Insurance applications can be challenging. The questions are often ambiguous and remembering every piece of relevant information is difficult. However, being diligent is important, as an insurer may deny coverage of a claim if an insured incorrectly answered a question or failed to disclose material information. On the other hand, insureds should be aware that the courts will scrutinise claims of inadequate disclosure on a reasonableness basis. Typically, insurers cannot rely on answers to ambiguous questions in application materials unless the nature of the risks that those questions sought to elicit is obvious or was brought to the insured's attention.
Ontario's Insurance Act requires that applicants disclose every fact within their knowledge that is 'material' to the insurance.(1) The failure to disclose a material fact may render a policy voidable by the insurer.(2) In other words, the insurer can treat the policy as if it had never been in force, as long as it returns all premiums to the insured.
The courts consider information to be material if it would have affected a reasonable insurer's decision to accept the risk. Take, for example, a vehicle distributor that applies for cargo insurance prior to shipping a car by sea. The distributor is insured to ship a mid-market sedan, but the company instead ships a luxury supercar. On its journey, the vessel capsizes and the company makes a claim. In this example, the insurer could likely terminate the policy because it did not expect to have to indemnify the company for the loss of an expensive supercar. If it had known the value of the vehicle being transported, it would likely have assessed the risk differently and charged a higher premium.
Insureds' deemed knowledge of material information
The courts have held that insurers and insureds owe each other duties of utmost good faith. Before discussing the duty of insurers during the application process, insureds should consider their obligations to insurers.
There are circumstances in which insureds should know that information is material. In the cargo example, a court would likely find that the insured should have known that an addition of two more vehicles was material. The insurer would have likely assessed the risk and premium differently had it known that the total value of the cargo was triple what the parties had contemplated.
Another more common example is materiality in the fire insurance context. In one case, a homeowner indicated that the insured dwelling was a single family, owner-occupied home.(3) However, the owner rented the home out to others. The court decided that the insured had known that matters of owner-occupancy, rental units and tenants were material to the insurance based on the wording of the application form. Further, the court relied on the insured's prior insurance experience.(4)
What the insured should have known is assessed on a reasonableness standard. In an accident and sickness-related decision, the insurer asked the plaintiff a catch-all question at the end of the application form, which read: "[a]ny other disease or symptom not listed above". The insurer argued that the plaintiff should have disclosed sleep apnoea as a condition. The court disagreed, as the plaintiff had genuinely understood that he had no symptoms of this condition and the physician's assessment was inconclusive.
Accordingly, the courts can look to extrinsic factors to determine whether an insured should have known that certain facts were material to the insurance.(5) However, where the information is complex, the courts are more likely to rely on the insured's personal understanding. Insureds cannot be expected to independently answer questions that require the knowledge of a specialised professional (eg, a physician). The courts expect insureds to communicate material information based on their reasonable understanding of the information.
Insurers' obligation to enquire
Where the insured's appreciation of materiality cannot be reasonably implied by the nature of the information (eg, the value of goods) or the parties' circumstances (eg, prior insurance experience), the insurer may need to identify relevant issues.(6) This rule prevents insurers from unfairly denying claims based on information that the insurer had considered irrelevant before the loss occurred. It requires insurers to be clear and fair in their application materials.
One court stated that insurers can ask any number of questions to satisfy themselves of what they consider to be material information.(7) In most cases, insureds will know that information is material only if the insurer specifically asks questions in relation to the information. The insurer in the cargo example might consider that seaborne transit through certain chokepoints would affect the risk and premium. The insurer must not remain silent on this issue at the application stage. If the insurer does not ask questions about chokepoints when discussing transit routes, it cannot later deny coverage for misrepresentation if the loss arises because of a peril specific to chokepoints (eg, piracy).
Insureds should be careful and thorough when completing application forms and answering questions. However, insurers have a duty to provide fair and unambiguous application forms. Insureds will know what the insurer considers material only if the insurer asks. Insurers' failure to ask questions about material facts could lead to overturning a denial of coverage.
Endnotes
(1) Chapter I8, Section 308(1) of the Insurance Act, RSO 1990.
(3) Roumiani v Fowler, 1998 CanLII 18684 (NLSC) at Paragraph 12.
(5) MacQuarrie v National Bank Life Insurance Company, 2014 CanLII 1298 (ONSC) at Paragraphs 78 to 82 aff'd 2015 ONCA 100.
(6) Evans v State Farm Fire & Casualty Co, 1993 CanLII 5476 (ONSC).
(7) Thorne v Prudential Insurance Company of Canada, 1993 CanLII 7931 (NBQB).
