Would You Insure This House?

    Unfit for Human Occupation

Anyone who has applied for insurance on a house or commercial building knows that the insurance agent will want to complete a questionnaire disclosing detailed information about the condition of the building.  If the insured gives false information, the insurer can revoke coverage for misrepresentation.  A lot of people are probably unaware that they have an ongoing legal obligation to inform their insurance company of any significant change in the condition of the insured property, and that the insurer can deny a claim because of failure to report a "material change in the risk".

 

The source of this obligation is a statutory condition that is incorporated into most property insurance policies in Canada: "The insured must promptly give notice in writing to the insurer or its agent of a change that is material to the risk and within the control and knowledge of the insured."  Matters that might be considered material include changes in use or occupation, major renovations, or alterations to electrical, heating, alarms, or other important building systems.

 

Insurance underwriters often dispatch an inspector to look at the home or building before issuing the policy.  The inspector may or may not have any particular qualifications in engineering or construction.  The fee paid for the inspection is small, and the inspections are often cursory.  With home insurance policies, the inspector generally does not enter the house, and the review carried out is often referred to as a "drive-by" inspection as the inspector does little more than visit the location to confirm that there is a building with no obvious pre-existing damage.

 

What happens if the inspector is in a position to note a condition about the building that is material to the risk, but that the insured has not disclosed to the insurance company? The insured could argue that the insurance company had knowledge of the state of the building, so the statutory condition doesn't apply.  The same argument might be raised in the face of a misrepresentation defence.

From the insurance company point of view, the inspection is for a very limited purpose and is not intended to confirm every detail in the insurance application.  Carrying out a thorough inspection would increase underwriting costs, which would have to be passed on to the insured through higher premiums.  The insured is in the best position to provide information about the property, and insurers should be able to rely on information in the insurance application without further inquiry.

 

In Mah v. Wawanesa Mutual Insurance Company, however, a majority of the Alberta Court of Appeal was prepared to impute the knowledge of the inspector to the insurance company.

 

The insured bought a run-down house from his brother.  The house had been insured by Wawanesa, and the brokerage representing Wawanesa took an application from the new owner and agreed to bind coverage pending acceptance of the application by the insurer.

 

The insurance company knew that the building was unoccupied.  Between the date of the new owner's application and the date the policy was issued, however, an official with the regional health authority attended at the property and posted a notice on the rear door stating that the house was unfit for human occupation.  The notice was on bright orange paper, and the trial judge concluded that the owner must have seen it when he came by the house to cut the grass and take away the trash.  The owner did not report the health department's order to the insurer.

 

The insurer asked the broker to check on the type of heating system and age of the house, and to provide a photo "to confirm the dwelling's continued existence".  The broker sent a retired surveyor to conduct an inspection.  For $100, the surveyor attended at the property, carried out a "walk-around inspection", and took several pictures.  He did not enter the building.  He submitted his photos to the broker, along with a one-page handwritten report describing what he had seen.  The broker passed this note and the photos on to  Wawanesa's underwriting department.  One of the photos showed the back door; the orange notice was visible, but the print was not readable.

 

Wawanesa issued the policy, but denied coverage when the property was damaged by fire, citing the failure of the insured to report the health authority's order declaring the house unfit.  The surveyor was not called to testify at trial, so it is not known whether he actually read the health department notice or not.  The trial judge dismissed the action, and the insured appealed.

The fact that the insurance company did not have actual knowledge of the health department order was not in dispute.  The case turned on what the surveyor knew, and whether or not that knowledge could be attributed to the insurer.

The reasons of the trial judge were a little vague regarding the state of mind of the surveyor.  The judge said that "one could assume" that the surveyor saw the health department notice, then took note of the fact that he did not testify.  This suggests that the judge drew an adverse inference from Wawanesa's failure to call the surveyor.  The judge had concluded that the owner must have seen the notice on one of his visits to the property.  The majority in the Court of Appeal said that on the same basis, the judge's assumption about the surveyor's knowledge amounted to a fact finding that the surveyor saw the notice too.

According to the majority, the surveyor was an agent of the broker, and since the broker was an agent of the insurer, the surveyor was "the insurer's agent's agent".  In law, the surveyor's knowledge was the broker's knowledge, and the knowledge of the broker must be imputed to its principal Wawanesa.

In addition, the statutory condition requires notice to the insurer "or its agent".  In the view of the majority, the notice need not come from the insured, and the health authority was actually a better source of information about the fitness of the building.  Since the surveyor/agent had notice, the condition was satisfied and the insurer could not avoid coverage.

Justice O'Ferrall, in his dissent, did not take issue with the idea that the surveyor's knowledge could be imputed to the insurer, or that notice to the surveyor would satisfy the statutory condition.  He did not accept that the trial judge had drawn a factual inference regarding the surveyor's knowledge, and felt that the evidence did not support the conclusion that the surveyor must have seen the health department order.

For homeowner's policies, the costs involved in carrying out a detailed inspection cannot be justified as a routine part of the underwriting process.  Nevertheless, it appears that anything visible from outside the home will be considered within the knowledge of an insurer who orders a "drive-by" inspection prior to issuing a policy.  Certainly, any plaintiff's lawyer faced with a misrepresentation or non-disclosure defence will want to obtain production of the insurer's inspection report.

Mah v. Wawanesa Mutual Insurance Company, 2013 ABCA 363


Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

Visit our website: http://billingtonbarristers.com

View my profile on LinkedIn: Richard Hayles on LinkedIn



Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.

No Juries For Insurance Misrepresentation Cases

     Does trial by jury lead to chaos in the courtroom?

In a decision released Friday, the Alberta Court of Appeal denied the plaintiff's application for a jury trial in a life insurance claim: Coulter v. Co-operators Life Insurance Company.  The two Justices in the majority agreed that the insurer's misrepresentation defence was a claim for equitable relief which cannot be tried by a jury.  The dissenting Justice, who characterized the misrepresentation defence as statutory rather than equitable, would have permitted a jury trial.

The Misrepresentation Defence

 

The life insured was a long-time policyholder with Co-operators who applied for additional coverage less than two years before his death.  After investigating the claim, Co-operators paid the benefit on the original policy, but denied the additional benefit, taking the position that it was entitled to void this coverage as the life insured had misrepresented important facts on the recent application.  Co-operators relied on ss. 652 and 653 of the Alberta Insurance Act, R.S.A. 2000, c. I-3, which state that misrepresentation of a material fact in the life insurance application renders the coverage voidable by the insurer within the first two years after coverage takes effect.

 

The Alberta statutory provisions are derived from uniform life insurance legislation, and similar provisions are in effect in all the common law provinces and territories of Canada.

 

When the beneficiary sued, Co-operators raised the misrepresentation issue in its statement of defence, citing the Insurance Act provisions.  The defendant was content to defend on this issue, and did not counterclaim for rescission of the insurance contract.  The beneficiary applied for a jury trial, but this application was denied by the Chambers Judge, who directed that the trial should proceed by judge alone.

The Majority Decision
 

In the majority opinion, Mr. Justice Cote referred to the historical distinction between the common law courts and courts of equity.  In civil cases, the common law courts could award damages for breach of contract and other legal wrongs.  A broader range of remedies was available in the equity courts, including specific performance and declaratory relief.  Jury trials were available in the common law courts, but not in the courts of equity, where cases were decided only by judges.

 

Although the two courts are now joined into one, the distinction between common law and equity remains, and juries are not permitted in cases in which equitable relief is claimed.

 

There was no dispute that the plaintiff was claiming damages for breach of the insurance contract, and that this was a common law claim.  According to Mr. Justice Cote, however, the defence raised by Co-operators was essentially a claim for rescission of contract.  This was an equitable remedy, and since common law courts are restricted to damages, a jury could not decide the misrepresentation question.  The Chambers Judge was therefore correct in denying the application for a jury trial.

 

Justice Cote was careful to point out that although the reasons for denying the plaintiff a jury trial may seem to be based on a technical historical distinction, there are sound policy reasons for restricting equitable relief to judges.  Equitable remedies are discretionary.  In exercising their discretion judges are guided by previous cases, and by principles established in maxims such as "Delay defeats equities", and "He who seeks equity must do equity".  In the view of Mr. Justice Cote, the distinction between the principled exercise of a discretion and "mere sympathy or fairness" would be "almost impossible" to explain to a jury.  These cases are therefore unsuited to trial by jury.

 

In a claim for breach of contract or tort, on the other hand, the judge instructs the jurors that they must award damages if they conclude that the evidence supports certain findings of fact; there is no discretion involved.

The Dissent

 

In his dissenting judgment, Mr. Justice O'Ferrall seemed to accept that equitable claims involving the exercise of discretion are unsuited to trial by jury; in his view, however, the insurance company was not claiming equitable relief at all.

 

"Rescission" was not specifically pleaded.  In its statement of defence, Co-operators said that it was entitled to "void the policy" by virtue of the Insurance Act provisions.  This was a statutory defence rather than an equitable claim, and "What the jury would be asked to do in this case is determine whether or not the insured ... made a misrepresentation with respect to a fact or facts material to the insurance."  In his opinion, this was the kind of factual question that juries are especially well qualified to decide.  There is a presumption in favour of the right to trial by jury, which should be respected.

 

For the majority, however, Mr. Justice Cote pointed out that the Insurance Act provisions did not purport to displace the role of equity or replace the equitable remedy of rescission of contract.  The statute did not provide a comprehensive code for misrepresentation cases, such that it could be concluded that the legislature intended to occupy "the whole field" and do away with the role formerly carried out by courts of equity.

A View From the Bleachers

 

Justice Cote is right to prefer a principled or policy-based approach over reliance on the historical accident of the division between equitable and common law courts.  Where legal issues are more important to the case than factual issues, judges have an extensive knowledge of the law that jurors lack.  Jurors, on the other hand, are just as qualified as judges to decide whether or not a witness is lying, or to assess evidence and make findings of fact.

The jury is an important institution in our society.  Justice is delivered by members of the community who can bring a diversity of background and experience to the courtroom, rather than by a judicial "expert" with extensive, but perhaps narrow, training in one area (the law).  The jury introduces a populist, democratic element into our system of justice.  Trial by jury is a long-standing right that should only be taken away for cogent reasons.

It is conventional wisdom that an insurance company never wants to face a jury.  The man in the street will always be blinded by sympathy and emotion, it is thought, and will side with the individual plaintiff over the big, impersonal corporation every time.

This is not necessarily the case.  Several years ago, defence-side insurance lawyers in Ontario began to serve jury notices routinely in personal injury cases, believing that their clients would be better served by the practical, common-sense approach of jurors.  Whether to seek a jury trial is a question that both plaintiff and defence counsel should ask themselves in every case; it is a strategic decision that depends on more than just the sympathy factor.  A precedent that denies the life insurance beneficiary her claim to a jury trial cuts both ways, as insurers will not be able to put their defences to juries in future cases.

What about the Coulter case? Although it is easy to see how the discretionary aspects of certain equitable remedies, such as injunctions and specific performance, might be difficult for jurors without any legal training, it is unclear how equitable principles or maxims could come up in a misrepresentation case.  The issue is whether or not the insured misrepresented important facts on the application.  This is something a jury can decide.  Since the conduct of the insurance company is not in issue, maxims like "He who seeks equity must do equity" or "He who comes to equity must come with clean hands" don't have any bearing.  Delay is not a factor, as the insurer can only raise non-fraudulent misrepresentation within the two year incontestability period established by the insurance legislation.

 

The availability of jury trials in misrepresentation cases should be based on a pragmatic assessment of the real issues in the case, and not on the somewhat arbitrary fact that "rescission" of contract is historically a remedy granted by courts of equity.

 

Coulter v. Co-operators Life Insurance Company, 2013 ABCA 295

 

Contact Richard Hayles at Billington Barristers:

(403) 930-4106

RHayles@BillingtonBarristers.com

Visit our website: http://billingtonbarristers.com

View my profile on LinkedIn: Richard Hayles on LinkedIn



Any legal information provided is general in nature and may not apply to particular situations. It does not constitute legal opinion or advice. Please consult your lawyer regarding your specific legal issue.