Long time readers of articles on this website will be aware that in the late 2000s to early 2010s, substantial amendments were enacted to the insurance legislation in various provinces including B.C., Alberta and Manitoba. This article addresses one such amendment – the innocent insured amendment. Recent cases show that insureds are leveraging the innocent insured amendment to apply to situations which may not have been anticipated.
The Amendments
A significant focus of the amendments was to modernize and update insurance legislation in response to the 2003 decisions of the Supreme Court of Canada in K.P. Pacific[1] and Churchland v. Gore[2], which pointed out that insurance legislation continued to refer to narrow categories of insurance – such as “Fire Insurance” – and had failed to keep pace with modern developments, particularly the predominance of policies covering multiple perils and “all-risks”.
The amendments went further, however, and included new protections for innocent insureds. For ease of reference, these amendments, which we will call the “innocent insured amendment”, are now found in B.C. Insurance Act s. 35, Alberta Insurance Act s. 541, Manitoba Insurance Act s. 136.5, and (fairly recently) Ontario Insurance Act s. 129.1. Recent case law indicates that the scope of the innocent insured amendment is being litigated and may be broader than some might expect.
Background: The Scott v. Wawanesa Problem
Homeowner’s policies have long been subject to an exclusion for loss or damage caused by the intentional or criminal act of any person insured. Such policies broadly define those persons insured to include more than the named insureds either through a definition of “insured” or “you and your”. Roughly, members of the household other than the named insureds typically fall within those definitions. Historically, one pitfall arising from the definition is that if such person should intentionally or criminally damage the home, the named insureds’ coverage would be wholly excluded under the intentional or criminal acts exclusion. Similarly, the intentional or criminal act of one named insured would entirely bar the claim of another named insured, regardless of the latter’s innocence.
Perhaps the most well-known decision applying the exclusion is the 1989 decision of the Supreme Court of Canada in Scott v. Wawanesa[3]. There, the son of the named insureds intentionally burned down the family home. The son was defined as an “insured” as he was “any … person under the age of 21 in the care of an Insured”. The policy contained the following version of the intentional or criminal acts exclusion:
This Policy does not insure loss or damage caused by a criminal or wilful act or omission of the Insured or of any person whose property is insured hereunder
A majority of the SCC applied the exclusion to the innocent parents’ claim. In dissent, Mr. Justice La Forest would have read the exclusion as applying only to the property of the culpable son, and not the property of his innocent parents. Given that the family home is a primary store of wealth, the majority result has been seen as financially devastating to innocent insureds. The minority approach would have punished the wrongdoer alone.
More recently, the 2017 Ontario decision in Soczek v. Allstate[4] applied the intentional or criminal acts exclusion in particularly terrible circumstances. Mrs. Soczek’s husband tried to murder her by pouring gasoline on her and setting her on fire. The resulting conflagration, which she survived, destroyed the family home. Mrs. Soczek was a joint owner of the home and was a named co-insured (with her husband). Her claim for coverage for the home was denied on the basis of the criminal/intentional acts exclusion. In so holding, Justice E.M. Morgan lamented being bound by the majority opinion in Scott v. Wawanesa, and by the fact that Ontario had yet to enact an innocent insured amendment unlike British Columbia and Alberta.
Thus, the intentional/criminal acts exclusion has caused serious financial hardship to innocent insureds, and has been viewed by some as being particularly harsh in cases of domestic abuse, such as Soczek.
The Innocent Insured Amendment
Turning to the innocent insured amendment, what does it say? Taking Manitoba’s legislation as exemplary, s. 136.5(1) provides:
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
…
On its face, the amendment appears to be targeted at precluding applications of the criminal or intentional acts exclusion to preserve coverage for the innocent co-insured in the Scott v. Wawanesa scenario. Companion amendments limit the recovery of the innocent insured to their “proportionate interest in the lost or damaged property” – a concept which is not defined, but which appears to be intended to align with the view of Mr. Justice La Forest in Scott v. Wawanesa. Indeed, academic commentary on Alberta section 541[5], and on B.C. section 35[6] described the innocent insured amendments in those jurisdictions as generally intended to solve the Scott v. Wawanesa problem, and legislate the minority position of La Forest J.
But does the innocent insured amendment go further?
The Innocent Landlord?
In two recently reported decisions, landlords have argued that the innocent insured amendment saved their coverage where loss or damage was caused by conduct of their residential tenants, which could be characterized as intentional or criminal.
In the 2019 Alberta decision of Lafferty v. Co-Operators[7], a residential landlord argued that the innocent insured amendment meant that the insurer could not rely on an illegal drug operations exclusion to exclude their claim in context where their tenant damaged a rental property through an illegal cannabis grow-op. Unfortunately for the landlord, Alberta’s innocent insured amendment was not in force at the time of the loss. In obiter, the court noted that if the amendment had been in force at the time of the loss, then it “might” have prevented the insurer from relying on the exclusion, but the question was not decided.
The same question arose in 2020 Ontario decision of Justice Pinto in Lin v. Aviva[8]. There, a residential tenant caused a fire while trying to extract marijuana resin. The landlords’ claim was denied under a Marijuana exclusion, which the landlords argued was inoperative against them by virtue of the innocent insured amendment in Ontario s. 129.1.
As in Lafferty, Ontario’s innocent insured amendment was not in force at the time of the loss, and the court upheld the Marijuana exclusion. However, Justice Pinto held that even if the amendment had been in force, the Marijuana exclusion would still apply to the landlord’s claim, reasoning that the Marijuana exclusion excludes loss from certain uses of the property regardless of conduct, while the innocent insured amendment focuses on the conduct of the person causing the loss.
Justice Pinto also noted that the insured’s argument would render unenforceable other common exclusions, such as an exclusion for loss caused by terrorism (unless the insureds were themselves the terrorists who damaged their own property). Justice Pinto agreed that broadly applying the innocent insured amendment as requested by the landlord/insured would “radically alter” the balance between the insurer’s need to maintain financial viability and the reasonable expectations of the insureds. However, the weight of this opinion is arguably reduced given that Ontario’s innocent insured amendment was not actually in force at the time of the loss and was not to be applied retrospectively.
So as to a Marijuana/drug operation-type exclusion, Lafferty suggests the innocent insured amendment “might” save an innocent landlord’s claim, while Lin suggests otherwise.
Next, consider a similar scenario but where a landlord’s claim is denied not on the basis of an “exclusion” per se, but based on the scope of coverage.
A rental property might be insured under a specified peril policy covering the perils of fire and vandalism or malicious acts where the scope of the vandalism/malicious act peril is defined to not include damage caused while the property is vacant, or caused by a tenant. In a 1990 B.C. decision called Chung v. Les Garrison[9], the court applied a “proximate cause” analysis in the context of an intentional fire set by a tenant. The fire was preceded by the tenant’s act of vandalism or malice (throwing the incendiary device into the rental property which caused the fire), and there was no coverage for the landlord because vandalism/malicious act by a tenant was not included in the peril of vandalism or malicious acts. Arguably, in such circumstances there is no coverage because of the scope of the coverage clause, and not because of an “exclusion”, per se.
Would the same result occur today in light of the innocent insured amendment? Is a description of the peril of vandalism as not including vandalism by a tenant a “term or condition excluding coverage” such that the innocent insured amendment precludes the insurer from denying the landlord’s claim? That argument has been raised in Manitoba by a landlord, and a decision is presently under reserve.
Conclusion
Until a definitive answer is given, insurers should be on notice that such arguments are being made and that the scope of the innocent insured amendment may turn out to be broader than some might have expected. A broad interpretation of the innocent insured amendment could result in loss or damage by terrorist act, riot, or vandalism of a tenant (among other things) being covered whether such losses are captured by an “exclusion”, or whether such causes are defined out of a specified peril in the first place. On the other hand, the innocent insured amendment might be interpreted as only limiting the application of the intentional/criminal acts exclusion to preserve the claim of an innocent co-insured in context where that particular exclusion would otherwise apply.
We hope these questions will be resolved sooner than later.
[1] [2003] 1 S.C.R. 433
[2] [2003] 1 S.C.R. 445
[3] [1989] 1 S.C.R. 1445
[4] 2017 ONSC 2262
[5] See: Alberta’s Insurance Amendment Act: Meaningful Change or a Long Arrow with a Short Bow?”, (2012) 50:1 Alta L Rev 171 – 186, by Barbara Billingsley
[6] See: “Personal Responsibility for Intentional Conduct: Protecting the Interest of Innocent Co-Insureds Under Insurance Contracts”, (2013), 50 Alta L. Rev 615, by Elizabeth Adjin-Tettey
[7] 2019 ABQB 515
[8] 2020 ONSC 7137
[9] 49 C.C.L.I. 127 (BCSC)