Supreme Court of Canada Endorses Relief From Forfeiture For Material Change in Risk

All the common law provinces have “statutory conditions” in the fire insurance part of their respective “Insurance Act”. One such statutory condition provides that any change material to the risk within the control and knowledge of the insured voids the insurance unless written notice of the change is given “promptly” to the insurer.

The fire part of the Insurance Act also contains a provision relieving against “unjust or unreasonable” terms of the policy which might otherwise support a denial of coverage in any given case. For example, Section 171 of the Nova Scotia Insurance Act provides:

Can a statutory condition which provides for the voiding of coverage be circumvented on the grounds that it is “unjust or unreasonable”? “Yes” says the majority of the Supreme Court of Canada in the 5 – 2 February 24, 2005 decision in Marche v. Halifax Insurance Co.

In the Marche case, a fire in February 1999 destroyed the insured’s rental property in Sydney, Nova Scotia. When the policy had last been renewed before the fire, the property had been rented. However by September 1998 the property was vacant and remained vacant for three to four months. In December 1998 the property again became occupied by a relative of the insured who remained there until the time of the fire.

The insurer denied coverage under the policy on the basis that the vacancy has been an unreported material change in risk, that the statutory condition had therefore been breached, that coverage was void from the date of the breach, and therefore was not in force at the time of the fire.

The trial court held that, while vacancy was a material change in the risk, the subsequent occupancy had cured the breach and therefore it would be “unjust and unreasonable” to void coverage in the circumstances. The Nova Scotia Court of Appeal reversed that decision, holding that the breach of the statutory condition had voided the policy and the subsequent occupancy could not restore coverage. On further appeal, the Supreme Court of Canada restored the trial decision, holding that Section 171 of the Insurance Act does indeed apply to statutory conditions and that the insured should be given relief in the circumstances on the ground that the vacancy had been rectified prior to the loss.

The Court noted that there were two possible alternative applications of the “unjust condition” section of the Act, namely that,

1. the section could only be used to delete those policy terms which are not mandated by the statute ie. the section did not apply to statutory conditions, (including the condition respecting an unreported material change in risk); or alternatively,

2. the section could be used not only to delete terms (including statutory conditions) that are unreasonable on their face but also to provide relief where, in the particular circumstances of the case, the terms would be unreasonable in their application.

The Court adopted the second approach. Hence, in the Marche case, because Section 171 of the Act did indeed apply to statutory conditions, and because the unreported vacancy had been cured before the actual loss, the court affirmed that voiding the policy in such circumstances would be an unreasonable application of the policy condition and therefore refused a denial of coverage.

This decision affirms that the “unjust condition” provision in the Fire Part of the Insurance Act does indeed apply to statutory conditions and also provides relief where the application of the policy condition would be unjust or unreasonable.

But there is a major question which remains unanswered and which, rather remarkably, the Marche case did not address: Does the “unjust condition” provision of the Act even apply to the modern all-risk insurance policy?

In two earlier cases in 2003 (KP Pacific v. Guardian, Churchland v. Gore Mutual) the Supreme Court of Canada had ruled that the “category-based” Insurance Acts across Canada were “outmoded”, that they did not “coherently address the modern multi-peril policy”, and that such policies were not governed by the Fire Part of the British Columbia Insurance Act. For a review of subsequent cases considering this ruling in Provinces other than B.C. see “ A Horse of a Different Colour”.

Certainly, in British Columbia it is beyond doubt that the “unjust condition” provision in the Fire Part of that province’s Insurance Act does not apply to all-risk policies and, indeed, there is at least one ruling exactly to that effect: Rosam Enterprises Ltd. v. Zurich Insurance (BCSC, 1993). Hence, if the Marche case had arisen in British Columbia and the policy had contained a material change in risk condition which provided for voiding coverage upon breach, then coverage could have been successfully denied. It remains to be seen how this argument will be received in other provinces.

The Marche v. Halifax Insurance case can be accessed at:

http://www.lexum.umontreal.ca/csc-scc/en/
rec/html/2005scc006.wpd.html

Readers with any questions are invited to contact Nigel Kent at npk@cwilson.com or 604-643-3135 (direct dial).