INSURANCE LAW CONFERNCE 2012 B.C. S NEW INSURANCE ACT: DENIALS AND REMEDIES

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1 INSURANCE LAW CONFERNCE 2012 B.C. S NEW INSURANCE ACT: DENIALS AND REMEDIES Introduction British Columbia s revised Insurance Act, SBC 2012, c. 37 (the New Act ) plus related Regulations came into effect on July 1, 2012, replacing the Insurance Act, RSBC 1996, c. 226 (the Old Act ). This marked the introduction of significant amendments and wholesale structural revision to the existing legislative regime. This paper considers the impact of some of the more significant changes to the legislation on denials of insurance coverage and what remedies might be available to an insured. The focus is primarily on property and liability insurance policies. Rationale for the New Legislation The New Act marks the first comprehensive review and revision to the related legislation in more than 40 years. Previous amendments have been piecemeal, often resulting in inconsistencies within the legislation and creating uncertainty and confusion. Such amendments did not adequately recognize changes and developments in the insurance industry. The previous legislation was largely based on historic classes of insurance and over time failed to keep pace with new insurance products, which were not as easily categorized as the effective application of the legislation might require. Part 5 of the Old Act (Fire Insurance) dealt adequately with policies covering that specific peril, but with the emergence of multi-peril and all-risk polices, the application of and interplay between Part 5 and Part 2 (General Provisions) became confused and created uncertainty.

2 2 As is often noted, B.C. s insurance legislation was the subject of pointed criticism by the Supreme Court of Canada, particularly in the 2003 decision in KP Pacific Holdings Ltd. v. Guardian Insurance Co. of Canada, [2003] 1 S.C.R. 433; 2033 SCC 25, a fire loss case struggling to determine whether the limitation period in the General Provisions of Part 2 applied or the period set out in Part 5. At paragraphs 4 and 5, the Chief Justice said: Insurance practices, by contrast, have changed. A dominant policy in today s world is the all-risks or multi-peril policy, which covers a panoply of perils. This is good for consumers. It minimizes the number of policies they need to buy and ensures comprehensive coverage at lower cost. But it is bad when legal issues arise. The outmoded category-based Act contains rules based on the old classes of insurance. The newer comprehensive policies are difficult if not impossible to fit into the old categories. The result is continued uncertainty about what rules apply. Claims stall. Litigation ensues. Courts struggle with tortuous alternative interpretations. The rulings that have emerged have been likened to a judicial lottery :Professor J. A. Rendall, Annotation to Briggs v. B.C.A.A. Insurance Co.(1990), 40 C.C.L.I. 282, at p. 288 (commenting on B.C. case law prior to Dressew Supply Ltd. v. Laurentian Pacific Insurance Co. (1991), 57 B.C.L.R. (2d) 198 (C.A.)). It would be highly salutary for the Legislature to revisit these provisions and indicate its intent with respect to all-risks and multi-peril policies. In the meantime, the task of resolving disputes arising from this disjunction between insurance law and practice falls to the courts. Brown and Menezes lament: Surely there can be little which is less productive, or more wasteful, than litigation about such technicalities : C. Brown and J. Menezes, Insurance Law in Canada (2nd ed. 1991), at p. 16. I whole-heartedly agree. The Provincial Government then commenced a process of review and redesign that has finally resulted in the New Act and its related Regulations. Certainly any review of the changes suggests that an overall goal of the revisions was to enhance consumer protection by clarifying the language of the Old Act and logically

3 3 reordering its content. A government discussion paper of March listed three objectives of the review: 1. Consumer protection and clarity of contractual provisions; 2. Harmonization with other provinces, and 3. Justifiable intervention the minimization of government intervention in contractual relations. Given the currency of the New Act, it is not surprising that there has been no judicial analysis of its provisions. Accordingly, we will have to wait and see whether the stated objectives of the revisions are achieved. Overview of Significant Changes Some of the significant changes that will be discussed below are: Restructuring of the legislation through the repeal of Part 5 (Fire Insurance) of the Old Act and the broadening of Part 2 (General Insurance Provisions), including the application of statutory conditions Unjust contract provisions Relief against forfeiture Policy in accordance with the terms of application Waiver and estoppel Recovery by innocent persons Exclusions from coverage (fire) 1 Insurance Act Review Discussion Paper, Ministry of Finance, March 2007

4 4 Limitation periods Dispute resolution General Insurance Provisions and Part 2 Part 5 of the Old Act and the statutory conditions it incorporated at s. 129 applied only to coverage for fire losses, while all other property insurance, including multi-peril policies, fell under the General Provisions of Part 2. Part 5 has been completely removed from the New Act and many of its provisions have been incorporated into Part 2, which now governs most property and liability policies. (Note: only s. 14 of Part 2 - waiver and estoppel applies to life insurance which is governed by Part 3 and only ss. 13 relief against forfeiture and s. 14 apply to accident and sickness insurance which is governed by Part 4; Part 2 does not apply to contracts of reinsurance.) Statutory Conditions The statutory conditions under Part 5 of the Old Act have largely been moved into Part 2 of the New Act. Statutory conditions 2 through 5 and 14 apply, subject to some transitional provisions, to all policies of property and liability insurance and must be printed on every policy. Statutory conditions 1 and 6 through 13 apply only to policies concerning property losses and again must be printed in each policy. No variation, omission of or addition to a statutory condition is binding on the insured. The statutory conditions do not apply to surety insurance and, by Regulation 2 B.C. Reg. 213/2011, s. 5 2, do not apply to aircraft, boiler and machinery, credit, hail, mortgage, product warranty, travel and vehicle warranty insurance.

5 5 Of particular interest to this paper and the potential to void coverage, statutory condition 1 now clearly applies to all property policies, including multi-peril policies. It reads as follows: Misrepresentation 1. If a person applying for insurance falsely describes the property to the prejudice of the insurer, or misrepresents or fraudulently omits to communicate any circumstance that is material to be made known to the insurer in order to enable it to judge the risk to be undertaken, the contract is void as to any property in relation to which the misrepresentation or omission is material. Also of interest to the topic at hand, statutory condition 4 now applies to all property and casualty policies. It reads: Material change in risk 4. (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. (3) If an insurer or its agent is notified of a change under subparagraph (1) of this condition, the insurer may (a) terminate the contract in accordance with Statutory Condition 5, or (b) notify the insured in writing that, if the insured desires the contract to continue in force, the insured must, within 15 days after receipt of the notice, pay to the insurer an additional premium specified in the notice. (4) If the insured fails to pay an additional premium when required to do so under subparagraph (3) (b) of this condition, the contract is terminated at that time and Statutory Condition 5 (2) (a) applies in respect of the unearned portion of the premium.

6 6 The test for whether a change is material to a risk has been established through cases decided under Part 5 of the Old Act. The B.C. Court of Appeal confirmed the test as follows in Kehoe v. British Columbia Insurance Co., (1993) 79 B.C.L.R. (2d) 241 at para. 7 (C.A.): The question of materiality is a question of fact for the court. The burden of proof of materiality is on the insurer. It is a question of fact in each case whether, if the matters misrepresented had been truly disclosed, they would, on a fair consideration of the evidence, have influenced a reasonable insurer to decline a risk or to have stipulated for a higher premium. Insurers are now in a position to potentially avoid coverage where they have not been properly notified of a material change to the risk not only under property policies, but under liability policies as well. Unjust Contract Provisions Section 32 of the New Act reads: Unjust contract provisions 32. If a contract contains any term or condition, other than an exclusion prescribed by regulation for the purposes of section 33 (1) or established by section 34 (2) or (3), that is or may be material to the risk, including, but not restricted to, a provision in respect of the use, condition, location or maintenance of the insured property, the term or condition is not binding on the insured if it is held to be unjust or unreasonable by the court before which a question relating to it is tried. Again, this provision is taken from Part 5 (Fire Insurance) of the Old Act and is now situate in Part 2 of the New Act and accordingly has application to both property and liability policies. It essentially provides an avenue whereby an insured can argue against a coverage denial on the basis that the involved condition is either unjust or unreasonable.

7 7 The section references a term or condition that is or may be material to the risk. Accordingly, the objective test of materiality set out above is applicable. The obvious focus of the provision is on exclusions from coverage. The only reason to include exclusion in a policy of insurance is because its subject matter is material to the risk. As a result, this provision has potential application to all exclusions in a policy. Section 32 provides an obvious point of argument for insureds fighting against a coverage denial and will undoubtedly be a source of a significant amount of interesting litigation under the New Act. Neither the New Act nor the regulations provide any commentary on what might be considered unjust or unreasonable. Similar provisions have been considered by the courts in the context of statutory conditions under fire insurance, the most notable example being the Supreme Court of Canada in Marche v. Halifax Insurance Co., [2005] 1 S.C.R. 47, 2005 SCC 6. An insured house was vacant which amounted to a material change in the risk of which the insured ought to have notified the insurer pursuant to the statutory condition. A tenant moved into the premises after which the house was destroyed by fire. The insurer denied the claim on the basis of the earlier, unreported vacancy. The insured successfully argued that in the circumstances it would be unjust or unreasonable to deny coverage under the policy. With respect to the relevant provision in the Nova Scotia Insurance Act, the majority held: The expression unjust or unreasonable in s. 171 allows a court to look at the application of a statutory condition. While an insurance condition may on its face be reasonable and just, it may in its application be unreasonable and unjust. The expression unjust or unreasonable in relation to a condition means little unless it refers to the effects the condition may create. To hold that only the condition in the abstract must be unjust or unreasonable without regard to its effects when

8 8 applied would not accord with the broad remedial purpose of s. 171 to protect the public against unjust or unreasonable insurance conditions. The court determined that as the material change in risk had been remedied before the loss, it would be unreasonable to uphold the application of the statutory condition so as to void coverage. What is less clear is how s. 32 might be applied in cases where there is a more direct link between the breach resulting from a material change in risk and the loss itself. Relief Against Forfeiture If an insured fails to fully comply with a statutory condition or other term with respect to a loss under an insurance policy, the insurer may be in a position to terminate the policy and decline coverage for the loss. The relief from forfeiture provision in the Old Act gave the court a discretion to relieve against imperfect compliance (as opposed to non-compliance) where such would cause the insured undue hardship, but be of no prejudice to the insurer. Under the Old Act, the discretion was a fairly narrow one. The New Act duplicates the old provisions, but with clearer language and more significantly incorporates s. 24 of the Law and Equity Act, RSBC 1996, c Section 13 of the new provision reads: Court may relieve against forfeiture and termination 13. Without limiting section 24 of the Law and Equity Act, if (a) there has been (i) imperfect compliance with a statutory condition as to the proof of loss to be given by the insured or another matter or thing required to be done or omitted by the insured with respect to the loss, and

9 9 (ii) a consequent forfeiture or avoidance of the insurance in whole or in part, or (b) there has been a termination of the policy by a notice that was not received by the insured because of the insured's absence from the address to which the notice was addressed, and the court considers it inequitable that the insurance should be forfeited or avoided on that ground or terminated, the court, on terms it considers just, may (c) relieve against the forfeiture or avoidance, or (d) if the application for relief is made within 90 days of the date of the mailing of the notice of termination, relieve against the termination. Section 24 of the Law and Equity Act reads: Relief against penalties and forfeitures 24. The court may relieve against all penalties and forfeitures, and in granting the relief may impose any terms as to costs, expenses, damages, compensations and all other matters that the court thinks fit. Section 24 is a general equitable provision and its application to insurance policies has historically been a matter of debate. That issue has clearly been resolved and under the New Act, the court now has a broader discretion to relieve against all penalties and forfeitures arising from imperfect compliance with policy terms respecting a loss. The relief against forfeiture provisions under the New Act apply to accident and sickness, but not life insurance. Waiver and Estoppel The Old Act at s. 11 provided that no term or condition of an insurance policy was waived by the insurer unless the waiver was in writing. However, the Old Act was less clear with

10 10 respect to the impact of waiver of a term by conduct or estoppel 3. Section 14 of the New Act includes an amendment that clearly incorporates estoppel; s. 14(1) reads: Waiver and estoppel 14. (1) The obligation of an insured to comply with a requirement under a contract is excused to the extent that (a) (b) the insurer has given notice in writing that the insured's compliance with the requirement is excused in whole or in part, subject to the terms specified in the notice, if any, or the insurer's conduct reasonably causes the insured to believe that the insured's compliance with the requirement is excused in whole or in part, and the insured acts on that belief to the insured's detriment. Accordingly, insurers will need to be careful that their actions in response to a claim do not lead their insureds to reasonably believe that any particular policy term or defence is being abandoned. Policy in Accordance with Terms of Application Section 15 of the New Act indicates that after an application for insurance is made, any policy issued by the insurer is deemed to be in accordance with the terms of the application, unless the insurer immediately notifies the insured in writing of any differences between the two. Within two weeks of receipt of such notice, the insured may reject the policy; otherwise, the insured presumably accepts the policy provisions. This can provide the insured with coverage on making the application, but also encourages notice to the insured of any variations in the policy that might not have been contemplated at the time of application. 3 See: Cadboro Investments Ltd. v. Canada West Insurance Co., (1987) 19 B.C.L.R. (2d) 353 (C.A.); Bell Pole Co. v. Commonwealth Insurance Co., 1999 BCCA 262

11 11 Recovery by Innocent Persons Historically, if a policy covered multiple insureds, depending on the policy language, loss or damage caused by the criminal or intentional act of one insured could result in a loss of coverage for all insureds. Typical homeowners policies usually define insureds broadly to include all family members and relatives resident in the premises. If a vengeful family member caused a loss, then all other insureds would be barred from recovery. Such misfortune might arise as a result of a spousal dispute or as in the oft cited case of Scott v. Wawanesa Mutual Insurance Co.,[1989] 1 S.C.R There a teenage boy intentionally set fire to his parents home without their involvement. The definition of insured captured the parents as well as the teenager. The policy included a typical intentional act exclusion. The majority of the Supreme Court of Canada held that the language of the policy was perfectly clear and gave effect to the exclusion such that coverage for all insureds under the policy was excluded. The new provision to address this scenario actually came into effect on June 16, The provision which is situate in Part 2 of the New Act reads: Recovery by innocent persons 35. (1) Despite section 5, if a contract contains a term or condition excluding coverage for loss or damage to property caused by a criminal or intentional act or omission of an insured or any other person, the exclusion applies only to the claim of a person (a) whose act or omission caused the loss or damage, (b) who abetted or colluded in the act or omission, (c) who (i) consented to the act or omission, and (ii) knew or ought to have known that the act or omission would cause the loss or damage, or (d) who is in a class prescribed by regulation.

12 12 (2) Nothing in subsection (1) allows a person whose property is insured under the contract to recover more than their proportionate interest in the lost or damaged property. (3) A person whose coverage under a contract would be excluded but for subsection (1) must comply with any requirements prescribed by regulation. Accordingly, under the New Act, where there are multiple insureds under one policy, the criminal or intentional act exclusion will bar the wilful insured s claim, but will not bar the others from recovering their proportionate share of the loss. Neither the New Act nor its regulation provides any indication of how proportionate share is to be determined and this will likely be one focus of future litigation. Section 7 of the Regulation stipulates that the innocent person provision only applies to natural persons and anyone seeking to take advantage of the section must co-operate with the insurer by submitting to an examination under oath and producing relevant documents if requested. Exclusions from Coverage (Fire) As set out above, much of the confusion generated under the old legislation arose because it was initially crafted to govern discrete classes of insurance and specific perils, such as fire, and it was not historically amended in any appropriate way to address new insurance products, such as multi-peril and all-risk coverage. As a result, under the Old Act, a fire loss could be denied if the fire was caused by an excluded event, such as an earthquake. Such a denial would be counter to the reasonable expectation of the insuring public.

13 13 Section 33 appears in Part 2 of the New Act and essentially indicates that the only permitted exclusions relating to the cause of the fire are those expressly allowed by regulation. Section 6 of the Regulation allows for exclusions for fires caused by: criminal acts or omissions riot, civil commotion, war, invasion, act of a foreign enemy, hostilities, civil war, rebellion, revolution, insurrection or military power terrorism, but not to residential property property that is vacant for less than 30 days Notably, fire following an earthquake is not a permitted exclusion. Limitation Periods The Old Act contained diverse limitation periods depending on the class of insurance. The confusion generated by these limitation periods was the focus of the criticism of the Supreme Court of Canada in KP Pacific Holdings, supra. Statutory condition 14 in Part 5 (Fire Insurance) provided for a limitation period for an action against an insurer one year from when the loss or damage occurred. Under the general provisions of Part 2 of the Old Act, the limitation period was one year after the furnishing of a reasonably sufficient proof of loss, language which predictably lead to a significant volume of litigation. Under the New Act, subject to some transitory provisions, two years is the general limitation period. By s. 23 of the New Act, the limitation period for actions against insurers under a property policy is two years after the insured knew or ought to have known the loss or damage occurred. In any other case, the limitation period is two years

14 14 after the cause of action against the insurer arose. The latter period would apply to coverage disputes. The language knew or ought to have known brings with it the discovery standard (when the material facts relating to an action were or ought to have been discovered) which has been the subject of significant litigation and judicial commentary under the Limitation Act, RSBC 1996, c So while the New Act goes some way in clarifying limitation periods, there certainly remains fodder for related litigation. With respect to life and accident and sickness insurance, ss. 76 and 104 respectively dictate a limitation period in the case of death of two years after the proof of loss is provided or six years from the date of death. In cases other than death, the limitation period is two years following specified events. Section 6 of the New Act applies s. 7 of the Limitation Act to all limitation periods. Section 7 postpones the running of a limitation period until a minor reaches 19 years of age or until a person under a legal disability is no longer disabled. Section 4 of the Regulations include requirements that, subject to transitory provisions, an insurer must give notice of the applicable limitation period within specified timeframes (unless the insured is represented by counsel), failing which the running of the involved limitation period is suspended. Notice must be given at the time of or within

15 15 five business days of denial of all or part of a claim, and within ten business days after the first anniversary of the date that the insurer receives notice of a claim. Dispute Resolution Section 9 and statutory condition 11 of the Old Act provided an appraisal process which was largely focused on disputes over the value of property damaged by fire. Section 12 and statutory condition 11 in Part 2 of the New Act create a dispute resolution scheme that largely duplicates the appraisal process, in that the procedures by which each party selects a representative who can then select an umpire are similar. The new process, however, is broader in its scope and is clearly available regardless of the class or type of insurance involved. As with the old procedure, the focus of the exercise includes disputes over the value to the property insured, the value of the property saved or the amount of the loss. However, the new dispute resolution mechanism is also available to disputes over the nature and extent of the repairs or replacements required or, if made, their adequacy. The dispute resolution process becomes mandatory after either the insured or the insurer makes a demand for it in writing after the proof of loss has been delivered. By s. 3 of the Regulation, the insurer must advise the insured of the availability of the process within ten days after determining an applicable dispute has arisen or within 70 days following delivery of the proof of loss should valuation issues remain undecided. Miscellaneous

16 16 Pursuant to s. 57 in Part 3 (Life Insurance) and s. 106 in Part 4 (Accident and Sickness Insurance) of the New Act, if a premium is overdue and a payment is made within 30 days after a grace period, then the policy is reinstated, but only if the person whose life was insured is alive at the time of payment. Section 9 of the Regulations provides a cooling off period of ten days. An insured who purchases a life or an accident and sickness policy may rescind it by notifying the insurer within ten days of receipt of the policy and will receive a full refund of the premium. Sections 47 and 109 of the New Act allow the court on application to terminate a policy of life or accident and sickness insurance respectively where the insured reasonably believes his or her life is in danger as a consequence of the coverage. These provisions address the issue of someone attempting to cash in on insurance policies though nefarious means. While the New Act and its Regulations came into force effective July 1, 2012, some provisions are subject to transitory provisions set out in the Regulations. Very generally, some provisions will not apply until an existing policy is renewed or replaced and some will not apply to losses pre-dating July 1, Conclusion Clearly significant change and modernization has been achieved through the New Act. The bulk of the legislative amendments and additions enhance consumer protection for

17 17 the insuring public. The layout of the legislation is more in keeping with the current insurance industry and the language of the New Act is clearer. However, many of the amendments include operational provisions that lack definition or guidance (the reach of relief from forfeiture, the innocent insured s proportionate share, unjust contractual provisions) which may lead to increased litigation.