When Does an Insurer Waive its Right to Deny Coverage? The SCC to Provide Guidance

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On April 23, 2020, the Supreme Court of Canada granted leave to appeal in Bradfield v Royal Sun Alliance Insurance Company, 2019 ONCA 800, and thereby signaled its intent to consider the circumstances in which an insurer may deny coverage for a claim it has been defending without a reservation of rights.

Bradfield and Devecseri were riding their motorcycles when Devecseri struck an oncoming vehicle driven by Caton. Devecseri died in the accident, and Caton brought a claim for damages against Bradfield and Devecseri’s estate. The estate was defended by Devecseri’s automobile insurer, Royal Sun Alliance Insurance Company (“RSA”).

RSA appointed an adjuster to investigate. Despite undertaking other inquiries, the adjuster did not obtain the Coroner’s report, which was available shortly after the 2006 accident. Caton commenced his claim in 2008 and Examinations for Discovery were conducted in 2009 at which time RSA discovered that its insured, Devecseri, had consumed alcohol prior to the collision, in breach of the terms of his policy. This information was contained in the 2006 Coroner’s report, and was known to Bradfield and a second friend who were drinking with Devecseri before the collision. It was common ground that RSA did not have this information before Discoveries. Within two weeks of learning that Devecseri had breached his policy, RSA took an off-coverage position, withdrew its defence of the Devecseri estate, and reduced the funds available under the policy to the statutory minimum.

In Caton’s action, the trial Court held both Bradfield and Devecseri liable for Caton’s damages and Bradfield succeeded on his cross-claim against the Devecseri estate. In a second action, Bradfield sought a declaration that he was entitled to recover from RSA on the grounds that RSA had waived its right to deny coverage because Devecseri’s alcohol consumption was discoverable if RSA had obtained the Coroner’s report, or alternatively, it was estopped from denying coverage on the basis of its conduct between the May 2006 accident and its July 2009 denial, and because Bradfield had suffered prejudice by relying on RSA’s initial coverage position.

The trial judge accepted Bradfield’s waiver arguments. It held that RSA should reasonably have investigated whether Devecseri had consumed alcohol, as it knew that would be a breach, and that was appropriate to impute such knowledge to RSA as the information was available in the Coroner’s report, which it held RSA should reasonably have obtained. As a result, RSA defended when it reasonably should have known of the breach and had thereby waived the consequences of the breach.

The Court of Appeal overturned the trial court’s decision, finding that RSA had no actual knowledge of the breach. The higher Court declined to impute such knowledge, distinguishing these facts from circumstances in which an insurer has the relevant information, but fails to appreciate its significance. Here RSA did not have the Coroner’s report. Further, RSA had not shown a clear intention in writing to waive the policy breach, as required by s. 131(1) of the Insurance Act, and there was no evidence that Caton relied on RSA’s initial coverage position to his detriment.

This case raises interesting questions as to the early steps an insurer should reasonably take to investigate coverage, particularly when a claim is anticipated; the importance of issuing a reservation of right where material facts remain unknown; and the importance of an insurer acting promptly when it becomes aware of new facts which affect its coverage position. It will be particularly interesting to see whether the Supreme Court of Canada allows Bradfield to benefit from RSA’s late coverage denial when at all material times Bradfield was aware his friend had consumed alcohol, and was presumably aware that this information was significant to RSA’s coverage decision, but did not voluntarily disclose that information in a timely way, thereby hindering RSA’s ability to take an early off-cover position.

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