What Constitutes a Material Change in Risk? A Review of Two Recent BC Supreme Court Decisions

Two recent BC Supreme Court decisions address the issue of when an insurer may be entitled to void an insurance policy due to the insured failing to disclose a “material change in risk”. The insurer was successful in defending a claim by the insureds in one case, but unsuccessful in the other.

Insurance law principles stipulate that an insured has an obligation to provide accurate particulars of all information material to the risks being insured, including the nature of the property and its use. A fact is material where, if it had been disclosed, it would have influenced a reasonable insurer to decline the risk, accept a different risk, or charge a higher premium. Whether or not a change is material to the risk is a question of fact and must be assessed objectively. If an insured does not fulfil his or her obligation to disclose a material change in risk, the insurer will be entitled to treat the insurance policy as void ab initio, i.e. invalid from the outset, and decline coverage.

In Chase v. The Personal Insurance Company, 2019 BCSC 936, the plaintiff property owners obtained a standard “principal residence” home insurance policy from the defendant insurer in 2012. When purchasing the policy, the plaintiffs told the insurer that the property was occupied as their principal residence, the property was not occupied by others, there was no business or commercial activity on the property, there were no detached structures on the property of 800 square feet or larger and there were no pets or other animals on the property.

In fact, the plaintiffs had been leasing a portion of the property to graze cows and calves which produced an income each year, and they had obtained a legal farm classification for the property in 2010.

After the policy was initially issued, the insurer sent the plaintiffs a letter each year upon policy renewal, asking the plaintiffs to review the policy and to advise of any changes. The plaintiffs never disclosed that farming operations were being carried out on the property, or that they had constructed a large steel frame building which was used to store farm equipment.

In February 2017, the steel frame building collapsed due to heavy snowfall and the plaintiffs made a claim under their insurance policy to recover losses resulting from the collapse. The insurer investigated and denied the claim on the basis of misrepresentation. The plaintiffs subsequently sued their insurer and the insurer brought a summary trial application to dismiss the claim.

At the summary trial, the plaintiffs argued that the farming activities on the property were limited such that the property could not be considered to be a farm. The insurer tendered expert evidence indicating that an insurer would not have agreed to insure the property under a standard residential home insurance policy.

In his reasons for judgment, Mr. Justice Ball held that the fact that income was being generated by leasing acreage to a cow/calf operation and the fact that the property was operating as a farm, were material facts that ought to have been disclosed to the insurer at the outset and at the time of renewal. The plaintiffs mispresented the use of the property and failed to disclose material changes in risk to the insurer; therefore, the insurer was entitled to void the policy.

In Nagy v. BCAA Insurance Corporation, 2019 BCSC 930, the plaintiffs purchased a homeowner’s insurance policy from the defendant insurer for a property which they were living in on a part-time basis. After a fire destroyed the home in December 2016, the plaintiffs sought coverage pursuant to the insurance policy. The insurer denied coverage on a number of bases, including that the plaintiffs failed to disclose a material change in risk relating to the occupancy of the property.

The plaintiffs commenced an action against the insurer and, in turn, the insurer brought a summary trial application to dismiss the plaintiffs’ claim. The insurer argued that the plaintiffs represented they would be living at the property at least 50% of the time, but this was not the case as they only resided at the property on weekends.

In her reasons for judgment, Madam Justice Jackson held that the plaintiffs had in fact disclosed to the insurer that they would only be living at the property on the weekends until it was renovated, after which time, they would live there on a full-time basis. Moreover, she held that, even if she was wrong in finding that there was no change to the plaintiffs’ occupancy of the property requiring disclosure, such change was not material to the risk.

The insurance policy did not define “principal residence” nor did the policy require a particular threshold of occupancy. The only occupancy requirement in the policy was that the property remain occupied and not become vacant. Therefore the insurer could not say that the policy required the plaintiffs to live at the property more than 50% of the time nor could the insurer say that “reduced occupancy” was material. Further, the insurer did not tender any expert evidence suggesting that a reduced level of occupancy was considered a material change in risk by the broader insurance industry.

Madam Justice Jackson held that the insurer had failed to prove that the insurance policy was void by reason of a material change in the plaintiffs’ occupancy of the property and the plaintiffs’ loss was covered. Accordingly, the insurers’ summary trial application was dismissed.

The Chase and Nagy decisions highlight a number of important considerations for both an insurer and insured. First, while there is a duty on the insured to disclose material changes in risk, the policy wording must be unambiguous if the insurer intends to rely on it to deny coverage. Second, the determination of what constitutes a material change in risk will generally require expert evidence about standards in the insurance industry. Finally, the decisions demonstrate that such disputes may be effectively resolved by way of summary trial procedure.

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