Do you know and understand your rights and obligations under that contract?
If you have a dispute with your insurance company, how can you be sure that a court will protect you, the “little guy”, in the face of the arguments put forward by a large, possibly even multi-national, insurance company?
If you are an adult in Canada and own property of any value (such as a car or a house) or are involved in activities that pose risk to others (like driving a car), it is likely that you have entered into at least one insurance contract. It might be a property insurance contract, a liability insurance contract, a life insurance contract, or even a combination of different types of insurance. As an individual insured under the contract, you are the little guy (the insured) in the contractual relationship.
The party who provides insurance coverage under the contract, being a reasonably wealthy insurance company, is the big guy (the insurer). Almost certainly, the insurance company knows the details of the contract and its rights under the contract better than you do. After all, the insurance company wrote the contract and enters into insurance contracts every day. If there is a dispute about the contract or a claim you make under the contract, the insurance company probably has more money than you do to spend on hiring a lawyer to take the dispute to court. With such a huge imbalance of power, how can you be sure that your rights under the contract will be protected?
Lucky for you, over the past few years the Supreme Court of Canada has made a point of protecting the interests of the little guy in insurance contract disputes. Since February 22, 2002, when the Supreme Court of Canada issued its landmark decision in Whiten v. Pilot Insurance Co., it has heard several cases involving disputes between insureds and insurers (see list at end of article). The fact that the Supreme Court of Canada has heard so many insurance cases in recent years is significant because it only hears cases which it considers to be of national importance. The Supreme Court has obviously recognized that insurance disputes between insureds and insurers are important matters of national interest. Further, in each of these cases, the Supreme Court has ruled in favour of the insured. Because the Supreme Court of Canada is the top court in the land, these rulings must be followed by all other Canadian courts. So, when it comes to insurance law matters, the Supreme Court of Canada has clearly been developing law to protect the interests of the little guy.
The purpose of this paper is to provide a closer look at what the Supreme Court has been saying in its recent insurance law decisions and to demonstrate how the Court’s rulings address the contractual power imbalance between an insured and an insurance company. I begin by briefly summarizing the facts and findings of the Court in each case. For the purposes of these summaries, I have grouped the cases according to the major insurance issue being addressed by the Court. Following this outline of the cases, I offer some comments about the lessons to be drawn from the Court decisions with respect to the contractual relationship between the insured and the insurer.
Summary of the Cases
Insurer’s Duty to Respond to a Claim
Whiten v. Pilot Insurance Co., 2002
The Whiten family home, which was insured by the Pilot Insurance Co., burned down on a winter night. The Whitens lost everything except the clothes on their backs and were literally left out in the cold. All of the evidence obtained by the insurance company in investigating the loss (including reports from the fire department and the Insurance Crime Prevention Bureau) indicated that the fire was caused by accident. The insurer, however, remained adamant that the fire had been deliberately set by the insureds.
The insurance company believed that, because the Whitens were in financial difficulty prior to the fire, they had a compelling motive to commit arson. Accordingly, the insurance company
refused payment under the policy. The Whitens sued their insurer for payment under the policy. The evidence raised at trial suggested that the insurance company had been hoping that its denial of payment would lead the Whitens to accept a lower payment than they were entitled to under the contract. Ultimately, the Supreme Court of Canada required the insurance company to pay for the loss. More significantly, however, the Court found that the insurer acted in bad faith in denying payment to the insured without any convincing evidence to support this denial. The Court noted that, in purchasing insurance coverage, an insured is buying peace of mind. The Court found that the insurer in this instance failed to provide this comfort to the insured and, in fact, took steps which aggravated the insured’s already devastating situation. Because of the insurer’s abhorrent behaviour, a majority of the Supreme Court reinstated the trial jury’s finding that the insurance company must pay the insured $1,000,000 in punitive damages over and above the coverage provided in the insurance policy. This is the largest punitive damage award ever ordered by a Canadian court.
The Insured’s Obligation to Sue Within a Required Time Frame
Smith v. Co-operators General Insurance Co., 2002
Ms Smith was receiving benefit payments from her automobile insurer, Co-operators General Insurance Co., for injuries which she suffered in a motor vehicle accident on April 14, 1994. On May 8, 1996, Co-operators terminated the benefit payments by a written notice of termination which provided the insurer’s assessment of benefits and advised Ms Smith that she had the right to ask for mediation if she disagreed with this assessment. On September 8, 1998, following an unsuccessful mediation, Ms Smith sued the insurer for ongoing benefit payments. Both the trial and appeal courts of Ontario struck out Ms Smith’s action because she did not sue within the time frame required under Ontario’s Insurance Act.
A majority of the Supreme Court of Canada allowed Ms Smith’s appeal on the grounds that, when the insurance company advised her of available mediation procedures, the company also should have advised her of the time frame for commencing a lawsuit. The Court found that the limitation period accordingly did not bar Ms Smith’s action. The lawsuit could proceed.
KP Pacific Holdings Ltd. v. Guardian Insurance Co. of Canada, 2003
KP Pacific Holdings Ltd. commenced a lawsuit against Guardian Insurance Co. of Canada for payment for a fire loss at a KP hotel insured by Guardian. Guardian argued that KP’s lawsuit could not proceed because it was not commenced within one year of the date of loss as required by the Fire Insurance Section of the British Columbia Insurance Act. The trial and appeal courts of British Columbia found the action to be barred by the expiration of the limitation period, but the Supreme Court of Canada unanimously overturned this result. The Supreme Court concluded that the Insurance Act was unclear in setting out the limitation period applicable to a fire loss under an all-risk policy. The Court criticized the Insurance Act as reflecting an outdated classification of insurance policies which was inapplicable to modern, comprehensive insurance policies. Accordingly, the Supreme Court held that the one-year limitation period in the Insurance Act did not apply to the insured’s claim. Again, the lawsuit could proceed.
Churchland v. Gore Mutual Insurance Co., 2003
Churchland commenced a lawsuit against Gore Mutual Insurance Co. For theft coverage under a homeowner’s insurance policy. Gore argued that the claim was barred by the limitation period set out in the fire insurance section of the British Columbia Insurance Act, being one year from the date of loss (the same argument made by KP in the case discussed above). Churchland argued that the applicable limitation period was a longer time period as set out elsewhere in the Insurance Act. Employing its reasoning from the KP Pacific case, a unanimous Supreme Court of Canada held that the Churchland’s claim was not limitation barred. Again writing for the full court, Chief Justice McLachlin emphasized the obligation of the legislature to clarify its intent when imposing statutory restrictions on an insured’s ability to sue an insurer.
Interpretation of an Insuring Agreement
Martin v. American International Assurance Life Co, 2003
American International Assurance Life Co. issued a life insurance policy on the life of Dr Easingwood, providing for payment if death was caused by “accidental means”. Dr Easingwood, an opium addict, died from a self-injected overdose of Demerol. American International refused payment on the grounds that Dr Easingwood’s death was not accidental, having been caused by the doctor’s deliberate act of injecting the lethal dose of Demerol.
The Supreme Court of Canada unanimously held that Dr Easingwood’s death did fall within the policy coverage. The Court refused to define “accidental means” in a manner which would exclude accidental deaths which were caused by deliberate actions. The Court pointed out instead that virtually all accidents can ultimately be traced to some sort of deliberate act. The Court concluded that death by “accidental means” is a death which was unexpected by the insured even if the accident was caused by a deliberate act. The evidence in this case indicated that, while Dr Easingwood intended to inject himself with Demerol, he did not intend or expect to die from the injection.
Accordingly, the insurance company was obligated to pay.
Public Policy Considerations
Oldfield v. Transamerica Life Insurance Co. of Canada, 2002
Paul Oldfield, the insured under a life insurance policy issued by Transamerica Life, died when one of 30 condoms of cocaine, which he was carrying in his stomach, broke open causing him to have a heart attack.
Transamerica refused payment to the policy beneficiary (Paul’s ex-wife) arguing that public policy considerations militate against paying for a loss caused by the insured’s criminal act. A majority of the Supreme Court of Canada held that public policy does not prohibit recovery in this instance.
The Court stated that public policy does prohibit a criminal or his or her estate from profiting from a criminal act, but this rule does not extend to innocent, named beneficiaries of a life insurance policy.
Goulet v. Transamerica Life Insurance Co. of Canada, 2002
Mr Arbic was the insured under a life insurance policy issued by the Transamerica Life Insurance Co. of Canada. Mr Arbic was killed by the explosion of a bomb which he was attempting to plant under a car.
Transamerica refused payment to Ms Goulet, the policy beneficiary, on the grounds that public policy prohibited payment when death occurred during the commission of a crime. As in the Oldfield case, the Supreme Court of Canada rejected this argument and unanimously found that the public policy rule was not applicable against an innocent beneficiary.
Somersall v. Friedman, 2002
The Somersalls were injured in a motor vehicle accident allegedly caused by Jerry Friedman. On January 28, 1991, the Somersalls commenced a lawsuit against Mr Friedman, seeking compensation for their injuries in an amount which exceeded the limits of Mr Friedman’s automobile liability insurance. Subsequently, the Somersalls and Friedman entered into an agreement (the Limits Agreement) which permitted the Somersalls to continue to pursue their liability claim against Friedman but only for the amount of his liability insurance coverage. In other words, under the Limits Agreement, the Somersalls agreed not to pursue Friedman personally for any damages which were not payable by his liability insurer.
On July 4, 1994, the Somersalls sued their own automobile insurer, the Scottish & York Insurance Company (S&Y), under an SEF 44 Family Protection Endorsement issued by S&Y. The Somersalls claimed payment from S&Y for the amount their losses exceeded Friedman’s insurance limits.
S&Y then commenced a claim against Friedman to recover any money that it had to pay to the Somersalls. Friedman argued that S&Y’s claim against him was barred by the Limits Agreement. The company also argued that if its claim against Friedman was barred by the Limits Agreement, then the Somersalls had breached their obligations under the SEF 44 insurance contract.
Finally, S&Y argued that the Somersalls were obligated to assist it in its attempts to recover compensation from the person who caused the accident.
S&Y argued that, because of this breach of contract by the Somersalls, it did not have to pay the Somersalls’ insurance claim.
A majority of the Supreme Court held that the Somersalls did not breach their contractual obligation to co-operate by signing the Limits Agreement.
The Court agreed that the insurance contract required the Somersalls to cooperate with S&Y. However, the Court found that this obligation did not clearly and unambiguously prevent the Somersalls from entering into settlement arrangements with the person who caused the accident. Accordingly, S&Y could not use the Limits Agreement as a reason not to pay the Somersalls under the SEF 44 insurance contract.
Messages from the Court
Overall, the cases contain some clear messages about the Supreme Court’s view of contractual disputes between insurance companies and their insureds:
- As already noted, the mere fact that the Supreme Court decided to hear so many insurance law cases over such a short time period speaks to the importance which the Court places on ensuring that the law develops in a way which protects the rights of an insured in the insurance contract relationship. In several of the cases described, the Court commented upon the need for reform in insurance law noting that insurance law should reflect the modern day reality of insurance contracts. The Court is apparently dissatisfied with the general state of insurance law in Canada and seems willing to develop insurance law principles in order to achieve fairness for the insured.
- There is a clear inclination on the part of the Court to favour the insured in a dispute between an insured and his or her insurance company. The Court will not allow an insurance company to rely upon an insured’s failure to fulfill the terms of an insurance contract unless the terms are unambiguously set out in the contract or otherwise communicated to the insured. Likewise, the Court will not allow an insurance company to deny coverage by relying upon an insured’s breach of an insurance statute unless the terms of the statute are clear and explicit. In short, any uncertainty or ambiguity in the terms of the contract or the applicable insurance statute will be interpreted in a way which benefits the insured. (This is not a new proposition of insurance law, but the recent Supreme Court of Canada decisions strongly reinforce this principle in a modern context.) The Court will also not allow an insurance company to rely on public policy or public morality concerns to avoid its contractual obligations if the effect of doing so would be detrimental to an innocent beneficiary under the contract.
- When considering an insurance contract dispute, the Supreme Court will look at the dispute in the context of the larger purposes of insurance law and insurance contracts. Such larger purposes include consumer protection and the provision of peace of mind in times of unexpected loss. According to the Supreme Court, these purposes place a high degree of responsibility on insurance companies to pay claims without causing undue stress or hardship to the insured.
In the past few years, the Supreme Court has been working hard to stand up for the insured in insurance contract disputes. This does not mean that insureds will always be paid under their insurance contracts. Insureds still have legal obligations under these contracts which must be fulfilled before payment is required by the insurer. Nevertheless, the Supreme Court of Canada cases discussed in this paper suggest that the Court will not allow insurance companies to take advantage of their power position in insurance contracts. On the contrary, the Supreme Court’s recent decisions indicate that the Court will apply extremely high standards when assessing the behaviour of an insurance company precisely because the insurer holds the balance of power in the insurance contract relationship. The little guy is being looked after.
February 23, 2002 – November 1, 2004, the Supreme Court of Canada issued 6 decisions addressing conflicts between insureds and their insurance companies:
Oldfield v. Transamerica Life Insurance Co. of Canada  1 S.C.R. 742
(issued March 8, 2002);
Goulet v. Transamerica Life Insurance Co. of Canada  1 S.C.R. 719
(issued March 8, 2002);
Smith v. Co-operators General Insurance Co.  2 S.C.R. 129 (issued
March 28, 2002); Somersall v. Friedman  3 S.C.R. 109 (issued August 8, 2002);
KP Pacific Holdings Ltd. v. Guardian Insurance Co. of Canada  1 S.C.R.
443 (issued May 1, 2003);
Churchland v. Gore Mutual Insurance Co.  1 S.C.R. 445 (issued May 1,
Martin v. American International Assurance Life Co  SCC 16.