Outmoded and Outdated No More: Amendments to BC s Insurance Act Krista Prockiw kprockiw@ahbl.ca

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1 Introduction Outmoded and Outdated No More: Amendments to BC s Insurance Act The Insurance Act was passed in Despite repeated housekeeping amendments, it remains essentially unchanged. So spoke Madam Justice McLaughlin of the Supreme Court of Canada in the 2003 decision of KP Pacific Holdings v. Guardian Insurance. Thus was the start of a challenge to the Legislature to rectify the outmoded category based Act, which had resulted in wasteful litigation about technicalities. The BC Legislature answered this call to arms and, starting in March of 2007, began the long process of overhauling British Columbia s Insurance Act. A revamped and thoroughly modern Insurance Act comes into force on July 1, 2012, subject to some transitional provisions. A Parting of Ways: Structural Reform The current outmoded category based Act contains separate provisions applying to life insurance, accident and sickness insurance, and fire insurance. In addition, an omnibus general provision applies to virtually all other forms of property insurance including all risk policies. Under the new Act, Part 5, relating specifically to fire insurance, is eliminated. Consequently, basically all forms of property and liability policies will now be governed by the general insurance provisions in Part 2 of the new Act. These Part 2 General Provisions will not apply to life insurance or accident and sickness insurance, which remain governed by Parts 3 and 4 respectively, or to contracts of reinsurance. To a large extent the legislature has essentially imported the fire provisions into a new general provisions part of the Act. As set out below, his has some interesting (and perhaps unintended) consequences resulting from applying what were formerly property provisions to liability policies. Voiding coverage for material change in risk under statutory condition 4. Statutory condition 4 provides that an insured must promptly give notice in writing to the insurer of any change that is material to their risk and within the control or knowledge of the insured. Failure to do so can result in the contract being void. The Courts have articulated the test for a material change as being whether the change, had it been disclosed, would have influenced a reasonable insurer to either decline to continue the insurance or to have stipulated for a higher premium. While the Courts have set out and considered many material changes in the property context (installation of wood stove,

2 - 2 - vacancy) there are numerous factors that could be considered material under a liability policy. Proportionate contribution overlapping coverage. Section 127 of the former Act (re-enacted as Section 28.1 of the new Act) eliminated the insurer s joint and several liability to the insured where there was overlapping fire insurance coverage and imposed a proportionate liability rule. The effect of this section was that under a fire policy where there were multiple policies covering the same interest, the insurers were each liable to the insured only for their rateable portion of the loss unless expressly agreed in writing between the insurers. Up until now this proportionate liability analysis has not been applied in the liability context. Under liability policies the Courts look at the other insurance clauses contained in the policies. Generally types of other insurance clauses include pro-rata, excess and escape. The Supreme Court of Canada in Family v. Lombard, 2002 SCC 48 established a two-step analysis for determining priority of overlapping policies. The first step was to look to see whether the competing other insurance clauses could be reconciled without prejudicing the insured s coverage, i.e. one excess and one pro-rata. If so, then each would be applied. Secondly, where there was a true impasse the mutually repugnant clauses are rendered inoperable, and each policy contributes equally until one is exhausted. The question remains, now that liability policies are to be governed by the general provisions, does the Family v. Lombard overlapping coverage approach still apply in light of the new section 28.1? Save the Date: Clarifying Limitation Periods The Supreme Court of Canada in KP Pacific held that under an all risk policy the limitation provision contained in the general insurance provisions was to apply namely one year from the furnishing of a reasonably sufficient proof of the loss or a claim under the contract. Accordingly, what constituted a reasonably sufficient proof of a loss or a claim became the cornerstone in subsequent limitation litigation. Overview of New Limitation Periods The new Act contains the following limitation periods: Type of Policy Property Policy All other Part 2 policies (i.e. liability policies) Life Insurance Death Limitation Period 2 years from the date the insured knew or ought to have known the loss or damage occurred 2 years from the date the cause of action against the insurer arose The later of: 2 years after the proof of loss is provided, or If no proof of loss is provided, 6 years after the date of the death

3 - 3 - Life Insurance Actions not from death Accident and Sickness Insurance Death Accident and Sickness Insurance Actions not arising from death 2 years after the date the insured knew or ought to have known the first instance of the loss or occurrence giving rise to the claim for insurance money In the event of money payable on a periodic basis, 2 years after the date the insurer failed to make payment The later of: 2 years after the proof of loss is provided, or If no proof of loss is provided, 6 years after the date of the death 2 years after the date the insured knew or ought to have known of the first instance of the loss or occurrence giving rise to the claim for insurance money In the event of money payable on a periodic basis, 2 years after the date the insurer failed to make payment Liability Limitation Period With regards to liability policies, arguably the limitation period will start to run upon an insured being denied liability coverage by the insurer, as that would be the date the cause of action against the insurer arose. Knew or Ought To Have Known The potential area of dispute arising out of the new limitation period is likely to now be determining the date the insured knew or ought to have known the loss or damage occurred. In most instances, this date will easily be ascertainable (fire, theft). However, in some instances there will likely be a dispute over when an insured ought to have known the loss occurred. The new Act is essentially incorporating the common law principle of discoverability into the property loss limitation periods. The Supreme Court of Canada has addressed the issue of discoverability and has held that: A cause of action arises for purposes of a limitation period when the material facts on which it is based have been discovered or ought to have been discovered by the Plaintiff by the exercise of reasonable diligence. [Central and Eastern Trust v. Refuse] The application of this discoverability principle in an insurance context was considered by the Nova Scotia Court of Appeal in the decision of Stewart v. Royal and Sun Alliance, 2005 NSCA 6. There the Insured had lived in a house since The heating system was an old, fired hot water furnace fed from a thousand gallon oil storage tank buried under the floor of a detached garage. In 1984, the furnace boiler was replaced and the removal caused a minor mess in the basement. This mess was cleaned up, however the basement continued to smell of oil. In 1986 the underground fuel tank was replaced with an above-

4 - 4 - ground tank and access to the old tank was capped off. The Insured continued to smell oil in the basement and discussed this with the company that performed the furnace replacement. The discussion as to the smell of oil in the basement continued for some time and the furnace company ultimately ignored the Insured s continued complaints. In 1998, the Insured went to sell the home. As part of the sale process an inspection was performed which discovered that the soil and ground water around the home and under the foundations were contaminated by fuel oil and required clean up. The total cost of the clean-up was approximately $143, The Insured had homeowners coverage issued by Royal and Sun Alliance throughout 1986 to Royal and Sun s adjuster concluded that the oil leak had been noticed in 1986 (when the smell of oil was first noticed) and denied coverage relying on the one year limitation period in the policy. The Court accepted the Insured s evidence that they were unaware of the soil contamination problem until The issue before the Court was whether, with reasonable diligence, they ought to have known so. Ultimately the Court held they had acted diligently in investigating and dealing with the smell (thus ought not to have discovered it earlier). The Court referred to a number of factors in support of this conclusion: They initially thought the oil smell was attributable to the mess left upon the installation of the new furnace in 1984; The smell was in the basement, not elsewhere in the house nor on the surrounding property, thus they did not make a connection between the oil tank, which was buried under the floor of the garage, and the odour in the basement; and, When a Royal and Sun Alliance risk inspector came to assess the property in 1994, prior to renewing coverage, he did not mention the smell of oil in the basement. Given that the odour was persistent, it was reasonable for the Insured to assume that the inspector had smelled the oil but thought it of no consequence. The Court ultimately found that: I find that the material facts upon which [the claim] is based [or not] discovered or ought to have been discovered by the Plaintiffs by their exercise of reasonable diligence until the Fall of The action was filed in June of It is, therefore, timely and not barbed by contract or statute. Postponement of Limitation Periods The new Act applies Section 7 of the Limitation Act to limitation periods. This has the effect of extending those limitation periods for a person under a legal disability. For example, if the insured is a minor the limitation period only starts to run once they reach 19 years of age. In regards to other persons under a legal disability, the time only begins to run once they are no longer under such a disability. Notification of Limitation Periods

5 - 5 - The Regulations contain provisions requiring an insurer to give notice to an insured as to the limitation period. The Regulations require an insurer to give written notice to a claimant of the statutory limitation period: (a) (b) at the time or within 5 business days after the insurer denies liability for all or part of a claim and, at or within 10 business days after the first anniversary that the insurer receives notice of a claim. Unless the insurer has already (i) (ii) adjusted the loss acceptably or settled the claim or provided a notice under section (a). The Regulations further provide that an insurer is not required to give notice to a claimant who is represented by legal counsel. If an insurer fails to give the notice the limitation period is suspended starting on the date notice was supposed to be given and ending on the date notice is given or a date that would cause the limitation period to exceed six years. The Regulations also provide that the notice must contain a statement that the limitation period is set out in the Insurance Act. However, the notice does not need to state when the limitation period will expire. Transitional Provisions The transitional provisions of the Regulations provide that the portions of the Act dealing with the new limitation period do not apply in respect of a loss or damage which occurs before July 1, With regards to life and accident/sickness insurance where money is payable on a periodic basis, the new limitation period does not apply to a contract with respect to money payable on a periodic basis if, under the contract, insurance money has been paid and the next payment that would have been payable, had the insurer continued to make period payments, was before July 1, Civil Disobedience: Unjust Contracts Provision Thomas Jefferson has been quoted as saying that if a law is unjust, a man is not only right to disobey it, he is obligated to do so. While Thomas Jefferson is referring to laws, the new Act may well extend this reasoning to terms of an insurance policy. Contained in the General Provisions of the new Act is Section 28.3 which provides that: If a contract contains any term or condition that is or may be material to the risk, including, but not restricted to, a provision in respect to the use, condition, location or maintenance of the insured property, the term or condition is not binding on the insured if it is held to be unjust or unreasonable by the court before which a question relating to it is tried.

6 - 6 - The test of materiality is an objective test of whether any prudent insurer in the normal practice of the insurance business would be influenced to either accept or decline the risk or to stipulate a higher premium or other limitations. [Kehoe v. The British Columbia Insurance Company, 1992 CanLII 2336 (BCSC)] However, this begs the question of whether or not all exclusions are material to the risk, otherwise why else would an insurer insert it in the policy? Obviously it has some influence on whether or not an insurer would accept a risk or would charge a higher premium. This leads to interesting and potentially new challenges to both policy exclusions and warranties on the basis that their application is unjust or unreasonable in the circumstances. The Supreme Court of Canada dealt with a similar issue in Marche v. Halifax Insurance Company, 2005 SCC 6. There a house was vacant for a period of time and the Insurer was not advised. It has long been held that vacancy of a home is a material change in risk and has been accepted as a basis for voiding a policy under the statutory condition requiring an insured to give prompt notice of this change. However, in this instance a tenant had moved into the house before the loss, thus rectifying the breach. As a result, the Court had to consider whether it was unjust or unreasonable to allow the Insurer to void the policy for a subsequent fire loss even though the breach had been rectified. The Supreme Court of Canada held that relief from forfeiture applies not only to policy terms that are unreasonable on their face but also to terms that are unreasonable in their application. In this case, the Supreme Court of Canada held that because a vacancy (and material change in risk) had been rectified before the loss it was unreasonable to enforce the material change in risk provisions to allow voiding coverage. In the Marche decision there was no linkage between the vacancy and the loss. However, the question remains: if there is a nexus between an exclusion/breach of a term or condition and the loss, would a denial be just or reasonable? The British Columbia Supreme Court in the decision of Abell v. Lloyds Underwriters, 2005 BCSC 1715 suggests that it would. There the Insured had a policy covering a floating home. The policy was subject to a warranty that provided that it would be permanently moored in the location contained in the coverage summary page. The floating home ultimately ceased to be moored in the location identified in the declarations page and the Insurer took the position that due coverage was void due to breach of the warranty. The Insured relied upon the Marche decision arguing that the warranty was unreasonable in the circumstances. The Court rejected this argument and found that there was a nexus between the breach of the warranty and the loss as being permanently moored and part of a community of floating homes would have enhanced the chance of early detection of a fire. Thus, there was a clear link between the breach of the warranty (being permanently moored) and the fire loss. Presumed Innocent: Coverage for Innocent Co-Insureds As of July 2011, Section 28.6 of the General Provisions, Recovery By Innocent Persons, is already in force. This section enables an innocent insured to have coverage for loss or damage to property, even where the criminal or intentional act of a co-insured caused the loss. This is designed to address the issue of the effect of arson by one insured, i.e. a disgruntled spouse on recovery by the other insured s under the policy.

7 - 7 - This section provides that a criminal or intentional act exclusion only applies to the claim of the person : (a) (b) (c) whose act or omission caused the loss; who abetted or colluded in the act or omission; or who consented to or knew or ought to have known that the act or omission would cause the loss or damage. The Act provides that the innocent co-insured is limited to recovery of their proportionate interest in the lost or damaged property. Further, the Act requires the innocent insured to comply with any requirement prescribed by regulation. These requirements are set out in the Regulations as being that, upon request of the insurer, an innocent co-insured must submit to an examination under oath. While this section was brought into force as of June 16, 2011, the Regulations provide that it does not apply to loss or damage occurring before this date. Further, the Regulation limits its application to natural persons. Unclear from either the new Act or the Regulations is what constitutes a proportionate interest in the loss or damaged property. For instance, if a husband or wife jointly own a home does a wife collect 50% if one spouse commits arson? Fire, Fire Burning Bright: Mandatory Fire Loss Coverage The Act provides that the only exclusions relating to the cause of the peril of fire must be those permitted by the Regulations, which in turn specify that the only permitted fire exclusions are: criminal act or omission, or act or omission which was intended to bring about loss or damage; riot, civil commotion, or invasion, act of a foreign enemy, hostilities, whether war is declared or not, civil war, rebellion, revolution, insurrection or military power; fire or explosion following terrorism, but only under residential policies; and, loss or damage caused by fire or explosion that occurs when the insured property is vacant for a period of longer than 30 days. Accordingly, the Regulations provide that fire following earthquake is not a permitted exclusion. Walk on to Electric Avenue: Electronic Communications The new Act allows an insurer to provide any record or document by electronic means in accordance with the Electronic Transaction Act. This is designed to recognize that e- communications are an effective, efficient and enviro-friendly mode of conducting business that can benefit both industry and consumers in terms of cost, speed and accessibility. [Regulations Discussion Paper]

8 - 8 - However, the Regulations provide that the Electronic Transaction Act does not apply to an insurer s notice of terminating a contract for non-payment of premiums or under a statutory condition (i.e. material change in risk). Such documents will have to be provided in paper form and delivered in accordance with the Act. It s My Way or the Highway: Dispute Resolution The current Act has mandatory appraisal processes for disputes over value of property insured, the value of the property saved or the amount of the loss. The new Act broadens this scope to include disagreements over the nature and extent of the repairs or replacements required or, if made, their adequacy. The mechanics of the dispute resolution process are essentially unchanged from the appraisal process established in the former Act. Essentially, each side appoints a representative and if they are unable to reach an agreement they appoint an umpire to determine the issue. The Regulations further provide that an insurer must give written notice to an insured of the availability of the dispute resolution process at various times: within 10 business days after the insurer determines that the insurer and the insured have a dispute to which the Act applies, or within 70 days after the insured submits a proof of loss if at that time the insurer has not yet made a decision in respect of a matter to which Section 9 of the Act applies. Saving Grace: Grace Periods Under the life and accident and sickness parts of the Act, an insured has a 30 day grace period in which to pay overdue premiums and to have the insurance reinstated. Logically, this only applies if the person whose life is insured under the contract is alive at the time the overdue payment is made. It s Not You, It s Me: The Cooling Off Period The Regulations provide that an insured can rescind a contract of life insurance or accident and sickness insurance within 10 days after receiving the insurance policy or a longer period if provided for in the contract. Upon rescission the insurer must refund the whole of the premium paid. This cooling off period, though, does not apply to travel insurance with a term of less than 190 days or to an annuity contract or a variable insurance contract. The Squeaky Wheel: Consumer Complaints The Insurance Amendment Act amends the Financial Institutions Act and requires insurers to develop their own internal processes for the resolution of consumer complaints and to publicize these processes. In addition, on becoming aware of a dispute insurers (except re-insurers) are required to notify the consumer of the availability of the service provided by the Ombuds Service Organization. Further, insurers must be a member of the Ombuds Service for Life and

9 - 9 - Health Insurance or the General Insurance Ombuds Service. However, re-insurers and mutual companies are exempt from this requirement. CONCLUSION The new Insurance Act represents a significant overhaul of British Columbia s insurance regime. According to the Government, these changes will enhance consumer protection by modernizing the legal framework regulating insurance contracts and respond to industry needs by reducing red tape and supporting new ways of doing business. Whether the trade-off for this reduction of red tape is increased litigation remains to be seen.