Deliver Policies Quickly To Avoid Unwanted Risk

The degree of protection provided to an insured by a cover note continues to be the subject of debate in Canadian courts. Typically a cover note describes coverage in basic terms — property insured, premium, coverage limits, period of coverage and the like. The details of exclusions and conditions that might adversely affect the insured are often absent from the cover note. Section 124 (1) of The Ontario Insurance Act, R.S.O. 1990, c. I-8, along with its counterparts in other jurisdictions, provides a measure of protection to an insured where this occurs. Section 124 (1) of the Ontario Act states:

124 (1) All the terms and conditions of the contract of insurance shall be set out in full in the policy or by writing securely attached to it when issued, and, unless so set out, no term of the contract or condition, stipulation, warranty or proviso modifying or impairing its effect is valid or admissible in evidence to the prejudice of the insured or beneficiary.

In the Act, “contract” is defined as including interim receipts or writing evidencing an insurance contract. This has been interpreted by the Courts to include cover notes and interim binders.

The purpose of s. 124 (1), and similar legislation in other provinces, is to ensure that adequate notice is given to an insured, of limiting terms and conditions, before an insurer will be entitled to rely upon them. 1 This protects the insured, who might otherwise be prejudiced by not knowing that a particular risk is not covered.

Questions of coverage will sometimes arise when losses occur after the issue of a cover note, but before a policy, containing the entirety of the terms and conditions, is issued. The debate often centers on the degree of knowledge that the insured has, or can be expected to have, of policy contents. The issues are firstly whether an insured has received adequate notice of an adverse term, and secondly, whether an insured has agreed to the terms that are contained in the policy. In practice however, these two issues are so closely related that they rarely receive separate attention from the Courts. This, along with the failure of the Courts to clearly articulate a test has sometimes made it difficult to predict whether coverage will exist.

Where an insured who receives a cover note has actual knowledge of a restrictive term or condition contained in the policy, it is relatively simple for a Court to find agreement to the term or condition, and the policy wording is more likely to apply. The more difficult case will be where the insured does not have knowledge of the restrictive term or condition, even though it may be usual in nature. There does not yet appear to be a consensus in Canada as to the circumstances that will allow an insurer to assume that the insured is aware of the restrictive term or condition, nor a consensus as to whether awareness will allow an insurer to rely on the term or condition where there is no notice of it in the cover note.

Canadian jurisprudence does not appear to have developed a consistent framework within which to analyze these cases. For example, in Hwang v. AXA Pacific Insurance Co.,2 the British Columbia Court of Appeal did not apply the B.C. equivalent of s. 124. In Hwang the insurer alleged the full policy excluded coverage for the claim against the insured. The insured claimed not to have received the policy booklet, and the trial judge accepted this as a fact. The declarations page, which had been received by the insured, did not, of course, set out the full policy terms. The discussion centered on whether or not an insured could take the benefit of an instrument without taking its burdens. The Court held that if the insured wished to rely on the wording of the full policy, as issued, in order to establish his claim, he had to accept the policy wording in its entirety.

Justice Southin, writing for the Court, was of the view that the insured, having received the declarations page, should have known that there was another document containing the policy wordings, and he should have asked for it. In the result, the insurer was allowed to rely on terms and conditions in the policy that had not been set out in full in any form of writing provided to the insured.

In Ontario Hwang has been criticized. In Hazen v. ING Insurance Co. of Canada, 3 Justice Carnwarth expressed,

Where an insurer takes no steps to deliver a copy of the policy to the insured it seems illogical that the insurer can rely on exclusions in the policy merely by referring to the document in subsequent communications to the insured.

In Hazen, the insureds sought coverage for damages to their home caused by flooding from a frozen pipe. The insurance policy included a clause that excluded coverage for loss or damage from freezing and flooding unless the insured had taken specific precautions -which had not been taken. The insured claimed not to know of this requirement because they had not received a copy of the policy. ING maintained the policy was mailed, or, in the alternative that the insured had constructive notice of the requirements since renewal receipts of the policy incorporated the original policy by reference. The Court refused to dismiss the insured’s claim on a summary application, holding that the determination of an insured’s knowledge of a restriction in coverage will depend upon the individual facts in each case. Accordingly, there was a triable issue. However, the Court did not articulate a comprehensive framework for what acts by an insurer might meet the requirements of s. 124.

More specific guidance can be found in the Alberta Court of Appeal in New Forty Four Mine Ltd. v. Saint Paul Fire and Marine Insurance Company. 4 Here, a corporate insured requested a policy for a mine they wished to reopen. In order to obtain adequate insurance, the broker determined that a 24-hour security guard was necessary, and the corporate secretary informed him that this was the case. The interim binder referred to the 24-hour security requirement. The insured received the binder and glanced through it, but failed to fully grasp the requirement. There was a fire at the mine before the policy was issued. Needless to say, there was no security guard on-hand. The insurer was allowed to rely upon the requirement that there be a security guard, and coverage was denied. In the view of the Court, the reference to the security requirement in the interim binder was clear and the insurer could rely upon it. The case appears rightly decided however, the facts were such that the Court was able to make its decision without developing a framework for analysis.

Details appear to be key for the B.C. Supreme Court in 0712914 BC Ltd. v. Aviva Insurance Company of Canada. 5 Here, the interim binder included the words “Subject to: Alarm Warranty.” A loss occurred before a policy could be issued. Once issued, the policy contained an alarm warranty endorsement which made coverage contingent upon the insured’s alarm system being maintained and activated when the premises were empty. The insurance broker brought the existence of the alarm warranty to the attention of the insured verbally. The insured’s property was subsequently burgled while the alarm system was inactive. The Court held the alarm warranty was unenforceable, notwithstanding the full details of the warranty had been brought to the attention of the insured prior to the loss. The Court held that as the insured did not have an opportunity to read and accept the full warranty before the loss, the warranty was unenforceable. In the view of the Court, the claim was to be adjudicated by reference only to the contract as expressed in the interim binder.

It remains unclear within Canadian jurisprudence as to how much detail need be set out in the cover note before an insurer can rely on a restrictive term or condition. There is also uncertainty as to how actual knowledge by an insured, of a
restrictive term or condition, impacts the obligation of the insurer to provide detail in the cover note. As such, prudence requires cover notes contain as much detail as possible, of restricting terms and conditions, and that full policies be delivered on a timely basis.

Jennifer Pereira is an associate with Robertson Stromberg Pedersen LLP in Saskatoon Saskatchewan. Robertson Stromberg Pedersen LLP is a member of The ARC Group Canada.

1. 0712914 BC Ltd. v. Aviva Insurance Company of Canada (2007) BCSC 163, [2007] I.L.R. I-4578, 45 C.C.L.I. (4th) 120, [2007] B.C.W.L.D. 1319, [2007] B.C.W.L.D. 1361, 69 B.C.L.R. (4th) 343 (B. C.S.C.) at paragraph 30.

2. (2001) BCCA 410, 91 B.C.L.R. (3d) 34, 154 B.C.A.C. 231, 252 W.A.C. 231,

32 C.C.L.I. (3d) 201, [2002] I.L. R I-4056 (B. C.C.A.)

3. [2006] I.L.R. I-4493, 35 C.C.L.I. (4th) 62 (Ont. S.C.J.)

4. (1987), 53 Alta. L.R. (2d) 312, 78 A.R. 364, [1987] 5 W.W.R. 673, [1987] I.L.R. 1-2247, 28 C.C.L.I. 81 (Alta. C.A.)

5. Ibid., note 1.