Why the Co-operators won this appeal over homeowner claim

If a client learns something new about insurance law four years after their claim is denied, it’s probably too late to sue the insurer for breach of contract.

In a decision released this past Tuesday, the Court of Appeal of Alberta ruled in favour of The Co-operators, which had denied a claim in early 2011 on a homeowners’ policy.

A client and his mother had rented out the house they owned. It turned out the tenant was using the place for a marijuana grow-up, resulting in significant damage. In 2011, the owners’ property damage insurance claim was denied due to an exclusion related to illegal drug operations. The clients say they were also told verbally, by a Co-operators adjuster in 2011, that they did not have proper coverage because renting out their home resulted in a material change in risk. The clients further claimed that they had mentioned, to a Co-operators agent, that they would be renting out their house. That conversation took place while dealing with the client’s auto policy.

The claimant filed a lawsuit against The Co-operators in 2017. The lawsuit was dismissed by a case management master. That decision was upheld in Lafferty v Co-operators General Insurance Co, released in 2019 by the Alberta Court of Queen’s Bench.

The Court of Appeal for Alberta also ruled in favour of the insurer in a decision released Oct. 26, 2021.

When the lawsuit was first dismissed, it was on the grounds of the illegal grow-up and the limitations period.

When the clients took The Cooperators to court, they argued The Co-operators was estopped from claiming there was a material change in risk because the insurer knew about the rental and did not follow the required steps to avoid coverage. However, The Co-operators never took the position, in its denial letter, that the claim was not covered due to a material change in risk. Instead, it was due to the illegal grow-op.

Key to the claimant’s argument was that he started taking a law course a few years after the claim was denied. He found out some key insurance law facts in 2015. For example, he learned that the Alberta government changed its statutory conditions to prohibit exclusion clauses for property damage caused by criminal acts where the insured was an innocent party. However, the amended condition did not come into force until 2012, the year after the claim was denied.

The claimant’s legal education in 2015 did not start the limitations clock, the Alberta court of appeal wrote in its 2021 ruling.

Ultimately, the 2021 appeal court ruling means the lawsuit was filed more than four years after the two-year statute of limitation expired.

It was in January, 2011 – six years before filing their lawsuit – that the clients knew their claim was going to be denied, the appeal court wrote in its Oct 2021 ruling in favour of The co-operators.

In Lafferty v Co-operators General Insurance Co, the Alberta appeal court cited Grant Thornton LLP v. New Brunswick, released July 29, 2021 by the Supreme Court of Canada.

In Grant Thornton, the Supreme Court of Canada “clarified the standard to be applied in determining whether a plaintiff has the requisite degree of knowledge to trigger the commencement of a limitation period” the three Alberta appeal judges wrote in Lafferty.

In 2014, the New Brunswick government filed a lawsuit against Grant Thornton, whose accountants had audited the books of Atcon Group of Companies, which had borrowed $50 million from a major bank. That loan was essentially co-signed by the province. Atcon ran out of money so the province had to repay its loan. The provincial government tried to sue Grant Thornton, as the auditor, but the lawsuit was ruled by a judge as being time-barred. That finding was overturned by the N.B. appeal court but restored in 2021 by the Supreme Court of Canada.

In Grant Thornton, the Supreme Court of Canada found that the province “discovered” its claim February 4, 2011 –  three years and four months before it filed its lawsuit. The 2011 date was when a second accounting firm delivered a draft report to the province on Atcon’s financial statements that offered a different opinion from that of the Grant Thornton accountants.

Upholding the New Brunswick appeal court ruling would “move the needle too closely” to saying that a plaintiff must have certainty it has a case against a defendant before the limitations clock starts running, Justice Michael Moldaver wrote for the Supreme Court of Canada in its unanimous July 29, 2021 ruling.

“A claim is discovered when a plaintiff has knowledge, actual or constructive, of the material facts upon which a plausible inference of liability on the defendant’s part can be drawn.”

Feature image via iStock.com/alexsl