NON-DISCLOSURE OF WINE COLLECTION'S
MULTI-MILLION DOLLAR VALUE NOT MATERIAL
TO UNDERWRITERS

So you think it’s just the homes in West Vancouver that are so expensive, and that all their owners drink are – no caff, non-fat – lattes? “Not So” pointed out a B.C. judge (more or less), just a week before Christmas, in Wells v. Canadian Northern Shield Insurance.

Specifically, what Judge Ehrcke did was grant a more than $2,000,000 summary judgment to Ralph and Diane Wells for flood damage to a wine collection which was worth more than their West Vancouver home. And what he told Sovereign Insurance was that the insureds’ failure to disclose the multi-million dollar value of their collection was not material to the risk. Why? Because, even though they knew the Wells had collected rare and expensive contents, which included an extensive selection of wine, stored in a custom cellar, Sovereign had failed to ask what the collection was worth.

THE FACTS: LOSS, POLICY APPLICATION AND DENIAL
OF COVERAGE

THE LOSS

Mr. and Mrs. Wells collected rare and expensive bottles of wine, which they kept in a temperature controlled, architecturally designed wine cellar in their home, located in West Vancouver. The collection numbered over 8,000 bottles and included more than 50 cases of Chateaux Mouton Rothschild dating from as early as 1945. The value of the wine collection was estimated at between $5,000,000 and $10,000,000. On October 16, 2003, a municipal sewer backup caused a flood in the Wells’ home that ruined much of the wine.

The Wells attempted to recover some of the loss by claiming under their homeowner’s insurance policy, which was underwritten 50% by Canadian Northern Shield Insurance Company (CNS) and 50% by the Sovereign General Insurance Company (Sovereign). When the insurers refused to cover the loss, the insureds sued both of them. By the time of the Summary Trial, the parties had agreed that the Wells’ broker was acting as their agent, when it submitted the policy application.

THE POLICY APPLICATION

Before April of 2003, the Wells insured their home and contents solely with CNS, through another broker. CNS declined to renew the policy and their then broker had trouble finding a new insurer that was prepared to offer coverage at a premium acceptable to Mr. Wells. Accordingly, he enlisted the assistance of a new broker, Whyte Insurance Services Ltd. (Whyte), and their representative, Barbara Thibodeau.

It was not seriously disputed that Mr. Wells first spoke with Ms. Thibodeau on April 17, 2003. He told her he wanted approximately $900,000 replacement coverage for the family home, and $1,500,000 for its contents, because he liked to collect things. He told Ms. Thibodeau that he had a large wine collection, and showed her pictures. But he did not tell her the collection was worth between $5,000,000 and $10,000,000. Ms. Thibodeau wrote the $900,000 and $1,500,000 building and contents figures on the application form. These amounts were unusual, because homeowner policies typically provide contents coverage for an amount in the range of 70% to 80% of the building coverage. The Wells’ figures were basically the opposite.

Later that day, Ms. Thibodeau sent a memo to various insurers, including Sovereign, seeking an underwriter for the requested $900,000 building and $1,500,000 contents coverage. Among other things she stated in her memo: “He has a large contents limit because he collects rare (and obviously expensive items including antiques).”

There was, however, a serious dispute about Ms. Thibodeau said to Sovereign’s underwriter, Christina Veltri. Ms. Veltri deposed in her Rule 18A affidavit that, at the time she bound Sovereign to the risk, she had not been told that the Wells had a wine collection, let alone that it was worth at least $5,000,000 and as much as $10,000,000.

At her examination for discovery, Ms. Thibodeau was asked whether she informed the insurers that Mr. Wells had a large wine collection. She answered: “My guess would be yes, I did. I can’t tell you my exact conversations.” She went on to say: “If I get information from an insured, I try and pass on whatever I can to the underwriters.” Further, when asked if she told Sovereign that Mr. Wells had a large wine collection, either in a telephone conversation or in writing, she replied: “Well, I didn’t in writing. My guess would be that I did on the phone.”

On April 24, 2003, Ms. Veltri spoke to Ms. Thibodeau and requested an appraisal of the Wells’ home. On August 20, 2003, Ms. Thibodeau sent Ms. Veltri an inspection report which was prepared by the Insurers’ Advisory Organization (IAO) in 1995. The IAO report indicated, among other things, that the lowest level of the home included a wine room with custom wine racking and special mechanical equipment. The report also indicated that the insureds had an extensive, exclusive wine collection, and estimated a value, for the custom wine racking alone, of $45,000.

Ms. Veltri deposed in her affidavit that she did not see those materials until October 17, 2003, the day after the loss. She says that she “glanced at the appraisal”, noticing the reference custom wine racking valued at $45,000, which did not cause her any concern. But she did not read the entire document, and did not notice the reference to “an extensive, exclusive wine collection”.

It was not until more than a year later that Sovereign purported to void the policy. In the meantime, Ms. Veltri did not seek any further information about the value of the wine collection. Nevertheless, she deposed that if she had been informed that the collection was worth between $5.000,000 and $10,000,000, she would have considered this fact as material to the risk, and declined to underwrite it.

As noted above, the application was accepted by Sovereign, to the extent of accepted 50% of the risk. But the policy limits were not exactly as requested. The building limit was $931,200, and the contents was only $744,960, about half of what Mr. Wells wanted. But the policy also provided ‘flex-limit’ coverage of up to $2,328,000. This meant that if there was a claim limited to content loss only, the entire flex-limit of $2,328,000 would be available to pay the loss.

Mr. Wells gave Ms. Thibodeau a bottle of red wine to thank her for placing the insurance. (The value of the bottle is not disclosed in the reasons for judgment.)

THE DENIAL OF COVERAGE

On January 27, 2005, D.W. Edward, Assistant Vice President and Regional Branch Manager, sent a letter to Mr. and Mrs. Wells, in which he advised that Sovereign was “voiding its coverage under this Policy on the basis that you did not disclose to the Sovereign General, at the time of the application for policy coverage, the existence of a wine collection allegedly worth millions of dollars.” The letter went on to say, “If the existence of this wine collection had been disclosed to Sovereign General, it would not have agreed to provide the coverage.” Enclosed with the letter was a cheque for the premium and interest.

In his affidavit, Mr. Edward deposed that considers the existence of such a valuable wine collection to be a fact material to the risk because, “the occurrence of a peril which would ordinarily be expected to cause only comparatively minor property damage, could, as is alleged to have occurred in this case, result in a claim that exceeds policy limits.”

THE LAW: NON-DISCLOSURE IN POLICY APPLICATIONS, AND MATERIALITY OF FACTS

The factual issue before the Court was whether the insureds had failed to disclose material facts, so as to entitle their insurer void its 50% of coverage for the claim under their insurance policy.

The judge began his analysis by noting that the key facts did not concern the information provided by the Wells to Whyte’s representative, Ms. Thibodeau, but what information she gave to Sovereign’s representative, Ms. Veltri. This is because, as noted above, the parties had agreed that Whyte was acting as agent for the insureds, and not their insurer. However, evidence of what the Wells told Ms. Thibodeau was indirectly relevant, because it provided a basis for inferring what information Whyte gave to Sovereign.

The insurance policy in question included the following statutory condition:

The judge surveyed the case law, back, to the seminal 1766 (that’s not a typo) decision of Lord Mansfield, in Carter v. Boehm, as well as section 13(1) of the Insurance Act. The legal principles that he discussed can be summarized as follows:

1. The parties to contracts of insurance are subject to reciprocal duties of good faith.

2. The facts upon which the risk to be covered is based are most commonly known only by the applicant.

3. It is contrary to the applicant’s good faith obligation, and grounds for voiding the policy, to deceive the insurer by misrepresenting or concealing material information about the existence of the risk.

4. However, the insured may be innocently silent, among other matters, about what the underwriter knows, ought to know or waives being informed of.

5. The materiality of undisclosed information is an issue of fact.

6. The onus is on the insurer to prove that there was a misrepresentation or non-disclosure.

7. The insurer also bears the burden of establishing that the misrepresentation was material.

8. Materiality is established if the court accepts both that:

   1. the undisclosed information would have influenced a reasonable insurer to either decline the risk or charge a higher premium, and

   2. the insurer in question was induced by the misrepresentation to accept the risk at the stipulated premium.

NON-DISCLOSURE OF INFORMATION

As set out in the Mr. Edward’s denial letter, Sovereign’s ground for voiding its 50% coverage was that the Wells did not disclose either:

• the existence of their wine collection, or

• its $5,000,000 to $10,000,000 value.

Regarding the existence of the Wells’ wine collection, Judge Ehrcke took an expansive view of Ms. Thibodeau’s ‘guesses’ during her examination for discovery, finding as a fact that:

However, given the evidentiary onus and burden on Sovereign, to prove the alleged non-disclosure on a balance of probabilities, this was insufficient to establish the first prong of its defence.

MATERIALITY OF FACTS

Regarding the second prong of Sovereign’s defence, the Judge framed this question as: “Does it matter that Sovereign was not told [the] value [of the collection]?”

He began by noting that Sovereign had not adduced any expert evidence on this point, and went on to note that an insurer's failure to make specific inquiries on a subject may provide evidence that it does not consider the information relevant, for its underwriting purposes. On the facts, Sovereign had requested and received an appraisal of the building, but did not ask any questions about the total value of the contents, let alone seek any further information about the value of the wine collection.

Further, Sovereign had provided a flex-limit of $2,328,000, even though Mr. Wells had only asked for $1,500,000 in contents coverage. So the insurers were, collectively, prepared to pay out $828,000 more for a contents only loss than their insureds wanted to be able to claim for. As such, how could they say that the first $828,000 of the wine collection’s value, over and above the requested $1,500,000 contents limit was material? Indeed, how could they say that the first $2,328,000 of the wine collection’s value was material?

Moreover, through the broker, Mr. Wells had told Sovereign that “He has a large contents limit because he collects rare (and obviously expensive items including antiques).” That was in addition to the appraisal report disclosures of a large wine collection, and wine room with $45,000 in custom wine racking and special mechanical equipment. In the Judge’s words:

FURTHER INFORMATION

For another perspective on this issue, see the discussion of Lucow v. HSBC Canadian Direct Insurance in a previous Insurable Interest e-bulletin on Clark Wilson LLP's website: “Living In A Material World”. Counsel for the successful defendant in Lucow was Neo Tuytel of Clark Wilson LLP.

If you have any questions about this topic or any other insurance matter, please feel free to contact Mr. Tuytel, at 604-643-3180, or njt@cwilson.com, or any other member of the Clark Wilson LLP Insurance Practice Group.