Insurance policies require insureds to notify the insurer of claims and potential claims.
Insurance policies, like any other contract, contain certain legal obligations. For example, insurance policies of all types require insureds to notify the insurer of loss or damage – or in the case of liability insurance, claims or potential claims. This duty typically flows from the insurance policy itself. Sometimes, the duty may arise from “statutory conditions” in legislation that, by law, form part of the insurance contract.
The duty to notify allows insurers to assess liability and lessen any loss. If the insurer does not receive proper notice, they may deny coverage. This could result in the insured having to defend a lawsuit and potentially pay a court judgment without any help from the insurer. Unfortunately, it is not always clear when the insurer has received notice, particularly in liability claims.
Two types of liability insurance policies exist. Previously, insurance companies issued “occurrence” policies. Under these policies, if the insured acted carelessly during the policy period, they would be covered for any claims arising from the carelessness, even if the claim occurred after the policy period. But this type of policy caused problems for insurers, because they would not know for many years how many claims had occurred in a given year. This made it difficult to set premiums.
So, insurers began issuing “claims made” policies. Under these policies, the insurer covers claims made during the policy period and any claims made later, provided the insured gives notice of the potential claim during the policy period. With these policies, insurers can learn the number of claims and pending claims in a given year and set premiums for the following year accordingly.
Whether an insured has complied with the notice requirement depends on the specific facts of the case. Trisura Guarantee Insurance Company of Canada v Duncan shows how a court may decide this issue. The facts are as follows.
Keybase, an investment organization, dismissed one of its advisors, John Allen, for negligent and fraudulent handling of client accounts. Gregory Duncan and James White, two other advisors, assumed responsibility for Allen’s clients.
A few years later, various Allen clients sued Keybase. Keybase settled the case, but expressly agreed its advisors would not be released by the settlement. Later, the clients sued Duncan and White, alleging they had provided improper advice about how to mitigate the losses that Allen had caused.
Duncan and White sought a defence from their insurer, Trisura, under an insurance policy which Keybase had arranged for its advisors. However, Trisura argued the claims fell outside the policy period. Duncan and White applied to court for an order compelling Trisura to defend them. The court granted that order. Trisura appealed and the case went before the Nova Scotia Court of Appeal.
The insurance policy in question was a “claims made” policy. So, the court had to address whether Keybase had notified Trisura of the potential claims against Duncan and White during the policy period. According to the court, the lower court had correctly focused the analysis on what Trisura knew and when they knew it.
Trisura argued that the claims reported to it during the policy period concerned Allan and Keybase only – not Duncan or White. In their view, they had not received proper notice of the Duncan/White claims. However, the court agreed with the lower court that Trisura had appreciated the liability risk to Duncan and White, even though the original lawsuit had not named them as defendants. A risk remained that the plaintiffs could sue them later – which is indeed what happened. So, in these circumstances, the court found Trisura had knowledge of the potential claims. The policy thus deemed the claims against Duncan and White as having occurred during the policy period.
Relief from forfeiture
When an insured fails to comply with the duty to notify, they are said to forfeit their rights under the insurance policy. However, a court may apply “relief against forfeiture” in certain circumstances. In Alberta, section 520 of the Insurance Act contains the statutory authority for a court to apply this principle. However, a court can only grant relief where the failure to comply constitutes “imperfect compliance,” rather than “non-compliance.” Qualiglass Holdings Inc. v. Zurich Indemnity Company of Canada illustrates the difference between these two concepts.
Five plaintiffs obtained a judgment against their former accountant, David Chinnery. Chinnery filed for bankruptcy, so the plaintiffs tried to recover the debt from Chinnery’s insurer, Zurich.
Chinnery had a “claims made” liability insurance policy. The policy covered claims made during the policy period. However, during the policy period Chinnery did not notify Zurich of the claims against him. So, Zurich took the position the policy did not cover the plaintiff’s action.
The court had to address whether it could grant relief from forfeiture. In doing so, it described the difference between non-compliance and imperfect compliance. Non-compliance occurs when the insured fails to do something which, on the policy wording, is necessary to trigger insurance coverage. By contrast, imperfect compliance happens when the insured fails to do something which is not necessary to trigger coverage under the contract. Relief from forfeiture can only be granted in the latter case.
Based on its wording, Chinnery’s policy covered claims occurring during the policy period. The plaintiffs had made the claim against Chinnery during the policy period. In the court’s view, this event had triggered coverage under the policy, based on its plain wording. Although the policy contained a clause requiring the insured to report the claim “as soon as practical,” this was not necessary to trigger coverage. So, the court found Chinnery’s failure to promptly report the claim constituted imperfect compliance, not non-compliance.
Next, the court considered whether it should use its discretion to grant relief from forfeiture. According to case law, a court will consider two things: prejudice (unfairness) to the insurer and the reasons for imperfect compliance. The court found Zurich had not suffered any prejudice, and the evidence did not suggest Chinnery had attempted to gain any advantage by not promptly reporting the claim. So, the court granted relief from forfeiture and ordered Zurich to pay the judgment.
Insureds must give notice of claims in accordance with the insurance policy. If an insured fails to give proper notice, they may lose their rights under an otherwise valid insurance policy. The courts will sometimes lessen the harshness of this rule by granting relief from forfeiture. The courts will apply this principle when it would be unfair to enforce the insurance policy as written, and the failure to comply constitutes imperfect compliance.
The above information has broader implications for self-represented litigants. The duty to notify in an insurance policy is just one legal obligation – the law imposes many other duties. For example, court rules are full of deadlines which counsel and self-represented litigants must meet. Regardless of your legal issue, be mindful of deadlines and be sure to always act promptly. As stated above, failing to do so may result in a loss of your legal rights.
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The information in this article was correct at time of publishing. The law may have changed since then. The views expressed in this article are those of the author and do not necessarily reflect the views of LawNow or the Centre for Public Legal Education Alberta.
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