One of the most common types of insurance disputes that people may find themselves in is that related to questions around policy coverage, or more specifically, denials of coverage. It’s natural for people to purchase insurance and sleep comfortably under the impression that should anything happen to themselves, their home, or their car, that their insurance coverage will provide them with the protection they purchased. However, in some cases, insurance companies might discover that the insured breached the terms of the insurance policy and as a result, the insurer may deny coverage. In a recent decision, the Supreme Court of Canada weighed on whether or not an insurer should have been able to drop its defence for an insured person after finding out his actions on the night of a motor vehicle accident voided his coverage.
Insurer drops defence
The matter arose after the insured, (“D”) was tragically killed in a motorcycle accident. Two other people (“JB” and another unnamed claimant) were injured in the accident and pursued damages against D’s estate. The estate was initially defended by D’s insurance company, Royal & Sun Alliance (“RSA”). It wasn’t until a year later that RSA learned D had consumed alcohol on the night of the accident, thus putting him in breach of his insurance policy.
Once RSA learned D had been consuming alcohol the night of the accident, it ceased its defense of D’s estate. This also meant that the policy which provided coverage in the amount of $1 million was no longer in place, leaving just a $200,000 statutory minimum coverage in place.
The unnamed claimant’s lawsuit ended three years later. It resulted in a judgment against JB and D’s estate. JB was also successful in a crossclaim against D’s estate. However, JB took the position that RSA should have been stopped, or prevented, from denying coverage three years earlier.
Trial judge says coverage should have been provided
The trial judge who first heard the matter found that RSA had waived its right to deny coverage once it began to defend D’s estate. The trial judge did not mention estoppel since its decision on the conduct of the insurer made such an analysis a redundant exercise.
The matter proceeded to the Court of Appeal. This time around RSA was successful, with the court finding that the insurer’s conduct did not represent a promise or assurance to provide coverage since RSA did not initially know that D had been drinking the night of the accident. It was only once they learned of the drinking that they changed their position.
JB appealed this decision but reached a settlement with RSA before the matter could proceed any further. However, the Trial Lawyers Association of British Columbia asked to be substituted as the appellant in JB’s place. This was approved and provided the Supreme Court of Canada with an opportunity to issue a ruling.
Was the insurer entitled to drop insurance defence over one year later?
The Supreme Court looked at both the insurer’s conduct as well as promissory estoppel, however its decision focused primarily on the later, with the court using the opportunity to define what is needed in order for an insurer to be stopped from ceasing an insurance defence.
Promissory estoppel is a legal term that applies to situations where two parties are in a legal relationship, and one party makes a promise or assurance to the other. If the other party relied on that promise or assurance, and the promising party reneges on their offer, courts could find that they are stopped from doing so. In this case, a finding of promissory estoppel would mean that the insurer had provided assurance that it would defend D’s estate and that JB had relied on that before RSA revoked coverage.
The court went on to state that in order to rule that there is promissory estoppel, the party making the assurance (RSA) would have had to know all of the facts critical to making such an offer. The court wrote “a promisor cannot intend to alter a relationship by promising to refrain from acting on information that it does not have.” What this means when applying it to the case at hand is that if RSA had no idea about D’s consumption of alcohol prior to the accident, it could not have known it could change its decision to provide a defence based on that knowledge. There could be cases of imputed knowledge, which would apply if RSA knew of the breach but did not appreciate the legal significance of it at the time. But, as the Court of Appeal found, the Supreme Court ruled that there could not be knowledge (imputed or otherwise) leading to RSA’s assurance because they didn’t know about the consumption of alcohol. Had RSA known of D’s alcohol consumption, coverage would have been denied from the outset. Their initial defence of D’s estate only took place because they were without that key piece of knowledge.
This decision is an important one because it means that an insurance company can deny coverage and defence if it learns of a material fact that would have caused it to deny coverage or a defence in the first place.
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The insurance law team at HMC Lawyers has over 130 years of combined litigation experience. We have worked with clients on a countless number of insurance claims and know the nuances of policy language and how courts have interpreted insurance law. Important dates and steps to take are critical in being successful in insurance matters. Contact us online or by phone at 1-800-480-3534 if you need assistance with matters related to insurance claims or other matters related to insurance law such as professional negligence, occupiers’ liability, or property and casualty litigation.