Immaterial (or I’M material)?

A contract of insurance is a contract subjected to the legal doctrine of Utmost Good Faith [Uberrima fides]. It essentially means that the parties to the contract (the Insured and the Insurer) must always deal in good faith, disclosing all material facts at the time of entering into the contract, as well, any material changes to the risk (subject matter of insurance) thereafter, during the term of the contract. This is different from the legal doctrine of caveat emptor (“let the buyer beware”).

The duty of utmost good faith is bilateral. The Insured needs to make sure that all material facts are conveyed to the Insurer (or to the Insurance Broker), and the Insurer needs to make sure that adequate and enough coverage is made available (offered) to the Insured, notwithstanding whether the Insured is willing to accept the coverage offered.

The principles underlying this rule of disclosing all material facts were stated by Lord Mansfield in the leading and often quoted case of Carter v Boehm (1766) 97 ER 1162, 1164 [Wikipedia],

Insurance is a contract of speculation... The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only: the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstances in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist... Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary.

Whether to report a fact or a change in the risk to the insurers, sometimes, is a difficult decision for an Insured who may not be that insurance savvy. Inadvertently or in ignorance, there may be material facts to the risk that may not be made aware to the Insurers by the Insured. This may result in policy getting void, ab initio, wherein the Insurers will end up returning the premiums paid to the Insured and will void any claim coverage that was promised under the contract of insurance.

The subject of material mis-representation and/or non-disclosure has been discussed time and again in numerous lawsuits. In addition to the Insured and the Insurer, the Insurance Broker also plays a crucial role in such cases, being the voice of the Insured to the Insurer. It must be noted that the onus, however, to prove the change in risk was material enough to void coverage, lies upon the Insurers. 

In Schellenberg v. Wawanesa Mutual Insurance Company, 2019, the insured brought an action in the Supreme Court of British Columbia, against its Insurer (Wawanesa) and the Insurance Broker (Hub) with respect to a fire claim that was denied by Wawanesa based on failure to disclose material changes in the risk by the Insured. The incident involved a fire incident that destroyed the upper storey of a large outbuilding located in the property of the Insured. At the material time of the incident in 2014, the lower storey of the outbuilding contained a licensed medical marijuana grow operation involving 300+ plants. The insured also made upgrades to the electrical system of the outbuilding from 200 amps to 400 amps. Neither the grow operation nor the upgrade was ever brought to the knowledge of either the Insurer or the Insurance Broker, even though the Insured had been in business with the same Insurer and Insurance Broker for many years before the incident. After the fire incident, that was unrelated to either of the two changes,

Wawanesa voided coverage denying all liability in the matter, returning premiums paid by the Insured. Wawanesa’s and Hub’s position was that the grow operation and the electrical upgrades were material changes in the risk that should have been disclosed by the Insured. The Insured brought in a lawsuit against both, arguing that the Insured did not intend to misrepresent the change in risk and argued that it was the duty of the broker to ask the right questions, and that they failed to do so at the time of each renewal process.

The court, dismissing the Insured’s claim against Wawanesa and Hub, discussed, inter alia, the two most important basis of dismissing the action:

Materiality of Change to the Risk

Based on an expert opinion, it was established that, in a nutshell, Wawanesa would not have underwritten the risk had it known about the grow operations. With respect to the modification and upgrade to the electrical system, the 400 amp service was viewed as substantially more than is usually needed to maintain a “normal family home”. Thus, it was established that the change with regards to the grow operations and the nature of such operations was material to the underwritten risk.

Knowledge and Intention of the Insured

The Insured argued that they were “innocently silent” about both the changes as they did not think that the changes will be material enough to report. The presiding judge stated:

In Lafarge Canada Inc. v. Little Mountain Excavating Ltd., 2001 BCSC 218 at para. 25, for example, the principle provided the basis for quite the opposite conclusion, that is, the reason for the insured’s failure to disclose material information, whether deliberate or inadvertent, was irrelevant, along with Railway Passengers’ Assurance Co. v. Standard Life Assurance Co. (1921), 63 S.C.R. 79 at 97-98.

Further, it was stated:

Clearly the magnitude and complexity of the grow operation installed in their outbuilding was a significant change, very far from an ordinary use of the property, and certainly more unusual than the presence of the shop which Mr. Schellenberg did disclose. Given its elaborate infrastructure, the number of marijuana plants being grown, the amount of space they and the drying/dried marijuana occupied, and the Schellenberg’s fear of being targeted, the suggestion Mr. Schellenberg never considered the grow operation relevant to their insurance is simply not believable. The suggestion becomes implausible when one considers that he was aware of the obligation to notify Hub or Wawanesa of changes in risk that could affect their premiums or coverage. 

The case does not appear to discuss the cause of fire (except that it was unrelated to the grow operations). Wawanesa would not have underwritten the risk, at all, had they known about the grow operations. Thus, the cause of the incident and whether the grow operations contributed to the incident or not, became irrelevant. 


The content of this article is intended to provide general guidance only. A specialist must be consulted for specific circumstances.  

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