This article originally appeared on the OBA Insurance Law Section's articles page.
Introduction
On November 18, 2021, the Supreme Court of Canada rendered its decision on whereby an insurer may be allowed to deny coverage based on a policy breach discovered several years down the road.
In Trial Lawyers Association of British Columbia v. Royal & Sun Alliance Insurance Company of Canada (“TLABC v. RSA”), Royal & Sun Alliance Insurance Company of Canada (“RSA”), defended an action arising out of a motor vehicle accident (“the accident”) on behalf of its insured, the deceased, Steven Devecseri (“Devecseri”), commenced against his estate. RSA defended the estate in two lawsuits commenced by individuals who allegedly sustained injuries as a result of the accident, including Mr. Jeffrey Bradfield (“Bradfield”). Three years following the accident, RSA became aware that the deceased had consumed alcohol immediately prior to the accident, thereby breaching the terms of the insurance policy. As a result, RSA took an off-coverage position, leaving the claimants' collective entitlement to the statutory minimum limits of $200,000, rather than the $1,000,000 issued to Devecseri. Bradfield sought a declaration of entitlement to recover judgement against RSA.
One of the fundamental issues considered by the Court was whether RSA had waived Devecseri's breach of the policy, and whether RSA was estopped from denying coverage to Devecseri's estate.
Procedural History
Trial Court's Reasoning
At trial, the Ontario Superior Court of Justice granted Bradfield's declaration. The Court found RSA had waived its right to deny full coverage by failing to take an off-coverage position and by providing a defence to Devecseri's estate in the course of the litigation. The Court did not consider the applicability of the doctrine of promissory estoppel as Bradfield was successful in establishing waiver by conduct.
Court of Appeal for Ontario's Reasoning
...Ontario's Insurance Act... only recognized waiver in writing |
The Ontario Court of Appeal permitted RSA's appeal and provided clarification on two issues raised. First, at the time, s. 131(1) of Ontario's Insurance Act did not include waiver by conduct and only recognized waiver in writing. Considering the waiver must be given in writing, the Court found RSA had not waived any rights in writing. Second, since RSA did not have knowledge of Devecseri's breach of the insurance policy at the time and RSA provided a defence to his estate, RSA's conduct could not be considered as a promise or assurance which would have affected the parties' legal relationship. The Court was not convinced that such knowledge could be imputed to RSA, or that Bradfield had successfully established detrimental reliance.
Bradfield appealed.
Eventually, settlement was reached with RSA and Bradfield's appeal was discontinued. Nonetheless, the Supreme Court of Canada heard the case in order to provide clarification to the bar on the issues raised. As such, Trial Lawyers Association of British Columbia (“Trial Lawyers”) were substituted as the appellant.
Supreme Court of Canada's Reasoning
The Supreme Court of Canada held that RSA had not waived its right to deny coverage, since waiver by conduct was precluded by statute at the relevant time. With respect to promissory estoppel, the Court found RSA to not have intended to alter its legal relationship with Bradfield, since it lacked knowledge of Devecseri's breach.
After upholding the Court of Appeal's decision on the issue of waiver by conduct, the sole issue before the Court was whether RSA was estopped from denying coverage, since it had responded to the claims against Devecseri's estate for a period of time after it could have discovered evidence of Devecseri's breach of the policy.
In reaching its decision, the SCC outlined the requirements for establishing the equitable defence of promissory estoppel, as stated in Maracle v. Travellers Indemnity Co. of Canada, [1991] 2 S.C.R. 50. In order for promissory estoppel to apply:
- the parties be in a legal relationship at the time of the promise or assurance;
- the promise or assurance be intended to affect that relationship and to be acted on; and
- the other party in fact relied on the promise or assurance to its detriment
Within the insurance realm, the defence of promissory estoppel is applicable in circumstances where the insurer later denies coverage due to the insured's breach of a policy term or the insured's ineligibility for insurance, after conducting itself in a manner consistent with coverage.
...promise to refrain from acting on information that it does not possess. |
Ultimately, the Court rejected Trial Lawyers' promissory estoppel argument finding that in order to use the defence of promissory estoppel, the promisor (insurer) must have knowledge of the facts that are said to give rise to that legal relationship. The Court clarified that intention rests upon what the promisor knows, and the intention of the words or conduct must be assessed objectively. This has to do with both what the insurer knew and what the insurer reasonably ought to have known. A promisor cannot intend to alter a relationship by promising to refrain from acting on information that it does not possess. In this case, RSA provided no promise or assurance intended to affect its legal relationship with Bradfield. Moreover, RSA did not have knowledge of Devecseri's breach, particularly that he had consumed alcohol immediately prior to the accident, when defending his estate. These factors were imperative in the Court's decision-making on the promissory estoppel argument.
However, circumstances would differ if an insurer was in possession of the facts demonstrating a breach but failed to appreciate its legal significance. Then, an inference could be drawn that the insurer had knowledge of its right to withhold coverage, but through its conduct, remained acting in a manner consistent with providing coverage. This would demonstrate an insurer's intention to alter its legal relationship.
Regarding Trial Lawyers' argument about RSA having imputed knowledge of the breach, the Court found that had RSA been aware of the breach and failed to appreciate its legal significance, an argument could be made that RSA had imputed knowledge of the legal significance. Nevertheless, the Court did not find that to be the case here since RSA lacked knowledge of Devecseri's consumption of alcohol prior to the accident. Moreover, even though the coroner's report was available shortly after the accident and RSA denied coverage approximately three years later, the Court still did not find RSA to have imputed knowledge of the insurance policy breach. The Court found it noteworthy to highlight that neither RSA nor Bradfield or any other party took steps to obtain the coroner's report, further solidifying lack of knowledge about the consumption of alcohol.
...the Court provided two reasons for rejecting the argument... |
Responding to Trial Lawyers' argument of RSA's duty to investigate the claim which would have led to constructive knowledge of the facts demonstrating the breach, the Court provided two reasons for rejecting the argument:
First, in order to hold that RSA had constructive knowledge of the breach, there would need to be an unwise and unnecessary modification made to the duty of an insurer. The Court recognized an insurer's strong economic incentive to deny coverage. Insurers have a duty to investigate a claim fairly, in a balanced and reasonable manner, without engaging in relentless searches for insurance policy breaches. Furthermore, in attributing constructive knowledge to RSA, Trial Lawyers relied on RSA's duty to know all facts within its grasp. However, Trial Lawyers failed to consider that the coroner's report which would indicate Devecseri's consumption of alcohol prior to the accident was not in possession of any of the parties.
Second, an insurer's duty to investigate a claim in a fair, balanced, and reasonable manner is owed solely to the insured, and not to a third party. As such, this duty only extended to the insured, Devecseri in this case, and not Bradfield. Hence, the Court rejected Trial Lawyers' argument that RSA had constructive knowledge of the breach through their duty to investigate thoroughly and diligently.
Overall, the Court ruled that RSA's conduct could not be interpreted as an unequivocal assurance that RSA would continue to provide coverage, even under circumstances where the insurance policy was breached. RSA's conduct with regards to continuing coverage was not indicative of its intent to alter legal relations. Moreover, RSA lacked knowledge of Devecseri's consumption of alcohol prior to the accident. The defence of promissory estoppel could not be made in this case.
He then noted that the releases produced by the defendants included additional terms, such as confidentiality and a waiver of independent legal advice. He found that these terms should not be enforced and that they had no bearing on the applicability of the “essential” terms of the settlement (that the action would be dismissed and that there would be no costs).
