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Defences of Misrepresentation and Nondisclosure Angela Emerson and Larry Gilbertson

This publication first appeared in the June 1994 volume of the Canadian Independent Adjuster

Considering the industry-wide concern about the rising incidence of insurance fraud, it is worthwhile to review recent developments which may affect the defences of misrepresentation and omission, both at common law, and under Fire Statutory Condition 1, which is contained in section 148 of the Insurance Act1 of Ontario, and which reads as follows:

148. (1) The conditions set forth in this section shall be deemed to be part of every contract in force in Ontario and shall be printed in English or French in every policy with the heading "Statutory Conditions" or "Conditions légales," as may be appropriate, and no variation or omission of or addition to any statutory condition is binding on the insured."

(2) In this section, "policy" does not include interim receipts or binders.

Statutory Conditions

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

The insurance acts of many other provinces contain the same type of Statutory Condition.

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It will be appreciated that Section 143(1) of the Insurance Act stipulates that Part IV of the Act entitled "Fire Insurance" which contains the Statutory Conditions restricts the application of that part of the Act as follows:

143. (1) This Part applies to insurance against loss of or damage to property arising from the peril of fire in any contract made in Ontario except,

(a) insurance falling within the classes of aircraft, automobile, boiler and machinery, inland transportation, marine, plate glass, sprinkler leakage and theft insurance;

(b) where the subject matter of the insurance is rents, charges or loss of profits;

(c) where the peril of fire is an incidental peril to the coverage provided; or

(d) where the subject matter of the insurance is property that is insured by an insurer or group of insurers primarily as a nuclear risk under a policy covering against loss of or damage to the property resulting from nuclear reaction or nuclear radiation and from other perils."

Nevertheless, if the Statutory Conditions are physically incorporated and incorporated clearly by reference into a policy of insurance falling into such other classes, a court may well hold that the Statutory Conditions, including Statutory Condition 1 entitled "Misrepresentation," do constitute a part of the insurance contract and are binding on the assured and the insurer, not by virtue of the Insurance Act, but by virtue of clear reference and physical incorporation within the contract itself. Generally speaking, a court will accept this conclusion if the incorporating provision within the policy is clear and unambiguous. In the Ontario Court of Appeal case of Sever v. Economical Mutual Insurance Co.,2 the following incorporating provision was found inadequate to support the insurer's contention that the Statutory Conditions should apply:

“Conditions Applicable to the Various Coverages Provided Herein

The Conditions herein set forth under the title Statutory Conditions apply with respect to insurance provided under Forms specifically covering Fire and Extended Coverage Perils.

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Statutory Conditions 1, 3, 4, 5, and 15 only apply to Forms specifically covering Liability for Bodily Injury or Property Damage, Medical Payments and Residence Voluntary Compensation.

All of the Conditions herein set forth under the titles Statutory Conditions and Additional Conditions apply with respect to insurance provided Under All Other Forms except as they may be modified or supplemented by the Forms or Endorsements attached."

The Ontario Court of Appeal concluded that the reference to "All Other Forms" either did not extend to all of the insured perils under the policy, or at the very least was ambiguous, meaning the above-cited provision would be construed contra proferentem, i.e. it would be interpreted against the insurer as the drafter of the contract.

The following incorporating provisions, on the other hand, have been held to be clear and unambiguous:

"Conditions Applicable to the Various Coverages Provided Herein In respect of your Personal Liability Protection (including Residence Voluntary Compensation when added) - Statutory Conditions 1, 3, 4, 5 and 15 only, apply. Otherwise all of the Conditions set forth under the titles Statutory Conditions and Additional Conditions apply with respect to all of the perils insured by this policy except as these Conditions may be modified or supplemented by the Forms or Endorsements attached."3 and "Conditions - The Statutory Conditions apply to the peril of fire and as modified or supplemented by riders or endorsements attached apply as policy conditions to all other perils insured by this policy."4

It will be noted that the above cited incorporating provisions both make reference to insured "perils" as that to which the Statutory Conditions incorporated as contractual conditions will apply. Interestingly, the British Columbia Court of Appeal in the case of Dressew Supply Ltd. v. Laurentian Pacific Insurance Co. et al.; Mindell v. Canadian Northern Shield Insurance Co.,5 felt the Ontario Court of Appeal case of Sever was wrongly decided, and that the insurer's incorporating provision should have been found clear and unambiguous.

3 Freesman v. Royal Insurance Company of Canada (1986), 29 D.L.R. (4th) 621 at 628 (H.C.J.),

aff'd (1988), 63 O.R. (2d) 224(C.A.).

4 Dressew Supply Ltd. v. Laurentian Pacific Insurance Co. et al., Mindell v. Canadian Northern Shield Insurance Co. (19 91), 77 D.L.R. (4th) 317 (B.C.C.A.).

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While the cases referred to so far deal with efforts by insurers to incorporate Statutory Condition 1 and other statutory conditions contractually, it must be appreciated there is a certain disadvantage to doing so. The reason is that omissions must be fraudulent to allow the insurer to void the contract under Statutory Condition 1, whereas at common law omissions need not be fraudulent to justify the insurer voiding the contract.6

Under Statutory Condition 1, it will be noted that while omissions must be fraudulent in order to provide the insurer with the option of rendering the policy void, misrepresentations can be innocent or fraudulent. One of the only requirements that both omissions and misrepresentations share, with respect to Statutory Condition 1, is that they be material, meaning that if the true facts had been known, they would have led a reasonable underwriter to decline coverage, or charge a higher premium.7

In McLean v. The Paul Revere Life Insurance Company,8 Madam Justice Prowse stated that with respect to the requirement of materiality for misrepresentations and omissions, same must be determined objectively, and need not be related to the loss or damage which later becomes the subject of a claim, but rather need only be material with respect to an assessment of the risk at the time of the formation of the contract. This means the subjective intentions or motives of the assured in either omitting or misrepresenting certain facts, are of no significance with respect to determining the materiality of the misrepresentations or omissions.

In McLean, the assured, when applying for accident and sickness insurance, omitted to inform the agent of the insurance company about her prior diagnosis and treatment for a mental disorder. She said she did not disclose her prior medical history because she did not believe same was relevant in any way to her application for insurance. She argued that her attendances before psychiatrists and psychologists took place in the context of a criminal proceeding in which the psychiatrists and psychologists were retained simply to provide her with a defence to criminal charges. In other words, she felt her past medical history was irrelevant to her application for insurance, as she said she never did suffer from any form of mental or nervous disorder or illness.

6 Maryland Casualty Co. v. Blue Sparrow Industries Ltd., [1980] I.L.R.1-1299 (Ont.H.C.).

7 See Chenier v. Madill, 2 O.R. (2d) 361, 43 D.L.R. (3d) 28, [1974] I.L.R. 1-585 (H.C.J.); Goldshlager v. Royal Insurance Company Ltd. (197 7),19 O.R. (2d)166 (Ont. S.C.). 8

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Madam Justice Prowse held that the assured's disagreement with the diagnosis did not change the fact the diagnosis was made. She therefore concluded that since questions pertaining to past diagnoses and treatment were put to the assured, and because the assured was extremely sophisticated, it must have crossed her mind that her past medical contacts were in fact caught by the questions in the application forms, and would therefore constitute information used by the insurer to address issues pertaining to coverage and premium. On this ground, Madam Justice Prowse ruled the assured's omissions were in fact fraudulent.

Madam Justice Prowse turned lastly to the issue of materiality. She adopted the test of materiality as was set out in Kruska v. Manufacturers Life Insurance Company by Mr. Justice Finch,9 who stated:

"The test of materiality is whether the facts in question `would influence the judgment of a prudent (or reasonable) insurer in fixing the premium or in deciding whether to accept the risk'. . . The test is objective in the sense that it refers to any prudent insurer in the normal practice of that sort of insurance business. The opinion or belief of the insured as to materiality is irrelevant. The reason for this is that if it were otherwise, material information could be suppressed and it would be very difficult to show that the insured thought the information to be material; whereas if the insured's belief is not relevant, it will be in his interest to disclose all information within his reach."

Madam Justice Prowse accepted the evidence of the insurance company that it would not have accepted the risk, had it known of the assured's past medical history, and held that because the assured's belief as to the materiality of the non-disclosed information was irrelevant, the insurance policy in question was void ab initio at the insurer’s option.

In the recent case of Kehoe v. British Columbia Insurance Co.,10 the British Columbia Court of Appeal commented on the test for materiality and the evidentiary requirements for proving same. The fact situation in Kehoe involved an assured who sued the insurer for $60,000 plus pre-judgment interest as indemnity for the loss he sustained as a result of a burglary at his home in Coquitlam, B.C.

The assured formerly owned a home in Vancouver, in connection with which he claimed indemnity for five losses. Following the fifth loss, the assured notified his insurance agent of his intention to move and requested his policy be endorsed so it

9 Kruska v. Manufacturers Life Insurance Company (1984), 54 B.C.L.R. 343 at 350 (B.C.S.C.), aff'd

(1985),11 C.C.L.I.197 (B.C.C.A.), as cited in McLean, supra, at 10,216.

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would cover his new home in Coquitlam. The policy was so endorsed. Later however, the insurance

agent advised him that this insurer would only renew his policy if the deductible was increased from $200 to $5,000, and if he installed a monitored burglar alarm.

The assured was unhappy with these terms, hence he sought insurance with a new insurer, namely, the British Columbia Insurance Company. Over the telephone, the assured provided the British Columbia Insurance Company employee, Mr. Shun, with the information necessary to fill out a standard application for a residential policy.

The trial Judge held that Mr. Shun had questioned the assured with respect to previous claims, and that the assured had replied: "Not here"; or "Not at this address." Mr. Shun misinterpreted this reply to mean: "None," and subsequently wrote this answer on the application form. The assured testified at trial that he signed the application form completed by Mr. Shun without reading same, explaining he had been in a hurry. He said this was why he had overlooked the fact that on the application form the query regarding previous losses was answered with the word "None."

The British Columbia Insurance Company demonstrated to the trial Judge that an applicant's claims history would be considered by it, as well as by other insurers, as information material to assessing the risk. The insurance company also proved that such practice was in accordance with the general practice of the insurance industry. The issue which arose on appeal was whether the British Columbia Insurance Company also had to prove that this underwriting practice was "reasonable." The trial Judge held that such an evidentiary burden did lie with the insurance company, and as that burden had not been satisfied, avoidance of the policy on the basis of a material misrepresentation could not be allowed.

The British Columbia Court of Appeal, however, held that Henwood v. Prudential Insurance Company of America,11 a decision of the Supreme Court of Canada, clearly stood for the proposition that no such evidentiary burden rested with the insurer. Mr. Justice Ritchie in Henwood stated:

"Although the evidence of expert witnesses as to whether or not other insurance companies consider a question to be `material', is admissible and may be relevant in such a case as this, I do not think that when no evidence whatever has been adduced to suggest that the respondent's practice is anything but reasonable, it is

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seized with the burden of proving the practice of other insurers . . . If the matters here concealed had been truly disclosed they would undoubtedly have influenced the respondent company in stipulating for a higher premium and as there is no evidence to suggest that this was unreasonable or that other insurance companies would have followed a different course; I am satisfied that, on the evidence before us, it has been shown affirmatively that untrue answers. . . were material to the risk. This is enough to avoid the policy."12

On the basis of Mr. Justice Ritchie's ruling, the Court of Appeal in Kehoe held that the trial Judge had erred in law in holding that the test for establishing materiality required the insurer to prove its underwriting practices were reasonable. It was therefore held that because the British Columbia Insurance Company had demonstrated its own underwriting practices, and moreover, had even demonstrated that other insurers, and the industry in general, applied a similar standard, it was inappropriate to consider the British Columbia Insurance Company, in the absence of evidence to the contrary, as other than a reasonable insurer.

There are two further interesting aspects to the Kehoe decision. The first concerns the issue of what may properly be considered a misrepresentation. The second concerns an insurer's right to rely on the defence of misrepresentation where the agent misinterprets the assured's answer to a question on the application concerning previous claims, and the assured signs the application with a mistake thereon attributable to the agent, without having read same.

With respect to the first aspect, the trial Judge held that the assured, in responding: "Not here," or "Not at this address," with respect to queries concerning previous claims, did so with full knowledge that the insurer regarded him as a high risk. The trial Judge held, the assured had adopted the strategy in the hope that the British Columbia Insurance Company would not investigate his answer further and find he had told a "half-truth" and thereby misrepresented the true state of affairs.

The Court of Appeal found there was evidence to support the trial Judge's finding, and therefore, in the absence of palpable error, the Judge's finding must stand. Mr. Justice W allace further added:

". . . the defence of a literally true answer to an ambiguous question cannot prevail to assist an applicant for insurance who knowingly adopts the strategy of

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misrepresenting his claim history to obtain coverage on terms he knew would not have otherwise been available had he told the whole truth."13

It is submitted that such a pragmatic view of misrepresentation is in accordance with the spirit of "utmost good faith," which at common law governs the relations between parties to insuring agreements.

With respect to the second aspect, the insurer's right to rely on the defence of misrepresentation when the actual material misrepresentation on the application is attributable to the agent, Mr. Justice W allace held that by signing the application, regardless of whether or not he read it, the assured had made the answers contained therein his own. Mr. Justice Wallace adopted the statement of Mr. Justice Locke in Van Schilt v. Gore Mutual Insurance Co.:14

"The law is clear that in contracts uberrimae fidei the fact that a question is asked in the form makes the answer material. There is also a duty on the applicant to use reasonable diligence and to see that the answers are correctly written, and whether he read the form or not the law treats him as having adopted it: Biggar v. Rock Life Assur. Co., [1902] 1 K.B. 516."

It is interesting to note the British Columbia Court of Appeal did not consider whether Mr. Shun was the agent of the insurer or the assured in coming to its decision, particularly since Mr. Shun was in fact an employee of the insurer. More interesting still is the fact that the British Columbia Court of Appeal relied upon the above cited statement of Mr. Justice Locke in the Van Schilt case, when in fact Mr. Justice Locke's statement was contrary to the majority reasoning of Mr. Justice Carrothers, with whom Mr. Justice Craig concurred. Mr. Justice Carrothers stated in the Van Schilt case that:

". . . the general rule is that an insured who has signed a basis clause, as in this case, is bound by his answers and the onus of proof is on him to establish that, despite the actual wording of the application form, he did not, in fact, give the answer written down and attributed to him."15

In effect, the majority of the British Columbia Court of Appeal in the Van Schilt case considered that where a mistake originates with the agent alone, and such is proven to the satisfaction of the Court, the agent will be considered the agent of

13 Kehoe, supra, at para. 32.

14 (1988), 23 B.C.L.R. (2d) 201 at 207; (1988), 29 C.C.L.I. 181 at 186-7 (B.C.C.A.), as cited in Kehoe, supra, at para. 35 .

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the insurer. Consequently, the insurer will not be able to rely on the defence of misrepresentation, but must rather honour the policy, and seek indemnity from the agent where possible. Based on the facts in the Van Schilt case however, the Court held the misrepresentation originated with the assured. Therefore, the insurer was entitled to rely on the defence of misrepresentation, and void the policy ab initio.

In the British Columbia Supreme Court decision of Allstate Insurance Company of Canada v. Wong's Insurance Services Ltd.,16 a decision handed down, interestingly enough, just two days before the British Columbia Court of Appeal judgment in Kehoe, Mr. Justice Brenner adopted the majority reasons in the Van Schilt case, as he was bound to do. He stated:

"In Van Schilt the incorrect answers originated with the insured. The form was filled out by the agent and then passed to the insured for execution. He says he chose not to read the completed form. In the case at bar, the erroneous information originated with the agent. The form was blank when the insured signed it and he did so at the agent's request. In my view Van Schilt turns on the finding that the erroneous information originated with the insured and the case stands for the proposition that where an agent fills out an application form with inaccurate information supplied by an insured, the agent does so as agent of the insured.

In the case at bar the incorrect information originated with the agent who had binding authority from Allstate.

That being the case, the insured had a cause of action against the plaintiff [Allstate]. The plaintiff [Allstate] was correct in its decision to pay the claim of its insured Martlew and it is entitled to recover the amount so paid from the defendant [insurance agent]."17

Mr. Justice Brenner in effect held that because the error in the insurance application originated with the agent, the agent was deemed in law to be the agent of the insurer. Accordingly, the insurer could not rely upon the defence of misrepresentation to void the policy, but rather had to cover the assured's loss, and sue the agent for indemnity, which it did successfully.

In the 1943 Ontario Court of Appeal decision of Sleigh v. Stevenson,18 it was held that where an assured signs an application form, by the very act of signing, he

16

(1993), 15 C.C.L.I. (2d) 36 (B.C.S.C.).

17 supra, at 42.

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authenticates the statements contained in the form. It must be appreciated however, that Sleigh did not deal with a situation in which an assured signs a blank application form and the insurance agent unilaterally decides to provide answers which amount to material misrepresentations thereon.

In Levesque v. Federation Cie d'Assurance du Canada,19 the ratio of the Van Schilt case was applied. It was held that as the assured did not purposefully attempt to deceive the insurer, the policy remained valid, despite the fact the agent had misrepresented material facts on the application, and despite the fact that the assured had signed the application thereafter, without having read it.

One can distinguish Levesque from the British Columbia Court of Appeal case of Kehoe, on the basis that the assured in Kehoe did not tell his agent the truth but rather a "half-truth," which the agent misinterpreted fully, and which therefore led to a completely false answer being transcribed onto the application form. W here an assured misrepresents material facts to the agent, and these misrepresentations result in the application being completed falsely, it would appear the courts will take one of two positions. A court might hold the agent to be the agent of the assured for the purpose of completing the application, regardless of the form the misrepresentation takes in the application. Alternatively, a court might apply the reasoning, as found in Biggar v. Rook Life Assurance Company,20 which is simply

that the assured will be found responsible for the information contained in an application he signs.

In the Ontario Supreme Court case of North American Life Assurance Co. v. Caputo,21 the insurer sued its assured to recover disability benefits already paid, alleging material misrepresentation by the assured. On the application there was a question which read:

"Have you consulted any physician or other person about your health or for examination?", which was answered: "No". The assured had in reality seen many doctors about a stomach ailment. He later underwent stomach surgery and was unable to work for a long period of time.

The jury found the assured had satisfied the onus on him to show that the question which was falsely answered in the application form was not put to him and that the agent had unilaterally decided to write in the answer before the document was

19

(1990), 21 A.C.W S. (3d) 881 (Que. C.A.).

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[1902] 1 K.B. 516.

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signed by the assured. However, Mr. Justice Saunders held that the assured was under a duty to consider the document before he signed it. Following the Court of Appeal decision in Sleigh, he held that in most situations an assured is responsible for the contents of the application form he signs.

Mr. Justice Saunders then provided a brief history of the case law spelling out the situations in which an assured is not responsible for misrepresentations and fraudulent omissions in an application which he signs. He stated that in the Supreme Court of Canada case of Blanchette v. C.LS. Ltd.,22 it was held that the agent was the agent of the insurer in filling in blank sections of an application falsely, where the assured had signed the application prior to the agent filling in the blank sections. Mr. Justice Pigeon in Blanchette stated:

"W hen the insured signs after the answers have been entered by the agent, he has the opportunity of reading them. On the assumption that he is under a duty to verify before signing that the agent has properly filled in the form, I can understand how he can be said to be negligent if he does not do so.

However, in the present case, the signed form was already in the hands of the agent when he told the appellant that the additional coverage could be obtained by his making the necessary additions on the basis of the information given him by telephone. W hen Blanchette agreed not to insist on Raiche returning to his home for the purpose of adding the tractor coverage on the insurance application, he had no means of verifying the correctness of the form as completed. In my view, it is unfair to hold that he should suffer the consequences of Raiche's failure to complete the form properly . . . The [insurance] company is therefore precluded from relying on an erroneous answer written by its agent." 23(underlining ours)

Consequently, the assured was able to collect under the policy in Blanchette.

Mr. Justice Saunders in Caputo cited the cases of Bird v. New York Life Insurance Co.,24 and Bawden v. London, Edinburgh & Glasgow Assurance Co.,25as standing for the proposition that an assured will not be bound by answers in an application where the application is knowingly completed by the agent falsely, and subsequently signed by the assured, where the assured did not read same prior to signing but was not attempting to defraud the insurer.

22 [1973] S.C.R. 833, [1973] 36 D.L.R. (3d) 561, [19731 I.L.R. 1-532. 23 supra, at 577-8 (D.L.R.). 24 (1920), 47 O.L.R. 510 (H.C.). 25 [1892] 2 Q.B. 534 (C.A.).

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Mr. Justice Saunders also cited the cases of Stone v. Reliance Mutual Insurance Society Ltd.,26 and Ayrey v. British Legal and United Provident Assurance Co.,27 as standing for the proposition that an assured will not be bound by answers in an application completed by the agent and subsequently signed by him, if in fact the insurer knew, or had information concerning the facts materially misrepresented in the application.

Mr. Justice Saunders distinguished the facts in Caputo from those in Bird and Bawden on the basis that the assured in Caputo did not communicate to the agent all the necessary information to enable the agent to correctly complete the application form. The assured was therefore found responsible for the material misrepresentations therein by having signed it, despite the fact he did not read it prior to signing.

It must be appreciated from Mr. Justice Saunders' survey of the case law on the subject, that each case turns very much on its own facts. It is therefore vital when confronted with a suspected misrepresentation or omission in the application, that statements from the agent, the assured, and any witnesses be obtained which incorporate answers to the following questions:

1. Who filled in which parts of the application form, and on what date(s)? 2. Who signed the application form, and on what date(s)?

3. If the agent filled in any parts of the application form, on what dates did the agent receive information from the assured to do so, what information was provided and how was this information conveyed?

4. Exactly what information did the assured communicate to the agent, even if same was not used to complete the application, and how and on what date(s) was it communicated?

5. What relevant information did the agent have, or at least have in his/her files, with respect to the assured, apart from the information communicated by the assured for the purpose of filling in the subject application?

6. If the assured signed the application form, was it completed before signing, did he/she read it prior to signing, and if so, on what date(s), and where was this done, e.g. at the assured's home, place of business, at the agent's office, etc.?

7. Were any additions or alterations made to the application following the signing of same, and if so by whom, and on what date(s)?

26

[1972] 1 Lloyd's Rep. 469 (C.A.).

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8. Were there any witnesses to the filling in and/or signing of the application?

Answers to such questions will obviously not provide all the information required in every case. Each situation will require that special consideration be given to the particular set of circumstances involved. However, the above list can serve as a rough guideline or checklist when approaching the task of securing statements during the investigation process.

Depending on the kind of case, it may also be advisable to obtain as much information as possible regarding the relative sophistication of the assured. Mr. Justice Saunders in the Caputo case found it relevant that the assured was both well educated and an experienced businessman, meaning he was entirely capable of reading the application form and understanding it completely, prior to signing.

Important from the standpoint of fraudulent omissions made in contravention of Statutory Condition 1 are two very recent cases decided by the Supreme Court of Canada in the criminal context, which delineate the actual elements of fraud, as well as the tests needed to establish it.

In R. v. Theroux,28 Madam Justice McLachlin, speaking for the majority of the Court, stated with respect to the actus reus of fraud:

"Speaking of the actus reus of this offence, Dickson J. (as he then was) set out the following principles in [R. v. Olan, [1978] 2 S.C.R.1175]:

(i) the offence has two elements: dishonest act and deprivation;

(ii) the dishonest act is established by proof of deceit, falsehood or `other fraudulent means';

(iii) the element of deprivation is established by proof of detriment, prejudice, or risk of prejudice to the economic interests of the victim, caused by the dishonest act.

Olan marked a broadening of the law of fraud in two respects. First, it overruled previous authority which suggested that deceit was an essential element of the offence. Instead, it posited the general concept of dishonesty, which might manifest itself in deceit, falsehood or some other form of dishonesty. Just as what constitutes a lie or a deceitful act for the purpose of the actus reus is judged on the objective facts, so the `other fraudulent means' in the third category is determined

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objectively, by reference to what a reasonable person would consider to be a dishonest act. Second, Olan made it clear that economic loss was not essential to the offence; the imperiling of an economic interest is sufficient even though no actual loss has been suffered. By adopting an expansive interpretation of the offence, the Court established fraud as an offence of general scope capable of encompassing a wide range of dishonest commercial dealings." 29

In situations which involve a breach of Statutory Condition 1, the act which is prohibited is merely the misrepresentation or omission itself. The deprivation caused by the prohibited act, under such circumstances, is the placing of the insurer's pecuniary interests at risk, given that when misleading or insufficient information is provided to the insurer, its ability to properly assess the risk is impaired.

As only omissions need be fraudulent in the context of Statutory Condition 1, the mens rea of criminal fraud, by analogy, need only be addressed in the case of omissions. This is not necessary in the case of misrepresentations since they can result in the insurance contract being voided ab initio, even where they are completely innocent.

In Theroux, Madam Justice McLachlin stated that the mens rea of fraud is established by proof of:

"1. subjective knowledge of the prohibited act; and

2. subjective knowledge that the prohibited act could have as a consequence the deprivation of another (which deprivation may consist of knowledge that the victim's pecuniary interests are put at risk).

Where the conduct and knowledge required by these definitions are established, the accused is guilty whether he actually intended the prohibited consequence or was reckless as to whether it would occur.

The inclusion of risk of deprivation in the concept of deprivation in Olan requires specific comment. The accused must have subjective awareness, at the very least, that his or her conduct will put the property or economic expectations of others at risk. As noted above, this does not mean that the Crown must provide the trier of fact with a mental snapshot proving exactly what was in the accused's mind at the moment the dishonest act was committed. In certain cases, the inference of

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subjective knowledge of the risk may be drawn from the facts as the accused believed them to be."30

In R. v. Zlatic 31 Madam Justice McLachlin, again speaking for the majority of the Court, said the following about the mens rea of fraud:

"The findings of the trial Judge established that the appellant, when he received the goods, did not care whether or not he paid for them, and then proceeded to sell them and divert the money received from their sale to gambling. As is pointed out in Theroux, released concurrently, fraud by `other fraudulent means' does not require that the accused subjectively appreciate the dishonesty of his or her acts. The accused must knowingly, i.e., subjectively, undertake the conduct which constitutes the dishonest act, and must subjectively appreciate that the consequences of such conduct could be deprivation in the sense of causing another to lose his or her pecuniary interest in certain property or in placing that interest at risk."32

It can therefore be seen clearly the mens rea of fraud does not require the defrauder to be subjectively aware of the fact that he is committing fraud. Rather, all the defrauder need do is commit an act which a reasonable person would consider dishonest, be fully aware he has undertaken this act, and be fully aware that deprivation to his victim as caused by his act will, or could reasonably occur. On this basis, an omission as contemplated under Statutory Condition 1 is fraudulent if:

1. The assured had subjective knowledge that he/she did not inform the insurer of certain facts; and

2. The assured had subjective knowledge that his/her non-disclosure of these certain facts could place the insurer's pecuniary interest at risk.

Theroux and Zlatic stand for the proposition that to prove fraud, one need no longer demonstrate the existence of a "heinous state of mind" or "wicked mind," as was previously long held.33 Now, to be guilty of a fraudulent omission, the assured

need only omit material facts, know that he/she is omitting material facts and understand that the insurer might need the full facts in order to assess the risk. 30 supra at 20.1. 31 [1993] 2 S.C.R. 29. 32 supra, at 49. 33

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The reasons for the assured's nondisclosure, on this formulation of fraud, are wholly irrelevant.

The Supreme Court of Canada decision in Coronation Insurance Company et al. v. Taku Air Transport Ltd. et al.,34 presents an interesting facet to be considered in insurance fraud cases. In this case, Taku was a small commercial air carrier. Coronation Insurance was Taku's first insurer. As Taku had three accidents in its first year of business, Coronation refused to renew the policy. Taku consequently obtained coverage from the British Aviation Insurance Company. This insurance was terminated seven years later, as a result of further accidents. Taku then applied to Coronation again. Unfortunately, Coronation did not check its own files. Rather, it asked Taku to disclose its records. Taku did not do this, but instead reported just one accident which it falsely stated occurred when it was insured by British Aviation. Coronation calculated the risk based on the false information provided by Taku. Coronation neither consulted its own records nor investigated Taku in any significant manner.

Coronation at the time of assessing the risk for the second time also requested that Taku declare how many seats it wished to insure for each of its aircraft. Taku requested coverage for only four seats on its Beaver Aircraft, the subject vehicle in the current case, when in fact Taku regularly carried five passengers on this type of aircraft.

Mr. Justice Cory, speaking for the majority of the Supreme Court of Canada, stated that in situations where insurance is really for the benefit of the public at large, as is the case in the air passenger industry, the duty is on the insurer to investigate the risk it assumes. Consequently, the material misrepresentations of the assured will not void the policy unless the subject matter of the misrepresentation constitutes information which only the assured could possibly know.

Fortunately in this case, as only Taku would have known how many passengers it would carry at a time in its Beaver Aircraft, which in reality was five not four, as was told to Coronation, the policy of insurance was found void ab initio.

Mr. Justice Cory, fortunately, also stated that where insurance is for the benefit of the assured alone, a material misrepresentation of any fact of which the insurer was unaware, is sufficient to void the policy, for the simple reason that in such cases it is generally presumed that the material facts necessary to assess the risk are only within the knowledge of the assured.

34

(17)

Cases in which the initial concern is a suspected misrepresentation or omission in the application, are not the only cases which warrant careful consideration of the information contained in the application. Often in cases of suspicious fire, burglary and theft claims in particular, assureds who would present a fraudulent claim are equally capable of misrepresentation or omission when applying for insurance coverage. A thorough investigation by the adjuster of any suspicious claim should therefore automatically include examination of the information provided in the application to determine whether there is any evidence to establish that there has been a misrepresentation or omission which would warrant voiding the policy ab initio.

References

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