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THE TRUTH, THE WHOLE TRUTH AND NOTHING BUT THE TRUTH: Misrepresentation, Non-disclosure and the Insurer's Duty to Inquire

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THE TRUTH, THE WHOLE TRUTH

AND NOTHING BUT THE TRUTH:

Misrepresentation, Non-disclosure

and the Insurer's Duty to Inquire

by

Nigel P. Kent Jonathan L. Hodes*

Clark Wilson LLP Clark Wilson LLP

tel. 604.643.3135 tel. 604.643.3168

npk@cwilson.com jlh@cwilson.com

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TABLE OF CONTENTS

I. INTRODUCTION ...1

II. THE DOCTRINE OF UBERRIMA FIDES ...1

III. INSURED'S DUTY TO DISCLOSE...2

A. Has there been a misrepresentation or an omission? ...2

1. Innocent Misrepresentation or Non-Disclosure ...2

2. Statutory Conditions and Fraudulent Non-Disclosure ...3

3. Establishing Fraudulent Non-Disclosure ...3

4. Facts Versus Opinion...5

5. Knowledge of a Corporate Insured ...5

6. Representation True When Made ...5

B. Was the Misrepresentation or Omission Material?...6

1. Insurance Act: Materiality ...6

2. The "Reasonable Insurer" Test ...6

3. The "Decisive Influence" Test ...7

4. Proving Materiality...8

C. Was the Insurer Induced to Enter Into the Contract in Reliance Upon the Misrepresentation or Non-Disclosure? ...9

IV. INSURER'S DUTY TO INQUIRE ...10

A. Facts the Underwriter Knows About or Has Taken Responsibility for Determining ...10

B. Facts Which the Underwriter Ought to Know About ...12

C. Facts Which the Underwriter has Waived The Right to be Informed About...14

V. INSURER'S OPTIONS UPON DISCOVERY OF MISREPRESENTATION ...15

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THE TRUTH, THE WHOLE TRUTH

AND NOTHING BUT THE TRUTH:

Misrepresentation, Non-disclosure and the Insurer's Duty to Inquire

I. INTRODUCTION

This paper outlines the law of misrepresentation and non-disclosure in the context of property and casualty insurance and attempts to examine the balance set by the courts between the respective duties of the insured to disclose and of the insurer to inquire. Some practical suggestions will be given with respect to the successful defence of claims involving breaches of the duty to disclose as well as suggestions with respect to avoiding allegations that the insurer has failed in its duty to inquire.

II. THE DOCTRINE OF UBERRIMA FIDES

It has been well established since the 1766 decision of Lord Mansfield in the case of Carter v.

Boehm that contracts of insurance are uberrima fides, contracts of utmost good faith. The

concept of uberrima fides imposes upon both the insured and the insurer a duty to act with the utmost good faith throughout the application process leading to the formation of the contract of insurance. The courts have held that the concept applies only to the formation of the contract and not to the later process of making a claim on a policy after a loss. It should be noted, however, that the concept would likely apply to those circumstances where the insured is required, by the terms of the policy, to provide continued information relevant to the risk as time passes.

The Supreme Court of Canada enunciated the rationale behind requiring such a high level of disclosure by the insured in the case of Canadian Indemnity Company v. Canadian

Johns-Manville Company Ltd., [1990] 2 SCR 549 as follows:

"The taking of an insurance risk is made very difficult if the insurer cannot rely on the full and fair disclosure of the insured regarding facts material to the risk. Without such information, the insurer will be unable properly to decide whether to accept the risk and, if so, at what rate to set the premium. It would be unfair to require the insurer to take on the risk without all the relevant facts."

The preceding portion of the judgment deals solely with the insured's duty to disclose. The outer limits of this duty are further defined by reference to a corresponding duty on the part of the insurer to be informed or to inquire. The importance of this corresponding duty is described as follows:

"Likewise, it must be said that the consequences of the annulment of an insurance contract are very serious for the insured. The insured has almost certainly relied on the validity of the contract

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and cannot at a later date acquire coverage for a risk which is now perhaps realised. Accordingly, it is in the interests of stability of such contracts that the insured be able to rely on the diligence and professionalism of the insurer so as to avoid having the insurance contract annulled on the basis of facts which were not disclosed but which should have been notorious to the insurer had it acquired the level of knowledge of a reasonably competent underwriter."

The insured, then, must disclose all material facts to the insurer in order that the insurer may accurately judge the risk being undertaken and fix the premium accordingly, and if the insured fails in the duty to disclose, then the insurer will have the right to void the policy. However, there are certain facts which, though material, the insured need not disclose because they are facts about which the insurer has a duty to inquire.

III. INSURED'S DUTY TO DISCLOSE

The application process is the most critical stage in forming a contract of insurance. There is a heavy burden on those seeking insurance coverage to make full and complete disclosure of all relevant information when applying for an insurance policy, both at inception and at the renewal stage. However, the traditional rule that ambiguities in contract will be construed against the insurer applies equally to the application, and the burden of proving that the insured has breached its duty to disclose is placed upon the insurer. In order to satisfy this onus, the insurer must establish that:

(a) there has been a misrepresentation or an instance of non-disclosure; (b) the misrepresentation or non-disclosure was material; and

(c) the insurer was induced to enter into the contract in reliance upon the misrepresentation or non-disclosure.

See, for example, the recent case of Wells v. Canadian Northern Shield Insurance Co., 2007 BCSC 1844, which provides a useful summary of the law in this area.

Treatment of misrepresentation in the United States can be more favourable to the insured, as U.S. law requires a fraudulent intention in order to void a policy ab initio. Therefore, choice of law of an insurance contract may become critical where there are concerns about misrepresentation.

A. Has there been a misrepresentation or an omission? 1. Innocent Misrepresentation or Non-Disclosure

A misrepresentation is a positive assertion of fact that is erroneous or incorrect, whereas non-disclosure refers to a failure to disclose or concealment of a fact. A partial answer can in certain circumstances amount to a misrepresentation.

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The misrepresentation or omission need not be intentional since whether or not the insured's intention was to mislead, the effect is the same, that is to change the nature of the risk. As set out in the judgment of Lord Mansfield in Carter v. Boehm:

"The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstances in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risque, as if it did not exist.

The keeping back [of] such circumstances is a fraud, and, therefore, the policy is void. Although this suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived, and the policy is void; because the risque run is really different from the risque understood and intended to be run, at the time of the agreement."

As a result, even an innocently made misrepresentation or omission will entitle the insurer to void the policy, provided, of course, that the misrepresentation is material.

2. Statutory Conditions and Fraudulent Non-Disclosure

The statutory conditions in provincial insurance legislation introduced an important distinction between misrepresentations and omissions many years ago in the context of fire insurance. The statutory conditions provide that while any material misrepresentation will entitle the insurer to void the policy, only fraudulent omissions will entitle the insurer to the same relief. Section 126 of the British Columbia Insurance Act provides the following statutory condition:

Misrepresentation

1. If any person applying for insurance falsely describes the property to the prejudice of the insurer, or misrepresents or fraudulently omits to communicate any circumstance which is material to be made known to the insurer in order to enable it to judge of the risk to be undertaken, the contract is void as to any property in relation to which the misrepresentation or omission is material.

It is important to note, however, that these statutory conditions are only automatically incorporated into fire policies which, in today’s insurance industry, are extremely rare. In KP

Pacific Holdings Ltd. v. Guardian Insurance Co. of Canada, 2003 SCC 25 and Churchland v. Gore Mutual Insurance Co., 2003 SCC 26, the Supreme Court of Canada held that none of the

fire conditions apply to homeowners insurance or other multi-peril policies, unless they are specifically incorporated by reference in the terms of the policy. Where the conditions are specifically incorporated by reference, it will be necessary for an insurer to prove that an omission was both material and fraudulent, whereas a misrepresentation need only be material.

3. Establishing Fraudulent Non-Disclosure

Establishing fraud is a notoriously difficult enterprise. As stated by Lord Esher, M.R. in Le

Lievre and Dennes v. Gould, [1893] 1 Q.B. 491, "A charge of fraud is such a terrible thing to

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wicked mind." In order to establish that an omission was fraudulent, the insurer must prove deliberate concealment of circumstances with the intention of deceiving. It has been held that it is sufficient if the insurer proves that the non-disclosure by the insured was made knowingly or recklessly.

The courts have traditionally held that an omission will only be found to be fraudulent where the insured knew that the fact concealed was material. In the Ontario decision in Scrivanos v. IMG

Insurance (1987), 25 C.C.L.I. 286 (Ont. S.C.), for example, it was held that where the insured

did not know that a fact was material, he could not be held to have been fraudulent in failing to disclose it. The Ontario Supreme Court in Scrivanos relied upon an earlier decision of the Ontario High Court in Chenier v. Madill [1974] I.L.R. 1-585, where Galligan J. held that:

"Considering then the words 'fraudulently omits to communicate any circumstance that is material to be made known to the insurer in order to enable it to judge of the risk to be undertaken' contained in stat. con. 1, I am of the view that, in the absence of knowledge of the materiality to the insurer of the circumstances, there can be no fraud in the omission to communicate them. It is my opinion therefore, that unless I can come to the conclusion on the balance of probabilities that Mrs. Chenier knew that the circumstances she omitted to communicate to the insurer were material to it to judge of the risk to be undertaken, I cannot find that such omissions were fraudulent."

The insurer will, then, be required to show not only that the fact concealed was material but that the insured knew that it was material. It should be remembered, that where the statutory conditions are not incorporated into the policy, the insured must disclose all material facts and failure to do so will void the policy whether the insured knew the fact was material or not.

In recent years, the courts have considered whether the state of mind of the insured must be evaluated based on the insured’s honest, subjective belief or rather, what a reasonable person in the applicant’s position would have concluded.

In W.H. Stuart Mutuals v. London Guarantee, [2005] ILR I-4367 (Ont. CA), the Ontario Court of Appeal held that the test of the insured’s awareness is not strictly a subjective one and there may be an objective element to establishing the insured’s awareness of the risk. In that case, the insured was covered for employee theft by a fidelity insurance bond. In the original application, the insured represented that all cheques were signed by the principals of the company, which was true at the time. At renewal, the control systems had been changed to be fully automated without the cheques being manually signed, but the insured repeated the information that had been given originally, which had ceased to be true. Subsequently the insured was the victim of a theft by a back office employee.

The Ontario Court of Appeal stated that upon renewal, the insured had a duty to disclose the change, as it materially affected the risk. The lack of controls, combined with the dishonest employee’s access to computerized cheque generating system facilitated fraud, and the insured should have disclosed the change even in the absence of specific questions from the insurer. The Court of Appeal did not disagree with the trial judge’s view that the duty to disclose must relate to facts or risks of which the insured was aware, but stated that it could not turn the test into a completely subjective one.

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4. Facts Versus Opinion

The insured need only disclose facts within their personal knowledge. As a result, opinions alone will not usually be considered to be "misrepresentations" and will not form the basis for voiding a policy of insurance. Consequently, estimates of the value of property insured will not generally result in voiding of the policy, absent legal fraud. There is no duty on the applicant to conduct a special investigation, unless the application requires it. For example, in Fudge v. Charter

Marine Insurance Co., [1992] N.J. No. 69 (NFSC), the insured valued his vessel at

approximately twice its market value on the application for insurance. The insured was unable to substantiate the inflated value and it was held that the overvaluation constituted a material misrepresentation which vitiated the policy.

5. Knowledge of a Corporate Insured

If an insured is a “natural” person, the question of whether a material circumstance is known is usually readily determinable as a question of fact. The attribution or imputation of knowledge to a corporation is more problematic. The Canadian jurisprudence on this topic is not particularly well developed, but there is an established exception to the general agency law principle of attribution, whereby the knowledge of an agent will not be imputed to the principal where the agent is perpetrating a fraud on the principal.

The issue of corporate knowledge was addressed in the Ontario Court of Appeal case of J.J.

Barnicke v. Commercial Union, [2000] O.J. No.1059 (CA), in which a real estate firm’s

accountant had defrauded his company for ten years. The accountant also happened to be the person who applied for fidelity insurance for the corporate insured. The trial judge held that because the dishonest employee was the sole representative of the insured in charge of the insurance transaction and the fraud was not intended against the agent’s principal but rather against the insurer, the fraud did not fall within the exception to the general rule of agency law. In the alternative, the Court found that because the fraud was easily detectable, the company had constructive knowledge of the employee’s actions because the facts were such that it ought, in the ordinary course of its business, to have known. Supporting this judgment was the fact that the chairman/chief shareholder admitted the fraud was there to be seen “just by turning the page” and a simple review of payroll records and bank statements would have revealed fraud.

6. Representation True When Made

Where a representation of fact is true at the time it is made but, due to a change in circumstances, ceases to be true sometime thereafter, it will not be considered to be a misrepresentation. The insured's representation need only be correct at the time it is made. For example, in Laurention

Insurance Co. v. Davidson [1932] S.C.R. 491, the insured stated on their application for

insurance that their house would be occupied all year round. This was true for the first year that the insurance policy was in force. However, the insured subsequently moved to another home and, shortly thereafter, their former residence was destroyed in a fire. The Supreme Court of Canada held that the insurer's defence that there had been a material misrepresentation failed because the representation was true at the time it had been made. In order to avoid this type of

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difficulty, insurers now commonly include conditions in policies requiring the insured to notify the insurer promptly of any change in risk.

B. Was the Misrepresentation or Omission Material? 1. Insurance Act: Materiality

As noted above, provincial insurance legislation requires that a misrepresentation or non-disclosure in an application be material as a necessary precondition to avoiding the policy. For example, BC’s Insurance Act contains the following provision:

Misrepresentation and nondisclosure

13 (1) A contract is not rendered void or voidable by reason of any misrepresentation, or any

failure to disclose on the part of the insured in the application or proposal for the insurance or otherwise, unless the misrepresentation or failure to disclose is material to the contract.

(2) The question of materiality is one of fact.

This section, and its equivalents in other provinces, codifies the common law rule that whether or not a misrepresentation or non-disclosure is material is always a question of fact. In other words, the court will not lay down general rules with respect to what types of facts are going to be found to be material. It is not always the case that, for example, the occupation of a house by a renter rather than its owner will be material. The insured must, however, disclose special facts which render the risk of loss unusually greater, so-called “unusual risks”. In each case, the court must look to all the facts, the parties and the policies in order to determine whether any particular representation was material.

2. The "Reasonable Insurer" Test

An early formulation of the test for materiality was set out in Mutual Life Insurance Co. of New

York v. Ontario Metal Products Co. Ltd., [1924] SCR 35. In that case, it was held that the test for

whether a fact was material or not was whether the fact would have influenced a "reasonable insurer" to decline the risk or to stipulate for a higher premium. The insured's point of view on whether a fact is material is totally irrelevant to whether or not a court will find the fact to be material.

More recently, the British Columbia Court of Appeal further refined the reasonable insurer test in Kehoe v. British Columbia Insurance Co., [1993] BCJ No. 1172 (CA). In that case, Mr. Kehoe claimed on a homeowners policy with BCIC as a result of an alleged theft from his home. BCIC denied coverage on the ground of material non-disclosure of claims made by Mr. Kehoe against his previous insurer, Guardian. In Mr. Kehoe's ten years of coverage with Guardian he had made five claims, four within the last five years of coverage, and three of which were for thefts. The neighbourhood in which he lived was recognized by police to be a high crime neighbourhood. Mr. Kehoe moved to a new home in a different neighbourhood and Guardian refused to insure him on the same terms as previously. Mr. Kehoe then applied to BCIC. He answered "none" to

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the question "Give full details of all loses within the past five years which would have been covered by this policy" on his application. Mr. Kehoe also spoke with the BCIC agent who asked him whether he had any previous claims. Mr. Kehoe replied "Not here. I've only been here a month and a half".

The Court found that Mr. Kehoe's answer to the agent was a half-truth and that he had misrepresented the true state of affairs. The trial judge went on to consider whether the misrepresentation was material. He queried whether the claims history in a high crime neighbourhood had any relevance to the risk of theft in a different home in a different location and noted that no evidence had been led to suggest that the new home was in an area with a comparably high rate of crime. The only evidence presented by the insurer was to the effect that BCIC would not have insured Mr. Kehoe or would only have insured him on different terms had they been aware of the true claims history. The trial judge held that "an insurer must do more than simply state what its practices are in situations of this kind. It must offer evidence that these practices have a reasonable basis". In other words, the trial judge thought the insurer should be able to tell the court why they thought that a previous claims history would influence the insurer is assessing the risk, rather than simply asserting the fact that such a history did influence the assessment of the risk.

The Court of Appeal disagreed with the trial judge on the last point. They held that it is sufficient for the insurer to show that the underwriting practice followed by BCIC was standard in the insurance industry generally, that is, that BCIC and other insurers all took the previous loss history into account when assessing the risk. The reason why they took this factor into account was irrelevant. The Court of Appeal found that BCIC, Guardian and other insurers all took the applicant's claim history into account in assessing the risk, and this was sufficient to discharge the burden. It was not necessary to show that these insurers had a reasonable basis for deciding that the claims history was material.

In summary, the "reasonable insurer" test places the burden of proof on the insurer to show that its own practice in considering that a misrepresentation is material to the risk is in line with the practice of a number of other insurers. There is no need to show that that practice has a reasonable basis.

3. The "Decisive Influence" Test

A question has arisen in the English jurisprudence with respect to the reasonable insurer test. As has been seen, that test provides that a fact is material if it influenced the judgment of a prudent insurer in deciding whether to insure the risk and at what premium. The question that has been raised is what is meant by "influenced"? It might mean that a fact is material if its disclosure would definitely have changed the reasonable underwriter's mind about insuring the risk or the rate at which the premium was fixed. This is known as the "decisive influence" test. On the other hand, "influence" might simply mean that a fact is material if it would have been taken into account by the underwriter when assessing the risk.

In Pan Atlantic Insurance Co. Ltd. v. Pine Top Insurance Co. Ltd. [1994] 3 All ER 581, the decisive influence test was rejected. In that case, it was held that the insurer need only show that

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the reasonable insurer would have taken the undisclosed fact into account in its assessment of the risk in order to establish that that fact was material. There is no requirement to show that the reasonable insurer would have declined the risk or changed the rate of premium had it known of the undisclosed fact.

4. Proving Materiality

As noted, where the insurer is advancing a defence based on misrepresentation or non-disclosure, it will be required to prove that the misrepresentation was material. In order to do this, the insurer should lead evidence to demonstrate that the fact in question is taken into account in the course of its own underwriting procedures as well as the underwriting procedures of other insurers.

Although it is not necessary to prove a reasonable basis for these underwriting practices, it has been suggested by some authors that an insurer's case is greatly strengthened by leading evidence which tends to establish that its underwriting practices have a reasonable basis. Where, for example, the insured is alleged to have made misrepresentations about whether a house was rented or not, the insurer is required to establish that such representations were material. Evidence should be led about the practice in the industry generally to show that a reasonable insurer would take this fact into account in assessing the risk and fixing the premium. Evidence

could also be lead as to the basis for this underwriting practice, that is, evidence to show that

where a house is rented, rather than owner occupied, there is a greater risk of fire and the reasons for this increase in risk. This tactic was adopted by counsel for the insurer in Evans v. State Farm

Fire and Casualty Co. (1993) 15 OR (3d) 86 (Ont. S.C.) which was successful in establishing

materiality, although the insurer lost on other grounds.

Similarly, in Allstate Insurance Co. of Canada v. Wong’s Insurance Services Ltd., (1994), 98 BCLR (2d) 192 (CA) the insured was alleged to have misrepresented the age of the house on the application form. The insurer led evidence to establish that other insurers took the age of the house into account in their underwriting practices. In addition, the insurer lead evidence with respect to why the age of the house was likely to change the assessment of the risk, including a discussion of the prevalence of knob and tube wiring in older houses and the reasons why that type of wiring increases the risk of fire. The insurer was again successful in establishing materiality.

In the case of omissions, a question on the application form will not necessarily lead to a finding that the omitted information was material to the risk. However, an insurer’s failure to include a question can make it difficult to argue that a non-disclosure constituted a material omission. Similarly, an answer to an ambiguous question will not necessarily form the basis for a misrepresentation claim. See, for example, Sagl v. Chubb Insurance Company of Canada, 2009 ONCA 388, where the Ontario Court of Appeal reiterated the principles that 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.

In that case, Chubb purported to rely on its lack of knowledge of certain matters in support of its position that the binder was void due to non-disclosure. The Court noted that Chubb insured

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Sagl’s home and property for a considerable amount and for a considerable period of time without making any inquiries, notwithstanding an incomplete application form obtained only after the binder was issued. The Court held that it runs contrary to the insurer’s good faith obligation to the insured to agree to insure a risk, whether at the binder stage or at the time the policy is issued, when it knows or should know that there is information relevant to the risk that it does not have or inquire into, and then to raise the lack of information as a defence to a claim under the policy.

It should also be borne in mind that, where the application form asks for disclosure of information relevant to a particular time period, such as the loss history over the last three years, for example, the loss history beyond three years will be unlikely to be found to be material.

C. Was the Insurer Induced to Enter Into the Contract in Reliance Upon the Misrepresentation or Non-Disclosure?

The test for materiality enunciated in Pan Atlantic would seem to make it far easier for the insurer to establish materiality and, consequently, to avoid the policy. While this is true to some extent, the decision of the House of Lords in Pan Atlantic also stressed the importance of the final hurdle which must be overcome before the insurer will be entitled to avoid the policy. Even after the insurer has established materiality, it must also show that it was induced to enter into the contract on the basis of the undisclosed or misrepresented material fact. The insurer must show that they, rather than the reasonable insurer, were actually induced to enter into the contract in reliance on the misrepresented or undisclosed fact. If that fact played no part in the insurer's decision to insure the risk or decide the premium, then the insurer is not entitled to avoid the policy.

Nevertheless, where a fact is found to be material, common sense suggests that inducement can almost be presumed As was noted in Pan Atlantic, this will no doubt pose some practical problems for insureds:

"It is an answer to a defence of misrepresentation and non-disclosure that the act or omission complained of had no effect on the decision of the actual underwriter. As a matter of common sense however even where the underwriter is shown to have been careless in other respects the assured will have an uphill task in persuading the court that the withholding or misstatement of circumstances satisfying the test of materiality has made no difference."

The insured is most likely to succeed on such an argument where they can show that the misrepresentation was not known to the insurer until after the coverage was granted. In the Newfoundland Supreme Court decision of Biggin v. British Marine Mutual Insurance Assn. Ltd., [1993] I.L.R. 1-2909 for example, the agent inserted the wrong purchase price on the application for insurance on a vessel. The decision to insure was made by the insurer before the application was received and in the absence of any representations as to the purchase price. In addition, there was no evidence to show that the insurer relied on the application when it was received. As a result, it was held that the insurer had not established that it had relied on the misrepresentation in granting coverage.

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IV. INSURER'S DUTY TO INQUIRE

Even where an insurer can establish that there has been a material misrepresentation or omission, the insured may nevertheless be able to argue successfully that the policy should not be avoided because of a failure on the part of the insurer to inquire. The insurer's duty to inquire was recognized in Lord Mansfield's judgment in Carter v. Boehm, supra, where it was acknowledged that the insured could be innocently silent with respect to certain types of material information:

"There are many matters as to which the insured may be innocently silent - he need not mention what the underwriter knows - scientia utrinque pares contrahentes facit …

The insured need not mention what the underwriter ought to know; what he takes upon himself the knowledge of; or what he waives being informed of."

Since Carter v. Boehm, then, it has been clear that the insured need say nothing about the following:

(a) facts the underwriter knows about or has taken responsibility for determining; (b) facts which the underwriter ought to know about; and

(c) facts which the underwriter has waived the right to be informed about.

A. Facts the Underwriter Knows About or Has Taken Responsibility for Determining

A trilogy of decisions of the Supreme Court of Canada considered the extent of the insurer's duty to inquire. The first case in the trilogy is the decision in Ford v. Dominion of Canada General

Insurance Co., [1991] 1 SCR 36. In that case, Ford claimed for fire losses to his home and its

contents, farm buildings and livestock. The insurer defended on the grounds that Ford had made material misrepresentations or fraudulent omissions by not disclosing earlier insurance losses and policy cancellations as well as a criminal prosecution for an unfounded insurance claim. The insurer was successful in voiding the policy at trial.

The evidence was somewhat vague with respect to what information was actually conveyed by Ford to the insurer's agent. The agent alleged that Ford's representative had telephoned the agent prior to applying for the insurance and had disclosed that Ford had had a prior loss and a prior cancellation. The agent later met with Ford but failed to ask him any questions about his prior

loss history. In fact, Ford had more than one prior loss and one prior cancellation.

The Court of Appeal found that the evidence was susceptible of two interpretations. Ford's representative might simply have been inquiring as to whether the insurer would be prepared to discuss insuring Ford knowing that Ford had some loss history. On this view of the facts, there would have been no suppression of evidence and it would have been up to the agent to inquire, that is, to ask the appropriate questions with respect to loss history when he met with Ford. Alternatively, Ford's representative could have been purporting to give a detailed loss history in order to allow the insurer to make an informed decision with respect to whether or not to issue coverage. If that were the case, then there had clearly been a suppression of evidence and the

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insurer would have been entitled to deny coverage. The Court of Appeal held that the insurer had not established that there had been a failure to disclose since there was no way of knowing which of the above interpretations of the evidence was the correct one.

Philp J.A. wrote a dissenting judgment in the Court of Appeal. He held that it was clear that Ford had been purporting to give a detailed loss history, that he had failed to disclose material information in that respect and that it was not up to the insurer to investigate further to determine

whether there had been any other losses or cancellations.

"A contract of insurance is uberrima fides; utmost good faith must be observed by both parties. It has been said that the relationship between an insurer and an insured is one in which the insurer knows nothing of the risk to be undertaken, and the insured knows everything. From this relationship arises the obligation of the insured to disclose all material facts so that the risk the insurer undertakes will be the risk he intends to undertake."

As a result, Philp J.A. held that the insurer was entitled to void the policy. The Supreme Court of Canada overturned the decision of the Court of Appeal and affirmed the dissenting judgment of Philp J.A.

The BC Supreme Court recently considered the insured’s duty to make further inquiries in Wells

v. Canadian Northern Shield Insurance Co., 2007 BCSC 1844. In that case, the plaintiffs were a

married couple who collected rare and expensive bottles of wine, which they kept in a temperature controlled, architecturally designed wine cellar in their home. The collection numbered over 8,000 bottles, with a value estimated at between $5 and $10 million. In April 2003 the husband spoke with an employee of the defendant insurance broker, saying he was seeking approximately $900,000 replacement coverage for their house and $1.5 million for contents. The broker wrote those figures on the application form. The amounts were unusual in that homeowner policies typically provide contents coverage that is 70 to 80 percent of the building amount. The plaintiff told the broker that he needed $1.5 million contents coverage because he liked to collect things. He told her he had a large wine collection, and showed her pictures, but he did not tell her that the collection was worth $5 million or more. The broker sent a memo to various insurers, including the Defendant Sovereign, seeking an underwriter for the $900,000 building coverage and $1.5 million contents coverage. Among other things she stated in that memo: “He has a large contents limit because he collects rare (and obviously expensive items including antiques).” The broker was able to secure a one-year home insurance policy for the plaintiffs, subscribed equally by Sovereign and Canadian Northern Shield.

In October 2003 a municipal sewer backup caused a flood in the plaintiffs’ home that ruined much of the wine. They attempted to recover some of the loss under the homeowner’s insurance policy. When the insurers refused to cover the loss, the plaintiffs initiated an action against the two insurers and the broker. In its statement of defence, Sovereign plead that it was not liable to indemnify the plaintiffs because the plaintiffs failed to disclose material facts relating to the value of the wine collection. The plaintiffs applied under R. 18A for a declaration that Sovereign was liable to indemnify them for the loss, up to 50 percent of the policy limit.

The Court held that the plaintiffs’ failure to disclose the value of the wine collection did not amount to a material non-disclosure that would entitle Sovereign to void its participation in the

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insurance policy and refuse to indemnify the plaintiffs for their loss. Sovereign insisted on an appraisal for the building, but asked no questions about the total value of the contents, suggesting it was not much concerned on that issue. The reference to collecting rare and expensive items was sufficiently explicit to put Sovereign on notice to seek more information if that was a matter it considered to be material to evaluation of risk. As it did not do so, the Court held that Sovereign’s failure to ask for any more information had to be taken as waiver of any obligation on the plaintiff to specify a value for the wine collection.

B. Facts Which the Underwriter Ought to Know About

Where the facts are not known to the insurer and are misrepresented by the insured, the insurer will be entitled to avoid the policy. In such circumstances, the insurer is not required to inquire further of the insured but is permitted to rely on the information provided by the insured. This remains true unless the misrepresented facts come within the category of facts which "the underwriter ought to know about".

The second case in the trilogy is the Supreme Court of Canada’s decision in Canadian Indemnity

Company v. Canadian Johns-Manville Company Ltd., supra, in which the court specifically

considered the extent of and interaction between the respective duties of the insured to disclose and the insurer to inquire. The insured was a manufacturer of asbestos products and, in 1960, had received a report, the Selikoff Report, which set out the dangers and hazards associated with handling of asbestos. A comprehensive general liability policy was first issued in 1970. During the negotiations leading to the formation of the contract, the manufacturer was asked to complete a questionnaire form which did not contain any questions with respect to the hazards of handling asbestos. The insured also provided the insurer with a copy of its Annual Report for 1969 which made some minor reference to the Selikoff Report. The insurer later learned of the existence of the Selikoff Report and filed an action to have the policy declared null and void on the basis of a failure to disclose material facts. The insured argued that the facts relating to the health risks posed by exposure to asbestos were well known in 1970, at the time the policy was issued and that the insurer ought to have been aware of them.

The insurer was successful at trial; however, the Court of Appeal ruled in favour of the insured as did the Supreme Court of Canada. The Supreme Court agreed with the insurer that the information in the Selikoff Report was material and that the insured failed to disclose it to the insurer. However, in spite of these rulings, the court held that the insured's failure to disclose was excused because the relevant information was publicly available and notorious to the reasonably competent underwriter, such that the insurer should have known the facts which the insured failed to disclose. The insurer was required to meet the standard of the reasonably competent underwriter insuring similar risks in the industry covered by the policy. The court further held that the insured's failure to disclose was innocent but that, even had it been fraudulent, the insured would nevertheless have been excused because of the insurer's failure to comply with its duty to inquire.

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The Canadian Indemnity case stands for the proposition that "facts which the insurer ought to know about" include facts which are publicly available and which would be notorious to the reasonably competent underwriter insuring similar risks in the industry covered by the policy. In Coronation Insurance Co. v. Taku Air Transport Ltd., [1991] 3 SCR 622, the final case in the trilogy, the insured was a small commercial air carrier operating in British Columbia. It first went into business in 1978, at which time Coronation provided its insurance. The insured had three accidents during the first year of the policy, and Coronation refused to renew. Taku then obtained coverage from the British Aviation Insurance Company, but was involved in further accidents between 1979 and 1986, which led to that insurance being terminated. The insured then applied to Coronation a second time, through the same broker as had processed the application in 1978. That broker had a vague recollection of the insured’s name and requested that it disclose its aviation record. The insured did not do this, but instead reported a single accident dating from 1978. Coronation relied on this information and issued a policy. Subsequently, an accident occurred and five people were killed. It should be noted that the regulations governing the aviation industry required commercial air carriers to obtain and file proof of insurance for their passengers before they would be issued a licence.

As the insured provided false and incomplete information in the application process, one might predict that, following the Ford decision, the court would rule in favour of the insurer and hold that there was no duty on the insurer to make further inquiries with respect to the misrepresented information. This was the position taken by Sopinka J. who wrote a dissenting judgment ruling in favour of the insurer. The majority of the Supreme Court of Canada, however, ruled in favour of the insured noting that Coronation had failed to undertake the following inquiries: it did not consult its own records; it did not contact the previous insurer BAIC; and it did not make inquiries at the Canadian Aviation Safety Board as to accidents in which Taku had been involved.

It was held that the information available in the insurer's files and the information available to the public, including the insurer, concerning the insured’s accident record ought to be considered to be information that the insurer was presumed to know. The court held that this was information that would readily become notorious to a reasonably competent underwriter working in the field of aviation such that the underwriters had failed in their duty to inquire, as set out in the Canadian Indemnity case.

The decision in Taku extended the insurer’s duty beyond that set out in Canadian Indemnity, where the insurer was held to have a duty to inform itself generally of the risk associated with insuring a given industry. In Taku, on the other hand, the Supreme Court of Canada did not require the insurer to inform itself generally about the risks associated with insuring commercial aviation, but rather, required the insurer to make specific inquiries concerning the particular insured.

The rationale for extending the insurer's duty to inquire in this case was set out in the judgment of Cory J. as follows;

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"I would think that where the policy of insurance required by statute or regulation is primarily for the benefit of members of the flying public and not just the insured the insurer must take some basic steps to investigate the flying record of the air carrier applying for insurance."

The Supreme Court of Canada clearly extended the law because of its concern with respect to the innocent passengers, and in industries where insurance is a condition of a license, insurers are well advised to explore the publicly available avenues of inquiry.

C. Facts Which the Underwriter has Waived The Right to be Informed About

On occasion, the insurer will have partial knowledge of a fact, the totality of which was not disclosed or was misrepresented. In such circumstances, the question arises as to whether the insurer ought to infer the existence of other facts from those actually disclosed and whether the insurer ought to make further inquiry. It has been argued that the insurer's failure to make further inquiries after partial disclosure amounts to an implied waiver of a more explicit disclosure. This argument was attempted by the insureds in both Canadian Indemnity Company v. Canadian

Johns-Manville Company Ltd., supra and Original Leather Factory Ltd. v. Wellington Insurance Co. et al., [1990] BCJ No. 917 (SC), both times without success.

In the Canadian Indemnity case, the insured had made a passing reference to a report which fully explained the health risks associated with exposure to asbestos. The insured argued that the insurer waived its right to further information by failing to make further inquiries based on this passing reference. While ultimately finding in the insured’s favour, the court rejected the waiver argument, holding that where the insured provides only clues buried within the totality of facts disclosed, the insurer cannot be expected to perceive the clues and make further inquiries.

Similarly in Original Leather, the insured disclosed only one of a number of prior thefts. The insurer had independent knowledge of one theft and was not certain whether that was the theft which had, in fact, been disclosed. The court dismissed the insured's argument that the insurer's partial knowledge should have prompted it to make further inquiries. The court held that an insured can only succeed in such cases where the insurer's conduct induced the insured's failure to disclose.

One instance where an insured may be induced into believing that there is no need to disclose information is where there is a question on the application form which implicitly limits the extent of the disclosure required. In Biggin v. British Marine Mutual Insurance Assn. Ltd., supra, for example, the insured applied for insurance on a vessel. There were two relevant questions on the application form. The first asked for information about losses within the last three years. The second asked for "any other material facts". The insured accurately disclosed the loss history over the previous three years but did not disclose losses prior to that time. The insurer tried to argue that the losses which had occurred prior to that time should have been disclosed in the section requesting information about "any other material facts". The court dismissed this argument, holding that the insured could rightly assume that losses beyond the previous three years were not relevant and that, had the insurer wanted information about earlier losses, it could and should have said so.

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V. INSURER'S OPTIONS UPON DISCOVERY OF MISREPRESENTATION

When an insurer discovers a misrepresentation or non-disclosure, it must respond in one of five different ways. The options available to the insurer include:

(a) Repudiate the contract. This entails treating the contract as being invalid from the beginning. If this option is chosen, the insurer must return the entire premium to the insured and must notify the insured that it is treating the contract as void. (b) Cancel the insurance unilaterally. This means that the policy will be treated as

valid until a certain point in time after which the policy is cancelled. If this option is chosen, the insurer must return the unexpired portion of the premiums and must give proper notice of termination.

(c) Waive the breach, retain the premium and continue coverage as though no misrepresentation had been made.

(d) Raise the premiums whilst maintaining coverage. (e) Cancel the insurance by agreement with the insured.

It is important to remember that the insurer must choose one of the available options and, once it has chosen, cannot change its mind and back away from the chosen course of action. In addition, the election must be made within a reasonable period of time or the insurer may be estopped from relying on its strict legal rights.

The importance of making a clear election as among the available options and then acting on the chosen option is illustrated by the decision in Grant v. The Prudential Assurance Company

Limited [1989] I.L.R. 1-2460. In that case, the insured purchased a policy of automobile

insurance with the insurer effective March 11, 1985, for a period of one year. The policy was renewed for a further period to expire March 11, 1987. The original application was accurate and the insured correctly declared the use of the vehicle as pleasure and transportation to and from work. In September, 1986 the insured changed occupations and began using the vehicle to deliver pizzas. The insured failed to notify the insurer of the change of use as required by the policy. On January 24, 1987, the insured was involved in a motor vehicle accident and only after this took place did he advise the insurer of the change in use. The insurer elected not to pay the claim.

Unfortunately, the insurer did not notify the insured of cancellation, nor did the insurer declare the policy to be void or return the premiums for the unexpired term. In fact, further premiums were collected from the insured's bank account. It was held that the insured's non-disclosure rendered the policy and coverage voidable at the instance of the insurer. It was further held, however, that the insurer's failure to return the premiums for the unexpired term amounted to an affirmation of the contract which had been treated as valid and subsisting. As a result, the insurer was required to pay the claim.

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Where the insurer cancels the policy after learning of a misrepresentation, it should be remembered that the policy will remain in force up to the end of the grace period provided for in the policy or the statutory condition, which grace period will commence to run as of the date of notification of cancellation. This option should only be chosen, then, where the misrepresentation is discovered before a loss has occurred. Once the policy has been cancelled, the procedure for the return of the premium for the unexpired portion of the contract, as set out in the policy or the statutory condition, should be complied with exactly. Where the misrepresentation is discovered only after the loss has taken place, the insurer should exercise the option to repudiate the contract and should promptly notify the insured and return the premiums. Sending a letter to the policyholder declining to renew the policy will imply that the policy is still in force up to that point. The insurer should obtain a non-waiver agreement if there are concerns about disclosure in the application.

VI. CONCLUSION

In recent years, the Courts have balanced the insured's duty of disclosure against a corresponding duty of insurers to inquire as to the nature of the risk. In addition to determining whether there has been a misrepresentation or non-disclosure, judges must also decide whether the misstated or omitted facts were material, and whether they induced the insurer to enter into the contract. Finally, the Courts will also ask whether the insurer conducted itself appropriately after a misrepresentation was discovered, before dismissing a claim under the policy, whether on grounds of fraud or otherwise.

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