Material Change in Risk in Fire Loss Case

In Dubroy v Canadian Northern Shield Insurance Co., 2021 BCSC 352, the BC Supreme Court was asked to consider a situation in which a miscommunication between the insured and her broker resulted in a policy being issued on a property which her insurer thought was her primary residence, but, was in fact, the primary residence of her co-insured, her brother. When her brother later moved out and other family members moved in, the insured failed to notify her insurer of the change in the occupants, both at the time they moved in and, again later, at the time of renewal of her policy. When a fire destroyed the insured’s property, the court was asked to determine if the insured had voided her insurance policy with her insurer and, if so, whether she should be granted relief from forfeiture under the Insurance Act, R.S.B.C. 2012, c. 1, s. 29.

To answer the first question, the court had to consider whether the insured’s failures to notify her insured of the changes in occupancy amounted to a breach of statutory condition 4 under Section 29 of the Insurance Act. Section 29 requires the insured to promptly give notice in writing to the insurer or its agent of a change “material to the risk” that is “within the control and knowledge of the insured.” A “material change in risk” is change to the risk that, if disclosed, would have caused a reasonable insurer to decline the risk or stipulate for a higher premium. If the insured fails to notify the insurer of the material change in risk, then the insurance contract is void as to the part affected by the change. While the court accepted that, had the insurer understood from the inception of the policy that the property was not the insured’s primary residence, it would not have issued the policy as it would have considered the property to be a rental property, the court declined to find the policy was void as there had been no material change is risk. That is, when the insured failed to notify her insurer of the various changes in the occupants, she was not failing to notify her insurer of a material change in risk because whether the occupants were named co-insureds or not, they were, at all materials, no more than “a relative of the non-resident and exclusive owner”. In making this ruling, the court held that “[s]tatutory condition 4 does not empower an insurer to void a policy on the basis of a failure to correct inaccurate information in a renewal notice.”

The reader might ask why the policy was not considered void at the time of inception. In this case, before trial, the insurer had withdrawn its allegation that the insured had made any material misrepresentations and/or fraudulent omissions at the inception of the policy, most likely due to the fact that there had been a miscommunication between the broker and insured at the time she filled out the insurer’s application form that lead to the mistake in classification of the primary residence. Because of this concession, the court found that the policy was valid at inception. As such, the court only had to decide whether the subsequent changes in occupancy were material changes in risk.

Having found that there was no material change in risk, the court did not need to go on to answer the second question whether the insured should be granted relief from forfeiture under Section 32 of the Insurance Act, R.S.B.C. 2012, c. 1, s. 29. However, the court elected to do so anyway in case, on appeal, the insured was found to have failed to notify her insurer of material change in risk. The three factors that need to be considered by the court in exercising its discretion to grant relief from forfeiture are: (1) the conduct of the applicant, (2) the gravity of the breach, and (3) the disparity between the value of the property forfeited and the damage caused by the breach.

With regard to factor (1), the court found that the insured had acted both honestly and reasonably, that the error regarding the principal residence was made due to a miscommunication with her broker, and that the only reason she had not taken steps to correct the breach was because she did not appreciate that there had been a material change in risk. As such, factor (1) weighed in favour of granting relief from forfeiture. With regard to factor (2), the court found that the consequences of the breach were serious, namely, if the insured had notified her insurer of the changes in occupancy, it was “highly likely that [her insurer] would have reasonably declined to renew “the policy”. This finding was likely meant to be read in the context of an earlier comment in the judgement where the court agreed with the insurer’s submission that, had she notified her insurer of the change in occupancy of her co-insured, her insurer most likely would have uncovered the mistake in the classification of the property of her primary residence and would have declined to renew the policy. As such, factor (2) weighed against granting relief from forfeiture. With regard to factor (3), the court that the disparity factor was neutral, but provided an example of a hypothetical that would tip the balance in favour of the insured for relief from forfeiture: had the insured changed her insurance so that her actual primary residence was insured by the same insurer, then the insurer would have been obligated, by its own underwriting guidelines, to insure what would have been considered her revenue property. The insurer then would have collected a higher premium, the policy would have been valid at inception, and the insurer would have had to pay out the loss from the fire in full. Because factor (1), the reasonableness of the insured’s conduct is the most important factor, the court held that “[w]hile the case is a very close call … [the court’s] conclusion that [the insured] acted imperfectly by reasonably tips the scales ever so slightly in her favour” for relief from forfeiture.