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Ruling lights fire under insurers


The New Brunswick Court of Appeal has handed down a smoking hot decision that will leave insurance companies scrambling to confirm that clients have informed them of material changes?—??including the installation of woodstoves.

In Thomas v. Aviva Insurance Co, [2011] N.B.J. No. 371, the court found that the insurer could not cancel a contract with its client by relying on Statutory Condition 4, which obligates an individual to notify the insurance company in writing of any change material to the risk within their control.

Aviva was denied this use because the appeal court determined it had treated the information in question as insignificant prior to a claim being filed and, therefore, breached its duty of good faith.

The decision is believed to break new ground in Canada.

“Before Aviva v. Thomas, this issue does not appear to have been addressed by any court of appeal,” said Brenda Lutz, a partner with Canty Lutz Delaquis Grant in Saint John, who represented the insured client.

“Insurers no doubt reading this decision will be motivated to review their applications for insurance and renewal notices to ensure the questions or statements reflect their underwriting guidelines,” she added. “If insurers consider the installation of a woodstove to be a material change in risk, then that fact has to be communicated to their insured. This is particularly important for insureds living in rural areas where heating with wood is a way of life.”

Because the appeal court found there was a breach of good faith, it determined it was not necessary to address a key issue raised at trial with respect to Statutory Condition 4.

“The primary issue at trial was whether the insured’s lack of knowledge that the installation of a woodstove was a change material to the risk prevented the operation of Statutory Condition 4,” Lutz said.

The case was sparked by a fire at the respondent’s home that resulted from the installation of a woodstove. The insurance company was not aware of the stove and argued that Statutory Condition 4 effectively forfeited the policy. At trial, the court addressed whether the insurer has to prove there was a change material to the risk or if it also has to establish the insured knew the change was material to the risk.

“There are divergent views on this issue expressed in the case law,” Lutz said. “Courts in Ontario have held that knowledge on the part of the insured that a change was material to the risk is not an essential ingredient in determining whether there was a change material to the risk. In Ontario, an insurer can rely on Statutory Condition 4 even if the insured did not know the change was material to the risk.”

“There is no room for doubt after the decision in Aviva that courts have jurisdiction to grant relief against forfeiture, even for breach of statutory conditions, if it is found to be unjust or unreasonable,” she added.

Aviva could not rely on Statutory Condition 4 to cancel its insurance contract with the respondent in this case, the court determined. “To conclude otherwise would require turning a blind eye to the insignificance Aviva attributed in the preloss period to the information it claimed postloss was material to the risk,” Chief Justice Ernest Drapeau wrote in his 43-page decision.

“It would also require the Court to overlook the fact that it is Aviva’s own acts and omissions that resulted in the nondisclosure of what it contended post-loss was a change material to the risk,” he added.

The appeal court did not determine whether an insured has to have knowledge that a change is material to the risk for the insurer to successfully invoke Statutory Condition 4. It did, however, address the issue in several paragraphs. “In these paragraphs, the court provides compelling reasons to support a finding that the knowledge of the insured that the change was material to the risk is determinative of the insured’s disclosure obligations under Statutory Condition 4,” said Lutz.

Specifically Chief Justice Drapeau stated: “[F]ew, if any, of the pronouncements on the subject draw upon accepted principles of interpretation to decipher the meaning of the phrase ‘within the […] knowledge of the insured.’”

Reasons: Thomas v. Aviva Insurance Co., [2011] N.B.J. No. 371.

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