Does ‘material change in risk’ clause need better clarity?

Despite Wawanesa’s recent legal victory in a coverage dispute in British Columbia, judges in that province appear to be struggling to interpret the statutory condition on material change in risk.

Five years ago, Bob and Linda Schellenberg’s property in Chilliwack was damaged by fire. Their claim was denied by Wawanesa because it discovered a legal medical marijuana grow operation after the fire – one which had not been disclosed. The Schellenbergs sued both the insurer and brokerage.

Neither the broker nor the carrier asked the Schellenbergs if they were growing marijuana.

Justice Margot Fleming of the B.C. Supreme Court ruled in favour of both the insurer and brokerage, in Schellenberg v. Wawanesa Mutual Insurance Company, released in February, 2019.

Her ruling was upheld on appeal in an appeal court decision released Jan. 22, 2020.

But a key question remains. Say an insurer discovers during a claim that the client failed to disclose a material change in risk. The carrier voids the policy and the dispute goes to court. Does Statutory Condition 4 require the carrier to prove the insured knew the change in risk was material?

It was after the 2014 fire when Wawanesa discovered Schellenbergs were growing marijuana for medical use, an activity for which they were licenced by Health Canada.

Statutory Condition 4 in B.C. requires the insured to “promptly give notice in writing” to the insurer or broker of any material change that is within the control and knowledge of the insured.

That condition “is ambiguous with respect to what it is meant by ‘within the knowledge of an insured,’” Justice Fleming wrote in her original ruling from February, 2019. Ultimately, her ruling in favour of Wawanesa was based on her finding of fact that the Schellenbergs must have known the grow operation was relevant to their insurance. The size and complexity of the grow operation was a significant change to the property, “very far from an ordinary use of the property,” wrote Justice Fleming.

The Schellenbergs argued that the test for materiality should be interpreted to include a requirement that the claimants knew the change in risk was material. Wawanesa argues the insurer does not have to prove the claimants knew the change in risk was material.

In the Schellenbergs’ case, Justice Fleming ruled that it is not necessary for her to decide whether Statutory Condition 4 requires the insurer to prove the insured knew the change in risk was material to the insurer. This was based on her finding of fact that in the Schellenbergs’ case, the claimants must have known the grow operation was relevant to their insurance.

On appeal, the Schellenbergs argued Justice Fleming erred in finding that Bob Schellenberg knew that the existence of the grow operation and an upgrade to the electrical system were material changes to the risk. The appeal court upheld Justice Fleming’s findings of fact.

The Schellenbergs also argued Justice Fleming made an error of law in failing to consider whether statutory condition 4 required that an insurer voids the policy, the insurer must prove the client knew, either objectively or subjectively, that a change in risk was material to the insurer.

Because of Justice Fleming’s fact findings, there was no need for her to “embark on a theoretical analysis as to whether statutory condition 4 required the insurer to prove the appellants’ subjective knowledge of materiality and thus resolve the conflicting case law,” Justice Patrice Abrioux wrote for the B.C. Court of Appeal in its unanimous ruling.

“I have some concern about the impact of requiring an insurer to prove subjective knowledge of materiality, depending on the meaning and application of such a standard,” Justice Fleming wrote in her original ruling. “An approach that recognizes knowledge for an insured means knowledge the change is significant or relevant to his or her insurance, an insurance risk in other words, and willful blindness to prevent the mischief of asserting a lack of knowledge when an insured has ignored relevant advice and information would mitigate my concern.”

Among the previous court rulings considered by Justice Fleming were Marche v. Halifax Insurance Co., released in 2005 by the Supreme Court of Canada. That case arose from Nova Scotia’s statutory condition on material change in risk. The coverage disputed emanated from a house that was destroyed by fire when it was vacant – a vacancy of which the owners failed to inform the insurer.

“Statutory Condition 4 is not a model of clarity,” wrote Beverley McLachlin, then Chief Justice of Canada, for the top court in Marche.

At the time of Marche, Nova Scotia Statutory Condition 4 read as follows: “Any change material to the risk and within the control and knowledge of the insured shall avoid the contract as to the part affected thereby, 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 he desires the contract to continue in force, he must, within fifteen days of the receipt of the notice, pay to the insurer an additional premium; and in default of such payment the contract shall no longer be in force and the insurer shall return the unearned portion, if any, of the premium paid.”