature of conduct irrelevant (Vytlingam)
Test more demanding than for no-fault benefits (Vytlingam)
Rationale for Distinction:
No Fault Coverage:
Motorists generally believe that, when an accident occurs while they are making
ordinary and well-known use of their vehicles, no fault benefits will be available
This is the mutual expectation of both the insurer and insured
Indemnity Coverage:
Focus on tortfeasor’s car: was car implicated in loss
Consistent w/ parties’ reasonable expectations
Sympathy for claimants irrelevant
Parties to insurance K intend for coverage to be provided where insured whose
conduct is the subject matter of the indemnity claim is at fault as a motorist
Note: Must answer yes to both questions for loss to have arisen from “use and operation” of the insured motor vehicle
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