Regarding insurance matters, several time limits govern relationships between parties. For example, following a loss, the insured party has an obligation to notify their insurer as soon as they become aware of it.
In light of the current circumstances, even though most Canadian provinces are starting to resume their regular activities, it’s easy to imagine situations where insureds might not have notified their insurer of a loss in a timely fashion, either because certain businesses were closed for an extended period of time or other delays caused by Covid-19.
What rights does the insurer have in such cases? In what circumstances are insurers justified in denying coverage as a result of extended periods between the date of the loss and the reception of the notice of claim?
In an effort to answer these questions, we will review the applicable principles surrounding a notice of loss, in addition to outlining a few landmark decisions in this area.
Principles Surrounding a Notice of Loss
In Quebec, the Civil Code of Quebec (“C.C.Q.”) states the following as far as notifying an insurer of a loss:
2470. The insured shall notify the insurer of any loss which may fall under the coverage, as soon as he becomes aware of it. Any interested person may give such notice.
An insurer who has not been so notified, and thereby suffers injury, may set up against the insured any clause of the policy providing for forfeiture of the right to indemnify in such a case.
Article 2470 C.C.Q. is located in the division about damage insurance, more specifically in connection with provisions common to property insurance and liability insurance, and therefore applies to both types of insurance contracts.
The second paragraph of Article 2470 C.C.Q. states that an insurer may only invoke the forfeiture of the right to indemnify if the policy contains a clause to this effect. The insurer must also be able to prove that it suffered prejudice due to the insured’s failure to notify them in a timely fashion.
In accordance with Article 2803 C.C.Q., the burden of proving such prejudice is borne by the insurer[1]. Should the insurer’s proof be insufficient, the court will not recognize the insured’s forfeiture of the right to indemnify.
The Objective of Article 2470 C.C.Q.
In Marcoux v. Halifax Fire Insurance Co.[2], the Supreme Court of Canada stated that the notice of loss had been made in an effort to enable the insurer to start an investigation around the same time the loss had occurred. Doing so would allow them to shed light on the nature of the damages and the reason for the loss, as they retraced their steps and met with witnesses to get their version of the facts, etc. The notice of loss would also give the insurer a chance to be in control of the facts without being at the mercy of the insured, and take the steps necessary to safeguard its rights along with the rights of the insured party.
It is also important to note that the obligations of the insurer can be enacted following the reception of a notice of loss, that is to say, the obligation to defend and/or indemnify, since these are key factors when it comes to determining whether or not the insurer suffered prejudice.
The Prejudice Suffered by the Insurer
The insured’s obligation to notify the insurer of a loss arises as soon as the insured party is made aware of the damaging event. However, the fact that an extended period of time has elapsed prior to notifying the insurer does not inherently constitute prejudice to the latter[3].
In fact, in Chabot v. Groupe Ledor Inc., mutuelle d’assurances[4], more than two and a half years went by between the loss and the insured’s statement to the insurer. However, the Court of Quebec found that even though the insured’s notice was submitted late, the insurer did not suffer any prejudice. When it comes to indemnifying its insured party, the insurer’s situation would not have been any different whether they had been informed of the loss as soon as it occurred or nearly three years later. The decision rendered by the Court of Quebec in St-Cyr v. Gosselin[5] draws similar conclusions. Although the notice of loss was made late, the court found that the insurer had not suffered any prejudice and could therefore not claim that the insured party had forfeited its right to be indemnified.
And yet, certain judgments provide good explanations regarding factors that might be thought of as prejudicial to the insurer. For instance, in Rosenstein v. Guarantee Company of North America[6], immediately after reaching a settlement out of court in connection with a claim where a teacher was being sued by a school board, the plaintiffs found themselves in breach of the publication ban included in this agreement. The teacher then sued the plaintiffs due to comments made to the media. On July 30, 2010, a judgment was rendered against the plaintiffs, who didn’t notify their insurer until after their application to appeal with the Supreme Court was dismissed. Following the insurer’s notice of dismissal, the plaintiffs instituted a claim against Guarantee Company of North America. The Superior Court found that the notice of loss provided by the plaintiffs had indeed been made late, having been issued more than three years after the teacher sued them. This timeframe caused significant prejudice to the insurer by preventing it from establishing appropriate reserves, carrying out an investigation, hiring a lawyer to implement a strategy, and from conducting a counter-assessment. The insurer’s means of defense, based on a late notice of loss, was therefore allowed.
The decision rendered in Axa Boréal Assurances Inc. v. Université Laval[7] is another example of a situation where the prejudice suffered by the insurer led to the forfeiture of the right to indemnify. In this case, a student instituted a claim against Université Laval, alleging that he had undergone moral prejudice following an academic disagreement. Université Laval did not notify its insurer until after the action was dismissed, claiming lawyers’ fees and honorariums. The insurer dismissed the claim and invoked that the late notice of loss had caused it prejudice. For its part, the insured stated that by having won its case in connection with the student’s claim, the insurer had not suffered any prejudice. The Court of Appeal highlighted that the insured’s approach was reductive. The four-year timeframe prior to informing the insurer had effectively caused it prejudice because it had been deprived of exercising its rights associated with the obligation to defend, namely, that the insurer was not able to choose its lawyers or determine the orientation of the defense, and had been deprived of the opportunity to settle this case.
As such, under Article 2470 of the C.C.Q., the mere passing of time is not considered prejudicial in and of itself. However, being unable to assess the damages or the difficulties related to the investigation or determine the reason for the loss, the inability to examine the property or physical locations, the impossibility of hiring lawyers or loss experts, and not having the opportunity to settle the case[8] may constitute sufficient prejudice.
Food for Thought
In conclusion, the insurer must promptly draw attention to the belated nature of the claim. As underscored in Bédard v. Royer[9], the insurer cannot let the insured believe that it did not suffer any prejudice by receiving a late notice of loss, only to later raise the forfeiture of the right to indemnify under Article 2470, paragraph 2 C.C.Q.
As mentioned earlier, in light of the current circumstances, it will be interesting to see how the courts will handle late notices of loss and prejudice suffered by the insurer. Will they take the long-term closures of certain businesses into account when evaluating such timeframes? Would insurers have had access to their usual resources to evaluate the loss claimed by the insured party? How will a second wave of Covid-19 impact the notion of timeframes and prejudice under Article 2470 C.C.Q.?
Without answers to these questions, it’s not unreasonable to think that the current situation could have an impact on decisions related to Article 2470 C.C.Q., not to mention similar concepts throughout Canada.
[1] Soprema Inc. v. Gerling Global Cie d’assurances générales, [2004] J.Q. no 4538; RCM Modulaire Inc. v. Royal & Sun Alliance du Canada, société d’assurances, 2017 QCCS 1850.
[2] Marcoux v. Halifax Fire Insurance Co., [1948] R.C.S. 278.
[3] Bédard v. Royer, 2003 CanLII 74933 (QCCA) ; RCM Modulaire Inc. v. Royal & Sun Alliance du Canada, société d’assurances, 2017 QCCS 1850.
[4] Chabot v. Groupe Ledor Inc., mutuelle d’assurances, 2011 QCCQ 7697.
[5] St-Cyr v. Gosselin, 2011 QCCQ 16076.
[6] Rosenstein v. Guarantee Company of North America, 2015 QCCS 5672.
[7] Axa Boréal Assurances Inc. v. Université Laval, 2003 CanLII 40224 (QCCA).
[8] RCM Modulaire Inc. v. Royal & Sun Alliance du Canada, société d’assurances, 2017 QCCS 1850.
[9] Bédard v. Royer, already cited in footnote 3.