When Is An Insurance Company Allowed to Void An Insurance Policy Right Back to the Inception Date?

When An Insurer Alleges Misrepresentation As the Reason to Deny a Claim, the Insurer Must Prove That the Misrepresentation Was a Material Concern and Occurred When the Client Applied For the Coverage If the Insurer Wishes to Void the Policy From Inception. Do Note That Automobile Insurance Has Unique Rules.

Understanding When Misrepresentation May Cause Coverage Denial or Cause Voiding From Policy Inception

Coverage Denial or Policy Voiding Involving Misrepresentation Allegations By An Insurer When a person first arranges an insurance policy, or during the period of an insurance policy, and especially when a person is making a claim against the coverage provided within an insurance policy, the person is required to abide by the utmost good faith principle by providing honest and forthcoming information to an insurance company.  The requirement of honesty involves providing accurate information in response to any questions asked by the insurance company, or agent of the insurance company, and the requirement involves providing information that would reasonably be of interest and concern to the respective insurance company, even if the insurance company fails to ask direct questions about the specific concern.  This duty of good faith and requirement upon the insured to provide complete disclosure when arranging insurance was well stated by the Court of Appeal within the cases of Costanza v. Desjardins Financial Security Life Assurance Company, 2023 ONCA 54, and Gregory v. Jolley, 2001 CanLII 4324, wherein each it was respectively said:

[25]  It is well-established that a person applying for insurance has a duty to disclose to the insurer all facts within the person’s knowledge that are material to the insurance. The duty is not only an obligation on the applicant for insurance not to misrepresent their situation, but also a positive obligation to volunteer information which a reasonable[1] insurer would consider relevant to assessing the risk. The duty to disclose applies even in the absence of questions on a given subject from the insurer, although the absence of questions may be evidence that an insurer does not consider a fact to be material: Gregory v. Jolley (2001), 2001 CanLII 4324 (ON CA), 54 O.R. (3d) 481 (C.A.), at paras. 31-32; Sagl v. Chubb Insurance Company of Canada, 2009 ONCA 388, 249 O.A.C. 234, at paras. 51-52.

[31] The duty of an insured to make full disclosure of material facts is a well-established principle of insurance law. It is discussed in relation to disability insurance by M.G. Baer, Study Paper on the Legal Aspects of Long-Term Disability Insurance (Toronto: Ontario Law Reform Commission, 1996) at p. 5, where Baer writes

(emphasis added):

Disability insurance contracts like other insurance contracts are said to be contracts of the utmost good faith. . . . Utmost good faith involves not only an obligation on the insured not to misrepresent his or her situation, but also a positive obligation on the insured to volunteer information which the reasonable insurer would consider relevant in assessing the risk. In spite of its name, the requirement goes beyond a general standard of honesty and fair dealing. Over the years it has developed into a requirement which extends beyond the actual or reasonable expectation of the insured and failure to meet it results in the severe penalty of forfeiture of any claim under the policy.

. . . . .

The requirement of the utmost good faith requires the insured to disclose to the insurer all material facts. The onus is on the insured to disclose these facts on his or her own initiative whether or not the insurer has inquired about them.

[32] Similarly, Craig Brown, Insurance Law in Canada, looseleaf, vol. 1 (Toronto: Carswell, 1999) at p. 5-2, states:

A person applying for insurance must disclose all matters within his/her personal knowledge which are relevant in determining the nature and extent of the risk. The duty applies even in the absence of questions from the insurer.

(Footnotes omitted)

Furthermore, and in respect of claim denial for misrepresentation of the truth as related to information affecting an insurance claim, the duty of good faith was well stated with brevity in the matter of RBC v. Field, 2016 ONSC 5584 wherein it was said:

[150]  I conclude as a matter of law that there is a doctrine of mutuality that imposes a duty on an insurer and an insured party to act in good faith when dealing with each other in the making or processing of a claim under a policy of insurance.  This mutuality arises from the reciprocal duty of an insured to act fairly, honestly and in good faith when making a claim, and of an insurer to act fairly, honestly and in good faith when adjusting that claim.

Materiality of Misrepresentation at Application

With all the above said, there remains an issue of materiality, meaning was the misrepresented, or undisclosed and therefore omitted, information relevant to the issue of concern.  If the misrepresentation is immaterial then an insurer is, generally, forbidden from cancelling a policy or denying coverage on the basis of misrepresentation.  Essentially, the viewpoint is that if the willingness of the insurer to accept the insured, and to do so at the terms provided, such as premiums, deductibles, and extent of coverage, would be unaffected if known at the proper time, then the insurer is forbidden from relying upon the argument that without the misrepresentation the insurer would have avoided accepting the insured as a client and thereby completely avoiding the claim situation that arose.  Interestingly, when the question of materiality arises, the review of whether the insurer would have declined to accept the insured from the very beginning, and thereby avoided the potential obligation to pay insurance claims, is based on an objective test of what a reasonable insurer would have done rather than what the actual insurer would have done.  This requirement of materiality, and for determining genuine materiality, was explained well within the cases of Silva v. Sizoo, [1997] O.J. No. 4910, Lachman Estate v. Norwich Union Life Insurance Co.1998 CanLII 14854 and Estate of Kareem Watson et al v. RBC, 2021 ONSC 5305 wherein each it was respectively said:

7  Mrs. Silva had common law, statutory and contractual duties as an applicant for insurance to disclose all material facts in any application to an insurer underwriting an insurance risk. The common law duty can be traced back to the rule in Carter v. Boehm (1766), 3 Burr. 1905, 97 E.R. 1162 (Eng. K.B.); which held that an insurance contract is a contract uberrimae fidei and the consequences of even inadvertent misrepresentations on the part of the applicant are sufficient to void the insurance contract. Although over 200 years old, this case still represents the law. In Norwood on Life Insurance Law in Canada (2d ed.) Toronto, Carswell, 1992, at page 296 the author comments:

Unlike the case in many other kinds of contracts where the parties are in an equal position as far as ascertaining matters which are material to the proposed transaction, the facts which have a bearing upon the insurance risk which the insurer is asked to take are usually known in full detail only to the party seeking to be insured and are certainly not as easily available to the insurer.... Contracts of life insurance, therefore, are prime examples of contracts uberrimae fidei, imposing a duty upon the party seeking insurance to make true and full representations of facts which are material to the insurance risk.

8  While the focus in the above authorities is on life insurance, the insurer in disability insurance is in the same vulnerable position and these principles apply to that form of coverage as well: Hoffart v. Paul Revere Life Insurance Co. (1995), [1996] I.L.R. 1-3272 (Sask. Q.B.).

In particular, with contracts of life insurance, there is a duty upon the party seeking the insurance to make true and full representation of facts which are material to the insurance risk. What is material to the life insurance risk must be assessed from the insurer's perspective and the test is an objective rather than subjective test. That is why it must be demonstrated by the insurer that the underwriting guidelines of the insurer "must be in reasonable conformity with the ordinary standards for measuring insurable risks applied by insurers in general". Materiality, therefore, must be tested in the context of a "reasonable insurer": see David Norwood and John P. Weir, Life Insurance in Canada, 2nd ed. (Toronto: Carswell, 1992), p. 304. As the Supreme Court of Canada has said in Henwood, supra, at p. 726 S.C.R., pp. 720-21 D.L.R., where there is no evidence suggesting that the insurer's practice is anything but reasonable, it is not necessary for the insurer to pro ve the practice of other insurers. Nevertheless, the onus is upon the insurer to demonstrate the essential components of materiality.

[16]  Under the Insurance Act, the Policy, and the common law, if Watson’s pending criminal charges were material fact to insurance, he was under a positive obligation to disclose them to RBC during the application process.

[17]  Section 183(1) of the Insurance Act imposes a duty on the insured to disclose in their application “every fact within the person’s knowledge that is material to the insurance…” This legislative obligation is proactive, reflects well-established common law, and is based on sound policy: Silva v. Sizoo et al., [1997] O.J. No. 4910 (G.D.) at para. 7. Without full and frank disclosure of all facts material to the life insurance risk, the insurer cannot make an informed decision as to whether on not to approve a policy. This obligation is particularly relevant here, where RBC did not underwrite the risk prior to approving Watson’s Policy.

[18]  The disclosure obligation on the insured is not limited to simply answering questions stated in the application correctly: Mohammad v. The Manufacturers Life Insurance, 2020 ONCA 57 (CanLII) at paras. 10-11. Innocent non-disclosure of any material fact can invalidate the contract for life insurance: Hoffart v. Paul Revere Life Insurance Co., [1995] S.J. No. 621 (Q.B.) at para. 53. It does not matter, for example, that that the insured misjudged the fact to be insignificant or unimportant to an insurer: Silva at paras. 26-27, quoting Cameron v. Cooperants Mutual Life Insurance Society (1992), 16 C.C.L.I. (2d) 288 (N.S.C.A.) at 239.

[19]  While I agree that the Question could and should have been much more clearly worded, its ambiguity is irrelevant since Watson had a positive obligation to disclose all material facts. Moreover, RBC is not required to prove fraud or an intention to mislead because Watson’s death occurred within two years of the Policy being issued: s. 185.

[20]  Failure to disclose a material fact triggers the insurer’s right under s. 183(2) to void the contract and rescind a policy. The statutory scheme is accurately reflected in Provision F6 of RBC’s Policy. Provision F6 allows RBC to contest the validity of the Policy or the payment of the death benefit if the insured “incorrectly stated, misrepresented or failed to disclose a material fact in the application for insurance.” RBC does not have to establish fraud if the insured died within two years of the policy date.

Did Watson fail to disclose a material fact?

[21]  Watson clearly had knowledge of his outstanding criminal charges as of the application date. He had attended numerous court appearances to move the matter along.

[22]  Given that Watson did not disclose the criminal charges in his Application, the outcome is the same whether he omitted or misrepresented the material fact by incorrectly answering the question on the Application. In either case, the narrow issue before me is whether Watson’s outstanding criminal charges were “material to insurance” such that he was required to disclose them during the application process.

[23]  Materiality is a question of fact that is assessed from the perspective of the insurer because it bears the entire risk of the insured’s non-disclosure: Silva at para. 32, citing Mutual Life Insurance Co. v. Ontario Metal Products Co. (1924), [1925] D.R.E. 583 (Canada P.C.).

[24]  The onus is on the insurer to establish that the omitted fact was “material to insurance:Silva at para. 28. To satisfy the materiality requirement, RBC must show that the omitted fact, if properly disclosed, would influence a reasonable insurer to decline the risk, to accept a different risk, or to charge a higher premium: Pereira v Hamilton Township Farmers’ Mutual Fire Insurance Co., 2006 ONCA 12284 (CanLII) at para. 65.

[25]  The test is objective, and not subjective or particular to whatever insurer may be involved. Were it not so, “it would be open to an insurer to assert, after the event, that it would not have accepted the risk based on its own private internal underwriting considerations however removed from the industry practice they might be”: Silva at para. 34

[26]  Materiality must be established through relevant and reliable evidence. In comparable cases before me, to prove the objective materiality of a misrepresented or omitted fact, insurers have relied on medical experts, as well as experts related to underwriting practices and procedures: Hoffart at para. 23.

[27]  In this case, to establish materiality, RBC relies on an unsworn, unsigned, two-page internal Memorandum in which “Brandy McCully,” manager in corporate underwriting, writes that: “Based on the criminal history provided, this policy would not have been approved had the history been fully and accurately declared. Coverage would have been denied.” In support of her conclusion, Ms. McCully notes that Watson was charged and convicted of a criminal offence.

[28]  Given the resources available to it to defend this application, I am surprised that RBC chose to rely exclusively on the Memorandum to establish materiality. The Memorandum reads like what it is:  a hastily written bureaucratic missive created for the sole purpose of providing internal justification for denying Doucette’s claim. It was what lawyers call a “cover-your-butt” memo.

[29]  The Memorandum is entirely conclusory in nature and offers no supporting analysis or clear information about how the pending criminal charges were material to determining Watson’s eligibility for life insurance or evaluating his insurance risk. There is no information about RBC’s eligibility policies, the practices of comparable insurers, or relevant actuarial information. Even counsel for RBC admitted that it was unclear whether Ms. McCully had properly confined her analysis to risks associated with the pending criminal charges, which the parties agree was the only fact known to Watson on the date of Application.

[30]  This conclusory nature of the Memorandum distinguishes this case from Fernandes v. RBC Life Insurance Company, 2008 CanLII 34279 (ONSC) at paras. 24-25. In that case, the RBC employee “detailed her work and thought processes,” and referred to “company guidelines, charts and formulae,” and underwriting guideline and manuals. She clearly articulated the increased risks of morbidity or disability based on the undisclosed fact. Her conclusions were supported by an expert in insurance underwriting and her evidence was subject to cross-examination. The Court found the RBC employee to be reliable: para. 27.

[31]  Because RBC did not make Ms. McCully available for cross-examination, Doucette did not have the opportunity to challenge her on her conclusions. RBC’s failure to provide an affidavit from Ms. McCully is a breach of Rule 39.01. In short, the Memorandum is hearsay and cannot be afforded any weight.

[32]  RBC has not convinced me that Watson omitted or misrepresented a material fact in his Application for insurance. RBC did not have lawful authority to void the Policy.

Cancelling From Inception

At common law, and therefore subject to an overriding statute in some circumstances such as that provided below with respect to automobile insurance, where an insured makes material misrepresentations upon an insurance application, whether an application involves actual documentation or is a verbal or other process, an insurance company may void the policy, ab initio, meaning from the beginning.  As above, the misrepresentation must be material to whether the insurer would have accepted the client or accepted the client on the policy terms as agreed to.  If indeed the misrepresentation was material, then the insurer may treat the insurance policy as void ab initio.  This was clearly stated by the Court of Appeal within the case of Sagl v. Chubb Insurance Company of Canada, 2009 ONCA 388 where it was stated:

[51]  The starting point in the analysis of this ground of appeal attracts no debate.  The relationship between an insurer and an insured is contractual in nature.  But contracts of insurance are no ordinary contracts; special rules apply.  Chief among these is the doctrine of uberrima fides that holds the parties to a standard of utmost good faith in their dealings with each other.  It places a heavy burden on applicants for insurance coverage to provide full disclosure to the insurance company of all information relevant to the nature and extent of the risk that the insurer is being asked to assume: Coronation Insurance Co. v. Taku Air Transport Ltd., 1991 CanLII 16 (SCC), [1991] 3 S.C.R. 622, at p. 636.  A fact is relevant or material if it would influence a prudent insurer in deciding whether to issue the policy or in determining the amount of the premium:  Mutual Life Insurance Co. v. Ontario Metal Products Co. Ltd., 1924 CanLII 336 (UK JCPC), [1925] 1 D.L.R. 583 (P.C.), at p. 588; Gauvremont v. Prudential Insurance Co. of America, 1940 CanLII 65 (SCC), [1941] S.C.R. 139, at p. 160; Fidelity & Casualty Co. of New York v. General Structures Inc., 1976 CanLII 213 (SCC), [1977] 2 S.C.R. 1098, at p. 1110.  Whether a misrepresentation or non-disclosure is material is a matter of fact to be determined by the trier of fact: see s. 124(6) of the Insurance Act, and Mutual Life at p. 588.  However, there is a subjective element to the test as well.  The non-disclosure or misrepresentation must have induced the insurer to enter into the contract:  see s. 124(4) of the Insurance Act; see also Taylor v. London Assurance Corp., 1935 CanLII 2 (SCC), [1935] S.C.R. 422, at p. 429.

[52]  The duty to disclose all material facts applies even in the absence of questions from the insurer, although the absence of questions may be evidence that the insurer does not consider a fact to be material: Gregory v. Jolley (2001), 2001 CanLII 4324 (ON CA), 54 O.R. (3d) 481 (C.A.), at paras. 31-32 and 37, and W.H. Stuart Mutuals Ltd. v. London Guarantee Insurance Co. (2004), 16 C.C.L.I. (4th) 192 (Ont. C.A.), at para. 11, leave to appeal refused, [2005] 1 S.C.R. xvii.  The consequence of non-disclosure or misrepresentation of a material fact by the insured is that the insurer is entitled to void the insurance contract ab initio: see Lloyd’s London, Non-Marine Underwriters v. National Armoured Ltd., (1996) 1996 CanLII 8104 (ON SC), 142 D.L.R. (4th) 506 (Ont. Gen. Div.), affirmed by [2000] I.L.R. I-3751 (Ont. C.A.).

Statutory Automobile Insurance

Whereas automobile insurance is required by law per the Compulsory Automobile Insurance Act, R.S.O. 1990, c. C.25, and whereas accidents involving automobiles may result in serious injuries or even death, the law deems that certain coverage aspects of automobile insurance may remain in force and applicable regardless of any misrepresentations, breach of utmost good faith, misrepresentation, and even outright fraud.  For the most part, these absolute coverage protections, being coverage that remains effective regardless of wrongful conduct by the insured, are the coverage concerns that are for the protection and benefit of persons other than the insured whereas such other persons may become victims of injury or death caused by the insured (or another person operating the automobile as authorized by the insured).  To appreciate an example of the absolute coverage protection including the statutory availability of such coverage for the benefit of a third party accident victim it is necessary to review section 233, section 251, and section 258, of the Insurance Act, R.S.O. 1990, c. I.8 in combination whereas in such sections it is said:

233 (1) Where,

(a) an applicant for a contract,

(i) gives false particulars of the described automobile to be insured to the prejudice of the insurer, or

(ii) knowingly misrepresents or fails to disclose in the application any fact required to be stated therein;

(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.

251 (1) Every contract evidenced by a motor vehicle liability policy insures, in respect of any one accident, to the limit of at least $200,000, exclusive of interest and costs, against liability resulting from bodily injury to or the death of one or more persons and loss of or damage to property.

258 (1) Any person who has a claim against an insured for which indemnity is provided by a contract evidenced by a motor vehicle liability policy, even if such person is not a party to the contract, may, upon recovering a judgment therefor in any province or territory of Canada against the insured, have the insurance money payable under the contract applied in or towards satisfaction of the person’s judgment and of any other judgments or claims against the insured covered by the contract and may, on the person’s own behalf and on behalf of all persons having such judgments or claims, maintain an action against the insurer to have the insurance money so applied.

It is necessary to note that the invalidity of an insurance claim due to misrepresentation, among other things, as prescribed and described within section 233 relate only to invalidity of claims by, and indemnity for, the insured.  Regardless of misrepresentation, violations of conditions, among other things, an automobile insurance policy, as a motor vehicle liability policy, remains validly in force, and available for the benefit of persons other than the insured.  This was stated by the Court of Appeal in the case of Merino v. ING Insurance Company of Canada, 2019 ONCA 326 where it was said:

[36]  Section 233 provides that:

(1) Where,

(a) an applicant for a contract,

(i) gives false particulars of the described automobile to be insured to the prejudice of the insurer, or

(ii) knowingly misrepresents or fails to disclose in the application any fact required to be stated therein;

(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.

(2) Subsection (1) does not invalidate such statutory accident benefits as are set out in the Statutory Accident Benefits Schedule.

(3) No statement of the applicant shall be used in defence of a claim under the contract unless it is contained in the signed written application therefor or, where no signed written application is made, in the purported application, or part thereof, that is embodied in, endorsed upon or attached to the policy.

[37]  The section does not contain the terms “void” or “voidable”. It neither requires nor contemplates any action by an insurer to terminate the contract. Rather, it describes the consequences, as between the insured and the insurer, when the insured has knowingly misrepresented or omitted a fact in a signed application. Those consequences are three-fold: 1) a claim by the insured (for own property damage or own loss due to injury) is invalid; 2) the right of the insured to recover indemnity (from a claim by a third party who suffered damage where the insured was at fault) is forfeited; but 3) the insured remains entitled to certain statutory accident benefits under the Statutory Accident Benefits Schedule: see O. Reg. 403/96, s. 30.

[38]  While a number of cases still express the effect of s. 233 as rendering the contract “void” as between the insurer and the insured[1], it is clear that that language is intended to do no more than reflect the express consequences of s. 233, which makes claims by the insured for personal loss or indemnity invalid and unrecoverable. As Wittman J.A. stated in Schoff v. Royal Insurance Co of Canada, 2004 ABCA 180, 348 A.R. 366, at para 49, “s. 613 [of the Alberta Act], however, only renders the insured’s claim invalid. It does not end all of the insurer’s obligations.” He went on to refer to the insurer’s direct obligation to third parties under the Alberta equivalent of s. 258(1) of the Act.

Accordingly, any third party rights remain in force and with respect to third party persons, such as accident victims, review of section 251 shows that a minimum of $200,000 in third party liability coverage is available without exception or condition, other than the condition that the insurance contract is a motor vehicle liability policy that was in force at the time of an accident.  Furthermore, whereas section 258 provides a statutory right of action against an insurer by a third party, such a third party is assured that $200,000 in liability coverage will be available; albeit, it is possible that more than one third party will bring claim against the $200,000 in liability coverage.  Essentially, section 251 provides an absolute guarantee that $200,000 in liability coverage is available to a third party victim despite any misrepresentations or policy violations by the insured; and accordingly, the insured may be driving drunk, with a suspended licence, while carrying nuclear waste in the trunk of the vehicle, and also after blatantly lying about various facts upon the insurance application, and the insurance company remains oblligated to provide at least $200,000 in liability coverage.  Of course, the insurance company may be entitled to pursue the insured in an effort to recoup any of the $200,000 if paid out; however, that is a separate issue, outside the concern of the absoluteness in the liability coverage that an insurance company must make available to a third party victim.

Summary Comment

Generally, an insurance company may deny coverage for a claim or void a policy from inception as if the policy failed to ever exist, when a client, being an insured, engages in providing a material misrepresentation to the insurance company.  The misrepresentation may occur by omission of facts or information that a person reasonably ought to expect an insurance company to want to know even where the insurance company failed to ask questions.  Interestingly, a misrepresention must be material, meaning reasonably relevant to the concern from an objective viewpoint.

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