Andrew Epstein, partner, was recently invited to present at the Canadian Defense Lawyer's 7^th Annual Insurance Law Conference in Toronto. Andrew presented a paper on whether a material change in risk may void an insurance policy arising from the decision in Jackson v. Canadian Nothern Shield Insurance. He also participated in a panel discussion on the Supreme Court of Canada decision in Progressive Homes v. Lombard Insurance. Andrew was counsel at the Trial level in both cases. The text of Mr. Epstein's paper is reproduced below.

Voiding a Homeowner’s Policy for Material Change

Jackson v. Canadian Northern Shield Insurance Company et al[1]

by Andrew N. Epstein, Partner

Insurers are often concerned about material changes in risk, notwithstanding the fact that they and their insureds have a duty to act in the utmost good faith.  As a practical matter, given that there is rarely any contact between the two apart from policy renewal every year, situations frequently arise in which a policy may be voided as a result of an undisclosed material change in the risk.

Even when faced with a clear case of a material change in risk, many insurers are reluctant to deny a claim, or void policy in the face of the potential for a claim in bad faith, or significant pressure from the broker.

The recent decision in Jackson v. Canadian Northern Shield provides a useful summary of the key principles in the law as it relates to material change in risk, and includes some helpful discussion on relief against forfeiture and other relevant principles.

This paper will address the following areas:

1.     Material change;

a.     Statutory issues;

b.     What is “material”?;

c.      What are the insured's obligations to notify an insurer of a material change?; and,

2.     Relationship of the loss to the change;

3.     Bad faith concerns; and,

4.     Relief against forfeiture.

Jackson v. Canadian Northern Shield

The facts in the Jackson litigation were not particularly unusual, but it is helpful to understand the general framework of how these issues tend to arise to examine what happened in this particular case.  In addition, defense counsel's job was made much simpler as a result of the excellent work by the broker, at the time of renewal, and the adjuster, in the early stages of adjusting the loss.  To enable other insurers to benefit from CNS’ positive experience, some time will be spent explaining how effective renewal and adjusting procedures can assist in avoiding a claim.

The Jacksons’ Home

The Plaintiffs, a family doctor and his wife, a certified general accountant, set about building their dream home in Coldstream BC, a small town located between Kelowna and Vernon in British Columbia’s Okanagan Valley.

In addition to the principal residence, the Jacksons also constructed a barn, greenhouse, and other outbuildings.  Dr. Jackson had a long-standing interest in horticulture, and he designed and constructed the greenhouse to allow him to enjoy his passion for cultivating rare tropical plants.

Dr. Jackson's original design for the greenhouse included a computer-controlled heating system whereby water would be heated by a gas furnace and then circulated in underground radiant pipes.  Unfortunately, after a few months, it became clear that the original heating system did not provide adequate heat to keep the greenhouse sufficiently warm. As a result, Dr. Jackson set about looking at alternate or supplemental heat sources for the greenhouse.

One day, Dr. Jackson found an old woodstove at a garbage dump.  The stove was not in good condition, and lacked a heat rating, CSA or UL certification, or even a stamp indicating the name of the manufacturer.  Dr. Jackson claimed the stove and took it to a metalworking shop where he had the door removed and the opening extended.  Dr. Jackson's design theory was to keep the "firebox" on the inside of the greenhouse but have the opening extend through a passage into the adjacent workroom where firewood could be stored.  This design would also allow Dr. Jackson to feed the stove from his workroom, without having to enter the greenhouse.

The Loss

Dr. Jackson installed the woodstove and the attached chimney himself in November 2005.  On November 17, 2005, Dr. Jackson lit a test fire in the wood stove, and, having satisfied himself with the results, loaded the stove with a supply of hard wood fuel, lit it, and left to play in a prearranged hockey game.

At trial, Dr. Jackson testified that on his way home from hockey game, he received a telephone call from one of his neighbors advising him that his house was on fire.  By the time he arrived home, first responders were already on the scene. Fortunately, the residence did not sustain any damage, and neither Mrs. Jackson nor their two daughters suffered any injuries.  The workshop and attached greenhouse were less fortunate, suffering a total loss, along with various peacocks, chickens and ducks that were kept in pens alongside the greenhouse.

Insurance Policies

Prior to the commencement of construction, a Course Of Construction policy was placed with Gerling Global Insurance.

Prior to occupancy, a Homeowners policy application was made to Canadian Northern Shield.  As part of the underwriting process, a wood heat questionnaire had to be completed before the policy could be placed.  That questionnaire required details of the heat rating, certification, professional installation and clearance to combustibles.  Absent any of the four pieces of information, CNS underwriting guidelines would not permit the policy to be placed.

At the time the CNS policy was applied for, no wood heating existed, nor was any contemplated.

Slightly less than one year later, at the time of renewal, the broker forwarded the Jacksons a copy of the new policy declaration page, an invoice for the new premium, and also included a page entitled "Some Coverage Notes and Recommendations" and included the following, at paragraph 4:

4) Let us know about any changes!

If a "Material Change" arises during the policy period, this must be reported to our office immediately.  Failure to do so may result in a voiding of the Insurance Policy involved. A "Material Change" is something important enough to change the original agreement between the insurance company and the policy holder.

Some examples of "Material Changes" which would require that you notify your insurer would include:

• Starting a home based business/farm use
• Using an auxiliary wood heat source without the insurer's knowledge
• Renovations or Alterations to the Building.
• Changes in occupancy -- renting to another party or adding a second family.

"Material Change" can be found in the Statutory Conditions portion of your policy. (emphasis added)

The day after the fire, an insurance adjuster for CNS attended at the Jacksons' home and advised them that the presence of the woodstove might be problematic for coverage of the claim, leaving a nonwaiver agreement for the Jacksons to fill out and sign.

Prior to deciding what to do, CNS sought legal advice on whether or not the introduction of the woodstove constituted material change.  Following receipt of the legal opinion, CNS voided the policy as at the date of the installation of the stove.

Dr. Jackson wrote a letter to CNS imploring it to extend coverage for the claim.  In the letter he acknowledged that he had an obligation to advise CNS about the wood stove but stated that he had not yet had an opportunity to do so.

After CNS declined to revisit coverage for the loss, the Jacksons commenced an action in British Columbia Supreme Court for a claim against CNS for breach of the policy, and against the broker for professional negligence for allegedly failing to advise them of the need to alert the insurer of the installation of the woodstove.[2]

The Law

1.       Material Change

a.       Statutory Issues

The principle governing statute is the Insurance Act[3], which provides that a policy may be void or voidable for misrepresentation or nondisclosure, only where the misrepresentation is material:

Misrepresentation and nondisclosure

13(1)             A contract is not rendered void or voidable by reason of any misrepresentation, or any failure to disclose on the part of the insured in the application or proposal for the insurance or otherwise, unless the misrepresentation or failure to disclose is material to the contract.

…

The Act also adds statutory conditions to every insurance policy in force in the province, including Statutory Condition Four which deals with Material Change: 

Effect of statutory conditions

126(1)The conditions set out in this section are deemed to be part of every contract in force in British Columbia, and must be printed on every policy with the heading "Statutory Conditions", and no variation or omission of or addition to any statutory condition is binding on the insured.

(2) In this section "policy" does not include interim receipts or binders.

STATUTORY CONDITIONS

…

Material change

4. Any change material to the risk and within the control and knowledge of the insured avoids the contract as to the part affected by the change, unless the change is promptly notified in writing to the insurer or its local agent; and the insurer when so notified may return the unearned portion, if any, of the premium paid and cancel the contract, or may notify the insured in writing that, if the insured desires the contract to continue in force, the insured must, within 15 days of the receipt of the notice, pay to the insurer an additional premium; and in default of such payment the contract is no longer in force and the insurer must return the unearned portion, if any, of the premium paid.

b.       What is "material"?

In British Columbia, the leading authority on what constitutes "Material", for the purpose of analyzing if a material change has taken place is Kehoe v.  British Columbia Insurance Co[4]., a British Columbia Court of Appeal decision from 1993, which the Judge in Jackson followed: 

7   The trial judge then turned his attention to the legal consequences of such misrepresentations. He first asked the question whether BCIC had demonstrated that the misrepresentation was material. He accurately, in my view, expressed the applicable law in the following passage:

The question of materiality is a question of fact for the court.

The burden of proof of materiality is on the insurer. It is a question of fact in each case whether, if the matters misrepresented had been truly disclosed, they would, on a fair consideration of the evidence, have influenced a reasonable insurer to decline a risk or to have stipulated for a higher premium.

…

24 In my opinion, the trial judge erred in law in requiring as a criterion for the test of materiality that the insurer have the onus of demonstrating that its underwriting practices had a "reasonable basis". Rather it is clear that the test is one of demonstrating whether the insurer, in treating an applicant's claim history as material to the risk of the coverage being extended, was acting as a "reasonable or prudent" insurer.

25 In my opinion, where BCIC has demonstrated its own practice as to what it considered to be information material to the risk, and it has also demonstrated that Guardian, all other insurers contacted by the applicant's agent, and the industry generally adopted a similar standard, it is very difficult to categorize BCIC as other than a reasonable insurer.

26 To paraphrase Ritchie J. in Henwood, in the absence of any evidence to suggest that BCIC's practice is anything but reasonable or that any other insurer would follow a different course, it has been shown affirmatively that the non-disclosure by the applicant of his claim history was material to the risk and BCIC was entitled to avoid the policy. (emphasis added)[5]

c.               What are the insured's obligations to notify an insurer of a material change?;

The Act specifies that notice of the material change must be given “promptly.”

At Trial in Jackson, the Plaintiffs argued that they had formed the intention to notify the insurer and the loss occurred shortly thereafter, and they still might have been able to “promptly” notify the insurer.

The Trial Judge found that “Prompt” meant “immediately”, “at once” or “forthwith”, and as a result, Statutory Condition Four operated to allow the insurer the option to void the policy.[6]

2.              Relationship of the Loss to the Change

It is not necessary for the loss to have been caused by, or related to, the Material Change.  In Lazarakis v. Saskatchewan Mutual Insurance Company et al.[7] the British Columbia Supreme Court found that there had been a material change when additional roomers or boarders moved into the house which was insured as a single-family residence.  No evidence was led to suggest that the additional residents had anything to do with the fire that destroyed the house.

What an insured has a duty to disclose when circumstances change after a policy is issued is the same as what he has the duty to disclose when the application for insurance is made.[8]

In Mueller v. Wawanesa Insurance Co.[9] the plaintiff leased a residential property to an individual and his wife and children.  It subsequently came to the attention of the plaintiff that the tenant's family was not residing in the house and that three men who belonged to a motorcycle gang had moved in.  The residence was destroyed by a fire a few months later.  The fire department and insurance inspector determined that arson was the cause, although no criminal charges were laid.  A claim was made under the plaintiff's insurance policy with Wawanesa.  The insurer denied the claim and voided the policy on the basis that there had been a material change.  The Ontario Court of Justice (Gen. Division) made the following statement regarding material change:

9 Further, the owners acknowledged being advised by the police that the residence was being used by bikers and even if this is not entirely accurate, when you combine this knowledge with the changes to the residence, the car storage and dismantling operation, in my view there was a material change in risk and that the insured had knowledge of such change. This proof goes much further thin [sic] the evidence led in Doherty v. Home Insurance Co. (1986), 19 C.C.L.I. 314 in which the insurance company led the sole evidence related to material change.

10 As set forth in the Iacobelli v. Federation Insurance Company of Canada (1975), 7 O.R. (2d) 657 the burden is on the insured [sic] to show:

(1)        a material change to the risk;

(2)        that the change was within the control of the insured; and

(3)        that the insured had knowledge of the change as set forth in Iacobelli

11 I am satisfied that the defendant has succeeded in the first and third requirements.

12 In considering the issue of control, the plaintiff and Furmston indicated they had difficulties in terminating the tenancy as the tenants remained current within 60 days. However, I am satisfied that the plaintiff would have had little difficulty in terminating the lease as it had expired in accordance with the terms of the offer to lease. Further, the use of the premises had changed from being that of a residence to an operating towing and storage business adjoining a fortified gutted building. The landlords would have had little difficulty in terminating this tenancy had they wished to do so, thus the change was within their control.

13 Thus, having concluded that the insureds have breached the policy, the contract of insurance is void.[10] (emphasis added)

5.     Bad faith concerns;

Any time an insurer considers voiding a policy, there is a reasonable concern about a claim for bad faith in addition to the contractual claim to be brought by the insured.  That is particularly the case when the policy in question is for first-party coverage of the insured’s primary dwelling.  The industry is not so many years past the Whiten[11] decision that voiding a policy is taken lightly.

Fortunately for insurance counsel practicing in British Columbia, a body of authority has developed over the last 10 years whereby bad faith claims are now uniformly severed from coverage claims, to be dealt with subsequently, and even then only in the event that the Trial Court finds coverage to be in place.

The initial decision arose in another claim in which CNS voided a policy for material change following a fire which damaged a residential property.[12]

In Wonderful, the plaintiff argued that the insurer failed to get legal advice prior to voiding the policy, and that this omission constituted bad faith.  CNS brought an application to bifurcate the trial on the basis that if it was forced to disclose the discussions between the insurer and its legal counsel, including the legal opinions upon which it acted, it would be severely prejudiced.  The Court agreed, finding that the prejudice to the plaintiff of having to conduct two trials was less significant than the prejudice to the insurer of having to effectively waive solicitor client privilege over the legal analysis which formed the basis of its decision to void the policy.

In the 10 years since the Wonderful case was decided, it has become commonplace for severance motions of this nature to be granted.

An analysis of the principles in Wonderful and other subsequent decisions was provided by Master Groves in Stuart v. Manulife[13], in which it is made abundantly clear that in most cases, the request for severance will be granted:

17 Again, without oversimplifying matters, these cases stand for the general proposition that in this type of claim, claims which have their root in an insurance contract and in which a breach of duty of good faith is alleged, bifurcation can be considered and ordered by an analysis and a weighing of a number of factors.

18 The factors seem to be as follows:

 

1)          Would a continuation of the proceeding as one require the breach of privileged communications.

2)          Would the advice of counsel be raised as a defence to the breach of duty of good faith claim. Would counsel essentially have to be a witness.

3)          Is there an allegation of breach of good faith which is alleged to have its origin in post filing of the writ conduct by the defendant.

4)          Would the defendant have to retain new counsel.

5)          Is the delay associated with the bifurcation of significant inconvenience, cost or expense to the plaintiff to outweigh any prejudice that the defendant might suffer, specifically in having to disclose privileged communications.

19 Frankly, it seems to me that once the post-litigation conduct of the defendant is raised in a claim for damages resulting from a breach of duty of good faith, logic suggests that the conduct of counsel and the advice of counsel will likely come into play by the defence.

20 These cases, in my view, stand for the proposition that in balancing the prejudice considerable weight must be given to the very real danger that a breach of confidential communication between client and counsel could result if the case is continued to be tried as one.

21 The end result, in my view, these cases suggest that the plaintiff, perhaps unfortunately, has a considerable hill to climb to tip the prejudicial balance in his  favour.

6.     Relief Against Forfeiture.

In argument, the plaintiffs raised the issue of Relief against Forfeiture for the first time, having called no evidence on it.  It was not raised in the pleadings.

The basic principles are described in section 10 of the Act:

Court may relieve against forfeiture

 

10 If there has been imperfect compliance with a statutory condition as to the proof of loss to be given by the insured or other matter or thing required to be done or omitted by the insured with respect to the loss, and a consequent forfeiture or avoidance of the insurance in whole or in part, or if there has been a termination of the policy by a notice that was not received by the insured owing to the insured's absence from the address to which the notice was addressed, and the court deems it inequitable that the insurance should be forfeited or avoided on that ground or terminated, the court may, on terms it deems just, relieve against the forfeiture or avoidance or, if the application for relief is made within 90 days of the date of the mailing of the notice of termination, against the termination.[14]

It is trite law in Canada that that the deliberate failure to disclose material facts or a willful misrepresentation in the claim is "noncompliance", and not "imperfect compliance"[15], and as a result, Relief against Forfeiture is unavailable to save an insured in these circumstances.

One of the leading authorities in this area is Petersen v. Bannon, a decision of the British Columbia Court of Appeal which states as follows:

67 That having been said, the language of s. 34 cannot afford the appellant relief in these circumstances. In order to avail himself of s. 34, the appellant must show that several conditions precedent have been met:

(a)  that there has been imperfect compliance;

(b)  that this imperfect compliance pertained either

(i) to a statutory condition as to the proof of loss to be given by the insured; or

(ii) to a thing required to be done or omitted by the insured about the loss;

(c)  that a consequent forfeiture or avoidance of the insurance occurred; and

(d)  that it is inequitable that the insurance be forfeited or terminated.

68 The insured has not demonstrated that these conditions precedent of s. 34 have been met. I do not accept that making a wilfully false statement is "imperfect compliance with a statutory condition." Even if it were, the wilfully false statement pertained to the manner of the accident rather than the loss. Furthermore, the appellant has not demonstrated why this forfeiture would be inequitable.[16]

In Jackson, it was argued by the insurer that the Plaintiffs’ failure to give prompt notice of the material change was "noncompliance" and not "imperfect compliance"; nor was it related to either the proof of loss or "a thing required to be done or omitted by the insured about the loss", and as a result the relief against forfeiture provisions would not apply in any case.

Finally, it is clear that the concept of equity in the relief against forfeiture provisions of the Insurance Act must take into account the prejudice to the insurer by any imperfect compliance.  The judicial authority is clear that if the insurer has been prejudiced, relief will not be granted.[17] It was argued at Trial that the prejudice to the insurer was the very fact that it could not decline the risk.

The Trial Judge found that there was non-compliance with the notification requirements (as opposed to imperfect compliance), which caused prejudice to the insurer by preventing it an opportunity to decline the risk, and as a result, the Plaintiffs were not able to have the benefit of Relief against Forfeiture.

Conclusion

While not a very lengthy, or complicated decision, Jackson v. Canadian Northern Shield is a useful summary of several key concepts which often come into play in cases where there has arguably been a failure to disclose a material change in risk prior to a loss.

In addition, some lessons that can be learned from the case include the benefit of including a notice regarding the importance of alerting in insurer of material changes in renewal documents and having adjusters alive to potential issues of material change at the time of their earliest communication with the insurers.