In May 2016, a company called Land Pride gave notice of a liability claim arising from a water breach caused while it was conducting demolition work in a building. Land Pride was subcontracted for the work to a contractor called G.E.S, who was an Additional Insured under Land Pride’s policy, and who was also the unhappy recipient of the claim.
The notice was not well received by Land Pride’s insurer, for good reason. According to its application for insurance, Land Pride carried on business as a landscaper.
By June, the insurer was in receipt of a coverage opinion to the effect that it had grounds to void the policy ab initio (“from the beginning”) for material misrepresentation as to the nature of Land Pride’s business. By September, the insurer advised Land Pride that it was voiding the policy for misrepresentation, and refunded the premiums. Correspondingly, it would not be defending Land Pride (or G.E.S.) in the liability claim.
An unhappy G.E.S. sought a declaration that it was entitled to a defence, arguing that by reason of certain intervening conduct (prior to September), the insurer had either waived the right to void the policy, or was estopped from voiding the policy. G.E.S. argued the insurer had only three options on learning of Land Pride’s misrepresentation, that it had chosen the second by its conduct, and that there was no going back. The three options were not made up by G.E.S.’s’ counsel, but have considerable precedent. They were:
- advise the insured that it was voiding the policy ab initio and refund the premium;
- retain the premium and treat the policy as valid and subsisting;
- treat the policy as valid but cancel it unilaterally in accordance with the statutory conditions.
The conduct in question was that the insurer, in July, (after learning of the misrepresentation) had accepted a renewal application and premium from Land Pride. Thus, as of July, the insurer retained the original premium and accepted a renewal application and premium with knowledge of the material misrepresentation.
In a decision released this April, Justice Koehnen of the Ontario Superior Court of Justice dismissed G.E.S.’s application, for reasons we will return to.
The foregoing raises the question: on learning that there are – or may be – grounds to void a policy due to material misrepresentation or fraudulent omission in the application, what kind of conduct can preclude an insurer from voiding the policy? This question can be particularly acute in situations where a loss (or liability claim) has been presented and the insurer is in a period of initial uncertainty over whether there are sufficient grounds to void the policy.
A number of cases provide guidance; however, as will be seen, there is some basis to ask whether the decision in G.E.S. Construction might change the equation. Following, we review several decisions which provide some background for the three options indicated by counsel for G.E.S. before returning to describe the result of the case.
In a 1923 decision called Millican, the insured under an accident and sickness policy claimed in respect of an accident in July 1922. In September, the insurer wrote to the plaintiff to advise that the policy was being cancelled as at the date of the letter. The letter enclosed the unearned premium (to that date), and said that the claim would not be honoured as his policy application would not have been accepted had he provided accurate information about his health. In the ensuing suit, the insurer argued the policy was void ab initio due to misrepresentation.
The court of appeal held that the cancellation in September in accordance with the policy’s terms and the retention of the earned premium were conduct inconsistent with the position that the policy was void ab initio due to the misrepresentation and amounted to an unequivocal affirmation of the policy, saying:
Assuming that the misrepresentations were material … how does the matter stand? The policy was voidable. Two courses were open to the defendant:
(1) To disaffirm the policy ab initio and return the full year’s premium …
(2) To affirm the policy and retain the premium and allow the plaintiff to retain the money paid to him and at any time during the term, if it so desired, to cancel the policy without cause, in the manner provided by the policy, repaying the unearned portion of the current year’s premium.
The company could elect either course but not both, the one being inconsistent with the other.
Notably, the second option contains both options 2 and 3 recited in G.E.S.
The notion of “affirming” the policy relates to election of remedies. In certain circumstances, a party must elect one path amongst a number of inconsistent paths and the path once chosen, cannot be unchosen. To ‘affirm’ the policy, either by electing to keep the policy in force, or by cancelling it in accordance with its terms (or statutory condition), is to waive the alternative path of declaring the policy void from the outset.
In Millican the court was clear that the insurer did not intend to waive its right to void the policy. It did, however, intend to cancel the policy in accordance with its terms and to retain the ‘earned’ premium, both being intentional conduct consistent with there being a policy in place. If a policy is void ab initio – back to the time of its inception – it cannot be cancelled as of a given subsequent date in accordance with its terms, there being nothing to cancel, and no terms. Nor can any portion of the premium have been ‘earned’ if the policy is void, since there was no period of cover. Said the court:
The question is not whether there was an intention to waive, but whether there was an intention to do what had the effect of affirming the policy.
Next, a 1969 case called Abbi v. Klippert applied Millican to a situation where the insurer under an automobile policy learned that the insured misrepresented his driving history after an accident claim was presented. Again, however, the insurer cancelled the policy and retained a portion of the premium, despite knowledge of the misrepresentation.
In the result, the action against the insurer succeeded, with the court quoting Millican’s two options and concluding:
Having elected to cancel the policy on a date following the accident and retained the portion of the premium up to that date, the company affirmed the policy and could not later claim that it was void ab initio.
…
… the defendant has, by its conduct, admitted the existence of the policy and cannot now avoid payment of a claim which arose while the insurance was in force.
In a 1982 decision called Hansra, the insurer made two errors which precluded it from successfully voiding the policy. The case involved a misrepresentation as to driving history and two claims: on December 30, the insured reported the theft of his car stereo. On January 6, the insured was involved in an accident involving the vehicle, which was reported to the insurer on January 7.
The insurer became aware of the misrepresentation after receiving the theft report, but did not issue a letter voiding the policy and returning the premium until January 7, after the accident. Moreover, the insurer paid the theft claim.
In the result, the failure to immediately void the policy – which led the insured to continue to drive the vehicle until the accident of January 6 believing that he was covered – and the payment for the stereo theft claim, were fatal to the insurer:
… by its conduct in failing to advise the plaintiff immediately that it elected to treat the policy as void and in paying the plaintiff’s claim for the theft of his stereo, the company represented to the plaintiff that it considered the policy as being valid and subsisting. … The act of agreeing to pay out on the policy is incompatible with the intention to hold the policy void. Mr. Hansra was not advised of the company’s position at the time he submitted his claim for the stereo. He relied on the representation created by the insurer’s conduct, that his insurance was valid, and did not apply for insurance coverage with another insurer or cease to drive his car. The insurer should therefore be estopped from relying on the defence of Mr. Hansra’s misrepresentation.
Finally, we mention a 1999 case called LeDuc, a theft claim under an automobile policy.
Following an interview with the insured after the theft, the insurer learned that the insured had lied on his application for insurance when he stated that his license was in good standing (it was suspended). The insurer advised in a letter of November, 1996, that the policy was cancelled as of December 15, 1996. In January, the insurer wrote to say the policy was void.
The insured brought an action to recover on the theft claim. The claim was allowed on the basis that, being aware the insured had lied on the application but electing to cancel the policy on a future date had the effect of affirming the validity of the contract of insurance:
Once the company became aware of LeDuc’s lie … the company had three options. The company could have repudiated the contract immediately and returned the two months of premiums that LeDuc had paid in advance. The company could have decided that LeDuc’s lie had no effect on the risk that the company was prepared to insure and therefore treated the policy as valid and subsisting. State Farm, however, chose the third option, to give notice of cancellation at a future date, the legal effect being to affirm the contract and therefore the coverage until that date. … The effect of the letter of November 25, 1996 was to affirm the validity of the contract of insurance. The subsequent letter of January 16, 1997 was an invalid attempt to rely on the provisions of … the Insurance Act which had been waived by the letter of November 25th.
With that background, we return to G.E.S. Construction and ask why the insurer’s conduct – in retaining the prior premium for five months and accepting a subsequent renewal application – did not amount to “affirmation” such that it was permitted to void the policy some time later?
As should be evident, counsel for G.E.S. had a strong basis to argue that the insurer had only three options and that its conduct in retaining the original premium and accepting the renewal was conduct consistent with the contract being valid, an election from which the insurer could not resile.
The court relied on a 1994 Supreme Court of Canada case called Saskatchewan River Bungalows, which involved relief from forfeiture for non-timely payment of premiums on a life policy. There, the insurer sent two letters which the beneficiary received concurrently. One letter requested payment of the premium policy which was described as “technically out of force” (due to non-payment), while the second stated the policy had lapsed for non-payment. The request for late payment and the word “technically” were held to amount to a waiver of timely payment, and relief was granted. Discussing waiver, the court emphasized that it requires (1) full knowledge of the rights being waived; and (2) an unequivocal and conscious intention to abandon those rights. Requesting payment of a premium despite the ‘technical’ lapse of the policy due to non-payment showed unequivocal intention.
In applying Saskatchewan River, the court relied on some facts we have not yet mentioned and found that there was no unequivocal and conscious intention on the part of the insurer to abandon the right to void the policy for misrepresentation.
Those facts included that the insurer raised the misrepresentation with Land Pride “from the outset”, gave a non-waiver agreement, and that the renewal was “always couched in terms of resolving the issue of [the Insurer’s] obligation to respond to the claim Land Pride had made under the old policy.” In relation to the renewal, the insurer indicated it was accepted “for now”, but it was communicated and understood that the renewal was contingent on the existing claim being withdrawn. Indeed, Land Pride’s broker cancelled the renewal shortly thereafter, because “things were still in limbo”, creating a situation where Land Pride could not be sure of the status of its ‘renewed’ coverage. As the court said:
Land Pride knew that things with Lloyd’s were “in limbo” and complained of indecision on the part of Lloyd’s and its Canadian agents. In those circumstances, it would not be accurate to say that Lloyd’s had communicated to Land Pride either by words or conduct an “unequivocal and conscious intention” to waive its right to void the policy
Recall, however, that in Millican the insurer was found not to have intended to waive its right to treat the policy as void and that the same letter which gave notice of cancellation (thereby affirming the policy) also said that the existing claim would not be honoured due to the misrepresentation indicating an intention to treat the policy as void ab initio. There, the insurer was not allowed to rely on ‘mixed signals’, so to speak.
In short, G.E.S. Construction suggests that the ‘three options’ may not be as stark as the prevailing caselaw would suggest. The case does not allow an insurer to walk back an unequivocal election once made, but can be used to argue that the court should take a more nuanced view of whether an unequivocal election was actually made. If the reasoning in G.E.S. is followed, conduct which could otherwise be viewed as ‘affirming’ the policy after knowledge of a misrepresentation may not constitute an irrevocable election, if it is sufficiently clear in overall context that a definitive election was not intended. From that point of view, the decision arguably presents a divergence from earlier decisions in this area and may provide insurers with an argument in situations where an immediate decision to void a policy was not made.