Insurers Can Deny Coverage After a Claim Is Accepted, SCC Rules

Authors: Sharon Au, Teresa Holmes

The Supreme Court of Canada recently clarified that an insurer with no prior knowledge of a policy breach may later deny coverage once the breach has been discovered.

Trial Lawyers Association of British Columbia v. Royal & Sun Alliance Insurance Company of Canada involved an insurer (“RSA”) that discovered an insured had consumed alcohol before a fatal multi-vehicle accident that killed the insured. However, RSA only made that discovery one year into defending the insured’s estate in the ensuing litigation – and more than three years after the accident had taken place.

RSA discovered that the insured’s alcohol consumption breached both their motorcycle licence and insurance policy. Upon discovering the breach, RSA denied coverage and stopped defending the insured’s estate in the litigation.

Judgment was obtained against the insured’s estate. The judgment creditor sought to recover its judgment against RSA, arguing that the insurer was prevented or “estopped” from changing its position on coverage. The judgment creditor argued that by defending the claim in the first place, RSA was deemed to have either waived any breach of the policy or it was otherwise estopped from relying on the breach to deny coverage.

At trial, the Court found that RSA waived its right to deny coverage by its conduct, i.e. by not denying the claim earlier and going on to defend the insured’s estate in the litigation. The Ontario Court of Appeal reversed the trial judge’s decision, finding that provincial legislation prevented the Court from recognizing waiver as a defence in these circumstances. The Court also found that RSA could deny coverage because it did not know of the insured’s policy breach at the time it accepted the claim.

The Supreme Court of Canada agreed with the Ontario Court of Appeal’s findings. It confirmed that in order for an insurer to be “estopped” from denying coverage, the insurer must have intentionally promised to the insured that there would be coverage. Whether the insurer intended the promise depends on what the insurer knew at the time. Under these circumstances, RSA could not have intended to provide coverage despite the policy breach, because it was unaware of the breach in the first place. If RSA had known about the insured’s drinking but decided to provide coverage anyway, that would be a different scenario.

The Supreme Court of Canada noted that while insurers have a duty to reasonably and fairly investigate claims, that does not mean they have to search for every possible breach of the insurance policy. An insured still has an obligation to co-operate with the insurer, which includes disclosing facts material to their claim.

This decision confirms that an insurer may deny coverage due to a policy breach if the insurer discovers new information related to the breach during the course of litigation. It is not enough that an insurer ought to have known about the breach earlier in the course of the investigation. The test is whether the insurer had actual knowledge of the breach.

 Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.