No Vacancy?

On November 1, 2013 in Peebles v. The Wawanesa Mutual Insurance Company, 2013 BCCA 479, the British Columbia Court of Appeal allowed the insureds’ appeal from the trial judge’s order dismissing their claim. This article will give a short review of the case and highlight some of the issues it raises.

The two insureds, Peebles and Quinn, bought a house in Surrey, BC on July 1, 2006 as an investment. They insured it starting June 29, 2006 and renewed that policy of insurance on June 29, 2007. It was that policy which was in force when the house was destroyed by explosion and fire on April 26, 2008.

Peebles never lived in the house, but resided nearby and would drive by a few times a week and drop in occasionally to inspect his investment. Quinn did live there from the summer of 2006 to late 2007. At that time, he began spending more time at his girlfriend’s house as she was uneasy with Peebles’ unexpected drop-ins.

Due to friction and rising real estate prices, in late 2007 Peebles and Quinn decided to sell the property. Beginning in February 2008, Quinn’s job took him to the Northwest Territories for three weeks of each month. He was away from February 7 to 27, March 4 to 26, and April 1 to 23. During his time in Surrey, he was often with his girlfriend except at points at which their volatile relationship caused him to spend the night at the property in question. In the 30 days before the fire, he was at the house overnight for one night.

During that time, he also redirected his cell phone bill to the home of his girlfriend and his tax information was also sent there. When the loss occurred, the insurer denied the claim because the house was vacant and there was a material change in risk.

The term vacant was defined as follows in the policy:

“‘Vacant’ refers to the circumstances where, regardless of the presence of furnishings: all occupants have moved out with no intention of returning and no new occupant has taken up residence; or in the case of a newly constructed house, no occupant has yet taken up residence.”

Statutory Condition 4, prescribed by the Insurance Act, RSBC 1996, c. 226 was also argued. It states:

“Material change is… any change material to the risk and within the control and knowledge of the insured voids the contract as to the part affected by the change, unless the change is promptly notified in writing to the insurer or its local agent, and the insurer when so notified may return the unearned portion, if any, of the premium paid and cancel the contract, or may notify the insured in writing that, if the insured desires the contract to continue in force, the insured must, within 15 days of the receipt of the notice, pay to the insurer an additional premium; and in default of such payment the contract is no longer in force and the insurer must return the unearned portion, if any, of the premium paid.”

The trial judge found that vacancy had not been proved, as Quinn had not permanently moved out. However, the trial judge went on to deal with the question of material change and found that the failure by the insured to tell the insurer of “the material change in the risk arising out of the tenuous occupancy … justified the insurer in voiding coverage pursuant to Statutory Condition 4.”

At the trial, there was evidence from two underwriters. Mr. Grass, a senior underwriting manager with Wawanesa, said that had the facts been known (and he worked from assumed facts), then he would have changed the policy from all risks to fire and extended perils. In addition, the policy wouldn’t have been guaranteed replacement cost and exclusions would have been added, all with a 36% premium increase.

Bev Johnson, a senior personal lines underwriter, had her opinion admitted by consent without cross-examination. She agreed with Grass’ view of materiality and also said that occupancy is material to underwriters for both issuance of the policy and premium.

The Court of Appeal relied on Laurentian Insurance Co. v. Davidson [1932] SCR 491. In Laurentian, the loss occurred within 30 days of the insured’s moving to a new residence. The vacancy clause in the policy of insurance allowed 30 days of vacancy. The court held that the insurer had accepted the risk of vacancy of less than 30 days when it drafted that vacancy clause.

Did the Court of Appeal need to follow Laurentian? Arguably not. In Laurentian, the Supreme Court said:

“Evidence was offered at the trial to show that the vacancy of the property was a change material to the risk, but there was no evidence of any change material to the risk in addition to the bare fact of vacancy.”

The Court of Appeal in Peebles at paragraph 30 said:

“Although material change in risk for purposes of the statutory condition might otherwise have arisen from the ‘circumstances’ as a whole, no change was identified in this case apart from the ‘bare fact’ of (alleged) non-occupancy test, as was the case in Laurentian.”

In saying non-occupancy instead of vacancy, the Court of Appeal equated vacancy and occupation. Vacancy has an element of intention and occupation is a question of fact independent of intention.

As well in that same paragraph 30, the Court said it was “not referred to any case that stands for the proposition that ‘reduced’ occupancy – as opposed to ‘non-occupancy’ – constitutes a material change in risk that must be reported…” In saying that, the Court seems to have ignored or overridden the evidence of the two experts as to materiality.

Finally in paragraph 33, the Court of Appeal dealt with an argument that should have been made during the hearing of the appeal. It said:

“If a fire occurred after the 30 day period, the insurer could clearly argue that the insured’s absence from the house … (and from Canada) would constitute a material change in risk.”

In saying that, again, the Court seems to not deal with the point that there can be material changes to a risk that fall short of vacancy. In Peebles, there was evidence about the effect of tenuous occupancy on the risk; it is arguably distinguishable from Laurentian.

So what is the upshot of this? For an insurer, there were many factors in this case that would point to a material change entitling a denial of coverage. Indeed, on some of the evidence that is recited by the Trial Judge, it might well be argued to be vacant. The approach taken by the Court of Appeal arguably doesn’t deal with the impact of the facts relating to materiality. The Court of Appeal focused more on the wording of the vacancy clause and did not deal with the expert evidence by essentially equating vacancy and non-occupancy. This makes it difficult for insurers faced with similar situations in the future to analyze the effect of underwriting opinions as to materiality.

Further, while this judgment benefits these particular insureds, it may not be of benefit to the insurance-purchasing public generally. The Court twice refers to the fact that these wordings were the insurer’s wordings. If that is an invitation for the insurer to place more restrictive wordings, then such wordings will potentially not benefit insureds.

As just one example, if vacancy was reduced to 15 days, is that a benefit to an insured? It’s hard to contemplate every possible fact pattern when drafting policy wording. The trial judgment relied on the time-tested and time-honoured principles of materiality and good faith as they apply to contracts of insurance. Those principles embody the sense and the mutual obligations that are at the core of insurance. Applied in accord with existing precedents, those principles will provide clear guidance in almost every situation.

Mark M. Skorah,
Q.C., is a senior partner at Guild Yule LLP. He regularly represents insurers on coverage matters and defends claims against their insureds, including professional negligence, products liability, and complex personal injury matters.