Insurer unaware of policy violation may deny full coverage even after defending claim: SCC

“It’s a negative decision for claimants who rely on the fact that insurers are defending claims in the expectation that they will pay any settlement or judgment, only to learn that the insurer has belatedly denied coverage due to a policy breach that it ought to have discovered sooner.”

After Steven Devecseri died in a motorcycle accident in May 2009, his insurer Royal & Sun Alliance Insurance Company of Canada (RSA) defended his estate in two lawsuits brought by Jeffrey Bradfield and Jeremy Caton. They were injured in the accident with others. Neither the claims adjuster nor RSA took steps to obtain a coroner’s report.

Three years after the accident and more than a year into litigation, RSA learned that Devecseri had consumed alcohol immediately before the accident, which put him in breach of his insurance policy. RSA then ceased defending Devecseri estate and denied coverage, which reduced the value of Devecseri’s policy to the claimants from $1 million to $200,000.

Caton’s action proceeded to trial nearly three years later, resulting in a judgment against Devecseri’s estate and Bradfield and a judgment in favour of Bradfield on his cross-claim against Devecseri’s estate. Bradfield sought a declaration of entitlement to recover judgment against RSA on the basis that the insurer had waived its right to deny full coverage because it had provided a defence to Mr. Devecseri’s estate as the litigation progressed. The trial judge granted the declaration, finding that RSA had waived this right by failing to take an off‑coverage position and continuing to provide a defence.

The Court of Appeal allowed RSA’s appeal, holding that, at that time, Ontario’s Insurance Act precluded recognition of waiver by conduct. Concerning estoppel, the court found that RSA’s conduct could not amount to a promise or assurance intended to affect the parties’ legal relationship since RSA lacked knowledge of Devecseri’s policy breach when it provided him with a defence.

Bradfield sought to appeal the decision to the Supreme Court, but after being granted leave, he reached a settlement agreement with RSA and discontinued his appeal. The Trial Lawyers Association of British Columbia, which represents plaintiff lawyers, was permitted to be substituted as the appellant.

SCC ruling

In today’s judgment, the Supreme Court upheld the Ontario Court of Appeal decision, finding that the statute precluded waiver by conduct at the relevant time. For promissory estoppel, the top court found that RSA could not have intended to alter its legal relationship with Bradfield because it lacked knowledge of the facts that demonstrated Devecseri’s policy breach.

The majority noted that promissory estoppel requires that i) the parties be in a legal relationship at the time of the promise or assurance; ii) the promise or assurance be intended to affect that relationship and to be acted on; and iii) the other party, in fact, relied on the promise or assurance.

“Promissory estoppel seeks to protect against the ‘inequity of allowing the other party to resile from his statement where it has been relied upon to the detriment of the person to whom it was directed,’” Justices Moldaver and Brown explained in their majority reasons, with Chief Justice Richard Wagner and Justices Suzanne Côté, Malcolm Rowe, and Nicholas Kasirer concurring.

“The court decided that promissory estoppel preventing an insurer from denying coverage to a third party who is relying on the insurer requires an unequivocal assurance that the insurer will continue to provide coverage, and also requires actual knowledge of a policy breach,” MacKenzie told Canadian Lawyer.

“Constructive knowledge is not sufficient; in other words, it’s not enough that the insurer ought to have known of the policy breach.”

The appellant had argued that the insurer had a duty to investigate an incident fairly and fully and promptly, so that “it would learn of the policy breach and deny coverage, [and] a third party couldn’t rely on the fact that the insurer is defending … as a representation that any settlement or judgment would be paid by the insurer,” says MacKenzie.

“So, there is a duty on an insurer to conduct an investigation reasonably, in a reasonably timely way and in a reasonably thorough way, but that isn’t a duty that’s owed to a third party, the court held.”

The policy breach — by the policyholder’s drinking before the accident — was discoverable based on a coroner’s report showing the driver had alcohol in his blood, the appellant had argued.

“The information was there to be discovered,” MacKenzie adds. “The appellant argued that the insurer ought to have discovered the policy breach in a timely way and did not.”

In concurring reasons, Justice Andromache Karakatsanis disagreed with the majority that a promisor must know the facts underlying a legal relationship if the promisor intended to alter it.

In her view, the majority reasons “have added an unnecessary gloss to an element of promissory estoppel, inconsistent with the jurisprudence and inconsistent with the underlying principles of equity,” she wrote.

“Because the intention of the [promisor’s] words or conduct must be assessed objectively, both what the promisor knew and what they reasonably ought to have known are relevant.”

The judgement also noted that the Trial Lawyers Association of British Columbia had conceded that the Insurance Act precluded waiver by conduct as it read at the time, as the statute required that waiver be given in writing. The parties agreed that RSA had not given a waiver in writing.