June 28, 2022
This is the third article in our Insurance Coverage series. Other articles in this series include:
1. "The Interpretation of Exclusion Clauses in Insurance Contracts - Post Ledcor" by Carsten Jensen QC, FCIArb
2. "Fortuity as an Essential Element of "All Risk" Insurance Policies" by Robyn Graham
4. "Interpretation of the "Resulting Damage" Exception to Coverage Exclusions" by Ryan Phillips
The recent decision from the Supreme Court of Canada in Trial Lawyers Association of British Columbia v Royal & Sun Alliance Insurance Company of Canada, 2021 SCC 47 ("Trial Lawyers") considered whether an insurer is estopped from denying coverage in the event it has defended a claim while being unaware of a breach in the policy.
Promissory estoppel requires that: (1) the parties be in a legal relationship at the time of the promise or assurance; (2) the promise or assurance be intended to affect that relationship and to be acted on; and (3) the other party in fact relied upon the promise or assurance.[1]
As noted by the Supreme Court of Canada in Trial Lawyers, in the insurance context, estoppel arises most commonly where an insurer, having initially taken steps consistent with coverage, then denies coverage because of an insured’s breach of a policy term or its ineligibility for insurance in the first place. To prevent the insurer from denying coverage, the insured will typically attempt to show that the insurer is estopped from changing its coverage position based on its prior words or conduct.[2]
Background
In May 2006, Steven Devecseri, Jeffrey Bradfield and several others were riding motorcycles on a highway in Ontario when Mr. Devercseri drove into oncoming traffic and crashed into a motor vehicle driven by Jeremy Caton. Mr. Devercseri died in the accident. Several claims were advanced against Mr. Devecseri’s estate including by Mr. Bradfield and Mr. Caton. Mr. Devecseri’s estate was defended by his insurer, Royal & Sun Alliance Insurance Company of Canada ("RSA"). An RSA insurance adjuster’s initial investigation on whether substances were a factor was inconclusive. No one from the RSA followed up with obtaining the coroner’s official report.[3]
Three years after the accident and over a year into litigation, Mr. Devecseri’s consumption of alcohol prior to the accident was brought into issue. At this time, RSA obtained the coroner’s report which demonstrated that Mr. Devecseri had "a modest quantity of alcohol in his system when he died”. As a result of Mr. Devecseri’s consumption of alcohol at the time of the accident, RSA assumed an “off coverage” position on the basis that Mr. Devercseri was in breach of his policy.[4]
Mr. Caton proceeded with litigation against Mr. Bradfield and Mr. Devecseri and was awarded judgment in the sum of $1.8 million. Mr. Bradfield maintained a cross-action as against Mr. Devecseri’s estate in Mr. Caton’s action. Subsequent to the judgment, Mr. Bradfield brought a motion seeking a declaration that he was entitled to judgment against RSA, as RSA had either waived Mr. Devecseri’s breach or was estopped from denying coverage.[5]
The trial judge held that RSA had waived its right to deny full coverage by failing to take an “off-coverage” position initially and by providing a defence to the Devercseri estate as the litigation progressed. Having found waiver by conduct, the trial judge did not consider whether estoppel applied.[6]
The Appeal
However, the Ontario Court of Appeal subsequently overturned the judgment as section 131(1) of Ontario’s Insurance Act precluded recognition of waiver by conduct. The Ontario Court of Appeal held that estoppel did not apply because RSA did not know that Mr. Devecseri had breached the policy at the time it provided him with a defence and because detrimental reliance could not be made out by Mr. Bradfield. Mr. Bradfield appealed to the Supreme Court of Canada and was granted leave. However, he ultimately settled with RSA. The Trial Lawyers Association of British Columbia asked and was permitted to substitute Mr. Bradfield as the appellant in the action to address the issue of whether RSA was estopped from denying coverage in these circumstances.[7]
While the Supreme Court of Canada noted that a promisor cannot intend to alter a relationship by promising to refrain from acting on information that it does not have; and constructive knowledge arising from a breach of duty to investigate is insufficient. To hold otherwise, the Court noted, would be to unwisely and unnecessarily undermine the existing duty of insurers owed to insureds to investigate liability claims fairly, in a balanced and reasonable manner.[8] However, where an insurer is in possession of facts demonstrating a breach, an inference may be drawn, by its conduct, that it intended to alter its legal relationship with the insured - regardless of whether the insurer realized the legal significance of the facts known or appreciated the application of those facts to the policy with the insured.[9] Ultimately, the Court held that RSA could not have intended to alter the relationship by promising to refrain from acting on information that it did not have.[10]
The Supreme Court re-emphasized the reciprocal duty of utmost good faith owed by an insured and insurer to each other. This duty had developed with a view of facilitating honest, fair and expeditious resolutions of insurance claims while also requiring that an insured disclose material facts to the insurance policy and the claim, including all facts material to the risk.[11]
Notably, the Supreme Court of Canada did not consider the doctrine of waiver as the Insurance Act, at the time, legislated that waiver must be in writing.
Section 521 of Alberta's Insurance Act
Section 521 of Alberta’s Insurance Act resembles that of section 131 of Ontario’s Insurance Act and specifically states that the obligation of an insured to comply with a requirement under a contract is excused to the extent that: (a) the insurer has given notice in writing that the insured’s compliance with the requirement is excused in whole or in part, subject to the terms specified in the notice if any, or (b) the insurer’s conduct reasonably causes the insured to believe that the insured’s compliance with the requirement is excused in whole or in part, and the insured acts on that belief to the insured’s detriment.
The Alberta Insurance Act goes a step further than Ontario’s Act to state that neither the insurer nor the insured is deemed to have waived any terms or conditions of a contract by reason only of: (a) the insurer’s or insured’s participation in a dispute resolution process under section 519 of the Insurance Act, (b) the delivery and completion of a proof of loss, or (c) the investigation or adjustment of any claim under the contract.
The insurers knowledge of the facts at the relevant time is of utmost importance in determining whether the insurer may subsequently deny coverage to an insured. In the event the insurer had knowledge of the facts but failed to appreciate the legal significance of those facts, that could have been sufficient to establish estoppel.
Robyn Graham is an associate at JSS Barristers. Click here for Robyn's bio.
[1] Trial Lawyers at para 15.
[2] Trial Lawyers at para 16.
[3] Trial Lawyers at paras 5-6.
[4] Trial Lawyers at paras 7-9.
[5] Trial Lawyers at paras 11-13.
[6] Trial Lawyers at para 12.
[7] Trial Lawyers at para 13.
[8] Trial Lawyers at para 22.
[9] Trial Lawyers at para 30.
[10] Trial Lawyers at para 3.
[11] Trial Lawyers at paras 35-36. See also Bhasin v Hrynew, 2014 SCC 71 at paras 55 and 86 and Loblaw Companies Limited v Royal & Sun Alliance Insurance Company of Canda, 2022 ONSC 449.
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