Fraudulent Cross-Contamination: The Broad Effects of Misrepresentation on Indemnity
May 4, 2021
Written by Michael Hokanson and Taylor Hudson
Insurance coverage disputes are common and can be complicated when an insured provides false or misleading information to the insurer as part of their claim. However, a recent Alberta decision has provided some much-needed clarity for insurers with respect to their obligation to honour a claim after an insured has acted in bad faith.
Insured Misrepresented His Employment Status
Mr. Ali Abbas was a passenger in the backseat of a car driven by an uninsured driver when an accident occurred and he was thrown out of the car. Mr. Abbas was seriously hurt and filed a claim with his insurer, Esurance Insurance Company of Canada, for Section B disability benefits and coverage under the SEF 44 endorsement of his automobile insurance policy.
Esurance required that Mr. Abbas complete a form to access Section B disability benefits. Mr. Abbas lied about his employment situation on the form. He subsequently lied to the insurance adjuster and provided a forged employer’s certificate and hiring letter. Finally, his uncle perpetuated the lie in suggesting that Mr. Abbas worked for his business under the table.
Esurance denied Mr. Abbas Section B benefits as he did not qualify. Esurance further denied Mr. Abbas SEF 44 coverage on the basis of his false statements given in relation to the Section B disability benefits. Mr. Abbas then brought an action seeking coverage under the SEF 44 endorsement of his policy.
Esurance’s application for summary dismissal of the action was dismissed by the Master. He held that a determination that Mr. Abbas had forfeited all of his rights under the contract by virtue of his fraud, dishonestly and lack of good faith would be “draconian”. The false statements and fraud related to Section B benefits only; it would be patently unfair to deny SEF 44 coverage on that basis.
Esurance then successfully appealed to Justice Johnston in Abbas v Esurance Company of Canada, where the claim was summarily dismissed in a strong rebuke of dishonest behaviour.
Did the Insured Invalidate his Claim Under s. 554(1) of the Insurance Act?
The first issue on appeal was whether Mr. Abbas had invalidated his insurance claim and forfeited his right to recover SEF 44 coverage by operation of s. 554(1) of the Insurance Act, RSA 2000, c I-3:
Misrepresentation, fraud or violation of condition
554(1) If …
(b) the insured contravenes a term of the contract or commits a fraud, or
(c) the insured wilfully makes a false statement in respect of a claim under the contract,
a claim by the insured is invalid and the right of the insured to recover indemnity is forfeited.
Mr. Abbas said that a “claim” under s 554 only applied to the claim in which the fraud or misrepresentation was made. In effect, each claim becomes a watertight compartment; the contamination of fraud in one does not penetrate the others. Esurance, and the Court, disagreed. A “claim” includes any claim under the contract of insurance. Therefore the contravention of any term of the contract or willfully making a false claim in respect of any claim under the contract results in the invalidation of claims and forfeiture of an insured’s right to recover indemnity under the contract (para 41). Fraud and lies cross-contaminate all claims.
The Court held that this interpretation was consistent with the Insurance Act as a whole. When an insured fails to put forward their claim honestly and in good faith, the forfeiture of indemnity under the policy is hardly “draconian”. Section 520 of the Insurance Act affords Courts the discretion to relieve against forfeiture where there is mere imperfect compliance, rather than non-compliance, with the terms of an insurance policy.
Did the Insured Invalidate His Claim by Failing to Act in Good Faith?
The second issue was whether a failure to meet the common law requirement that both insured and insurer act in good faith would invalidate the entire claim. The Court noted that while courts should not lightly restrict the rights of insureds to indemnity, reprehensible conduct, such as Mr. Abbas’ lies, forgery and fraud, justified such a response. The “overarching thesis” of the cases, that “insurance fraud is serious and will result in the forfeiture of coverage”, applied.
The Abbas decision confirms that if an insured breaches policy terms, commits fraud, or makes willfully false statements in respect of a claim, their entire claim is invalid and their right to recover any indemnity is forfeit.
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