The Statutory Conditions of the provincial Insurance Acts permit insurers to void a fire insurance policy and deny a claim in the event that an insured has failed to promptly notify its insurer of a material change in risk. [1] However, there are certain conditions that must be met before an insurer can avail itself of this mechanism. Insurers and their broker partners also have an important role to play in educating the insured before a loss occurs.
Background
A material change in risk is one that would cause an insurer to reject the risk or increase its premiums due to the change. In order to rely on the material change in risk Statutory Condition to void a policy, an insurer must be able to establish the following:
- The insured failed to provide the insurer with prompt written notice of the change;
- The change was material;
- The change was within the control of the insured; and
- The change was within the knowledge of the insured.
The case law is relatively clear in interpreting all but the fourth condition – whether the change was within the knowledge of the insured. Importantly for insurers, it is possible to proactively take steps to ensure that certain changes will be considered by the courts to be within the ‘”knowledge” of an insured.
The differing standards of knowledge
Canadian Courts have struggled to develop a consistent approach in interpreting this component. Courts have at various times employed one of the following different interpretations as being necessary to void coverage. They may be thought of as being on a spectrum, with #1 being most onerous and difficult to prove, while #3 is the least onerous standard for an insurer to prove. The three differing standards are as follows:
- The particular insured claiming indemnity must have personally known that the change would be considered material by a reasonable insurer.[2]
- A reasonable insured in the same circumstances as the particular insured would have known, or should have known, that the change would be considered material by a reasonable insurer.[3]
- The particular insured claiming indemnity must have known of the change. The particular insured is not required to have known that the change would be considered material by a reasonable insurer.[4]
Note the requirement for subjective knowledge of the insured under standard #1. Using that test, no matter how obvious the materiality of a change, if the particular insured can prove that it did not know that it would be considered material, then an insurer may not void a fire insurance policy due to non-disclosure of the change. The insurer bears an onerous burden of proof under this standard.
On the other end of the spectrum, standard #3 omits the requirement that the insured have any knowledge of the materiality of the change at all. Under this test, if the insured is aware of a change, it must be disclosed to the insurer – regardless of whether that particular insured or a reasonable insured thinks it is material or not.
Standard #3 leaves materiality solely for the insurer to assess. The logical basis of this approach is that the insured is in no position to judge materiality. Materiality should be evaluated by insurers, as insurers are the experts in doing so. With no requirement for an insurer to submit evidence with respect to the insured’s knowledge of materiality, the burden faced by the insurer under standard #3 is most easily met. Although standard #3 has been cited with approval by some Alberta courts, a prudent Canadian insurer would not plan to rely on this standard, due to the uncertainty in the Canada-wide case law.
Standard #2 is arguably the most common approach employed by Canadian courts. It requires that the insured “either knew or should have known that [a change] was material to the risk.”[5] It does not require subjective knowledge on behalf of the specific insured involved.[6] If a change would be judged by a reasonable insured as being material, then that is enough.
The role of the insurer in helping insureds understand materiality
Insurers can take some simple proactive steps to help ensure that the materiality of more common changes in risk will fall within either the personal knowledge of their particular insureds (subjective knowledge – approach #1) or within the knowledge of a reasonable insured (objective knowledge – standard #2). This can be accomplished by efforts to notify and bring the materiality of certain changes to the attention of insureds before the changes occur.
A prime example is detailed by the British Columbia Supreme Court in Jackson v Canadian Northern Shield Insurance Co. [Jackson][7]. The material change in risk at issue in Jackson was the installation of an auxiliary wood-burning stove. In finding that the installation was a material change known to the insureds, the Court referenced a letter sent to the insureds from their broker, with an attachment stating to “Let us know about any changes!”. The attachment listed “Using an auxiliary wood heat source without the insurer’s knowledge” as an example of a material change. In light of this letter, the Court found that the insureds “understood their obligation to notify the insurer of the installation of a wood-burning stove.”[8]
In another material change in risk case involving the installation of a wood stove in a dwelling, the Court reached the opposite result. In holding that the materiality of the installation was not within the knowledge of the insured, the Court in Thomas noted how the insurer failed to advise the insured, in plain language, on what changes would be considered material.[9] Such an advisement was required by the insurer’s duty of good faith owed to the insured. Since the insurer failed to educate the insured, who was by no means sophisticated, on what could constitute a material change, and this omission resulted in the non-disclosure of the addition of the wood stove, the insurer could not avail itself of the Statutory Condition to void the policy.[10]
Take away
Why take the risk that a court would find an undisclosed material change as not being within the knowledge of the insured? Although it is not possible to control the sophistication of an insured, it is possible to impart knowledge surrounding material changes. Insurers and their broker partners can take proactive steps to ensure that either: (i) insureds actually disclose material changes; or (i) insurers may rely on the material change in risk Statutory Condition in denying indemnification because the insured either knew or ought to have known that an undisclosed change was material. As illustrated by the case law, the following steps may make the difference:
- Obtaining written answers to specific questions in an application for insurance that go to material characteristics of the risk.
- On the Declarations Page, stating in plain language common material changes that must be reported to the insurer or broker.
- Sending the insured a letter outlining examples of common material changes in risk, and that they must be disclosed.
- Discussing the meaning of a material change in risk with the insured upon policy formation and at subsequent renewals (by either the insurer or its broker partner).
[1] See, for example, Insurance Act, RSA 2000, c I-3, s. 540, Statutory Condition #4. The wording of the Statutory Condition across most provinces is similar.
[2] See, for example, Thomas v Aviva Insurance Co., 2011 NBCA 96 aff’g 2011 NBQB 26 [Thomas].
[3] See, for example, Heer v Allstate Insurance Co. of Canada, 1993 CarswellOnt 5611 (Gen Div).
[4] See, for example, Schmidt v Aetna Casualty Co. of Canada, 1982 CarswellAlta 114 (QB). This approach has been adopted on numerous occasions by the Alberta courts.
[5] Zheng v John Galon Insurance Services Ltd., 2016 SKPC 90 at para 57.
[6] However, subjective knowledge of an insured suffices to meet the objective (reasonable insured) knowledge requirement.
[7] 2010 BCSC 1532.
[8] Jackson at para 10.
[9] Thomas at para 48.
[10] Ibid at para 64.
