House insurance can be one of those things that people sign up for and don’t really think about again until it’s time to renew or make a claim. Unfortunately for some people, such as those involved in a recent case before the Supreme Court of British Columbia, a failure to disclose a material change or risk (in this case a marijuana grow-op) can leave insured parties out in the cold.
The insurance policy
The insured completed the construction of their house in 2004 or 2005. They had one insurance policy to cover its construction, and another policy was put in place when construction was complete. The policy was with Wawanesa, but was purchased through a broker referred to as “Hub” in the decision.
The insured were sent a reminder letter each year. The letter asked the insured to review their policy limits to ensure coverage was adequate in the event of a loss. It also contained an attachment titled “Some Coverage Notes and Recommendations.” This part read,
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 voiding of the Insurance Policy involved. A “Material Change” is something important enough to change the original agreement between the insurance company and the policyholder.
Some examples of “Material Change” 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 insurers knowledge
- Renovations or Alternations 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.
British Columbia’s Insurance Act defines “Material risk” as follows:
Material change in risk
(1) The insured must promptly give notice in writing to the insurer or its agent of a change that is
(a) material to the risk, and
(b) within the control and knowledge of the insured.
(2) If an insurer or its agent is not promptly notified of a change under subparagraph (1) of this condition, the contract is void as to the part affected by the change.
Electrical upgrades and growing marijuana
At some point prior to the fire, the insured had upgraded the home’s electrical service from 125 amps to 200 and later to 400, with 200 amps going to the an outbuilding. The outbuilding was a 1,350 square foot structure made of concrete on the bottom floor and wood on the top floor. The stories were separated by a concrete slab. In 2010 the insured obtained a license to grow medical marijuana for their two of their children, who suffered from pain conditions. The license allowed for a total of 292 marijuana plants to be grown on the property. They decided to grow the marijuana in the lower level of the outbuilding.
A fire, unrelated to the marijuana, occurred in the upper level of the outbuilding on January 21, 2014. The fire destroyed the upper level of the outbuilding and damaged the concrete slab dividing the two floors. Water leaked through the slab, damaging the lower floor. The outbuilding also lost its roof, which made it impossible to grow marijuana inside.
Upon filing a claim with Wawanesa, the adjuster assigned to the file, informed them that the outbuilding had been used to grow marijuana, with there being 311 plants inside at the time of the fire. As a result, the adjustor informed the insured on January 27, 2014, that Wawanesa was reserving its right to disclaim any obligation under the policy “due to fact that the building damaged by fire was used in the production of marijuana” and “[t]he insurer was not made aware of this fact during the application of insurance (misrepresentation) …” In May of 2014 Wawanesa informed the insured it was voiding their policy effective February 1, 2011, the day it allocated for the change in use of the outbuilding.
Was the grow-op a material change in risk?
The insured argued while they didn’t read the reminder letter, it was still inadequate in explaining their obligation to notify the insurance company of changes. The examples listed as a material change in risk, the insured said, were not similar to their use of the outbuilding. Even if they had read the letter, they said they would not have contacted their insurance company.
The court walked through the burden of proof Wawanesa would bear to show there was a material change in risk. The court said Wawanesa must prove:
(a) there was a change material to the risk;
(b) the change was within the Schellenbergs’ control;
(c) the Schellenbergs had knowledge of the change; and
(d) they did not notify Wawanesa or Hub (promptly and in writing) of the change.
The court then took some time to discuss whether the insured should have known about the risk posed by growing marijuana. But it ultimately decided such a determination was not required. The court wrote, “Given its elaborate infrastructure, the number of marijuana plants being grown, the amount of space they and the drying/dried marijuana occupied, and the (insured’s) fear of being targeted, the suggestion (the insured) never considered the grow operation relevant to their insurance is simply not believable.” The court found the marijuana grow-op was a material risk, and as such the Wawanesa was entitled to void the policy.
The insurance team at HMC Lawyers has decades of experience litigating insurance-related matters on behalf of our clients. Our commitment to finding and using the best strategy for our clients includes exploring civil litigation, arbitration, and mediation. We’re also ready to go to court when necessary. If you need advice related to a property loss matter, please reach us online or call us at 1-800-480-3534.