Canada: BC's New Insurance Act: Making The Transition To The New World Order

Executive Summary

In 2003, a lawyer's negligence case involving a missed limitation period resulted in a Supreme Court of Canada decision declaring that BC's Insurance Act was "outmoded", "incapable of coherently addressing the modern multi-peril policy", and resulted in "unproductive, wasteful litigation about technicalities" KP Pacific Holdings Ltd. v. Guardian Insurance [2003] 1 S.C.R. 433 ("KP Pacific").

The case dealt with the limitation period applicable to the coverage enforcement action under an all risk property policy. The Court held that such a policy could not be "shoe-horned" into the Fire Part of the Insurance Act and instead applied the longer limitation period stipulated by the General Provisions (Part 2) of the Act. It specifically urged the legislatures across the country to "rectify this situation".

In 2009 the BC Legislature finally got around to amending the Insurance Act. These amendments included some significant changes, including such things as:

  • Eliminating the "Fire Part" of the Act altogether and instead expanding the "General Provisions" part of the Act so as to apply to virtually all types of property and liability insurance;
  • Importing the requirement of Statutory Conditions for both property and liability policies;
  • Importing "proportionate contributions" as between overlapping policies;
  • Imposing a base two (2) year limitation period for coverage enforcement lawsuits against the insurer;
  • Enacting an "unjust contract provision" preventing coverage denials where they are considered either unjust or unreasonable in the circumstances of any given case;
  • Introducing the concept of "innocent persons" to whom the "criminal or intentional act" exclusion would not be applicable and who would be allowed to recover their "proportionate interest" in lost or damaged property;
  • Mandating coverage for all fire losses except those permitted to be excluded by regulations; and
  • Allowing electronic delivery of certain insurance records or documents.

Some of the amendments to the Act contemplated terms, conditions or exceptions to be clarified by government regulation. It has taken almost three (3) years for those regulations to be enacted by the BC Government, but they were finally issued at the beginning of December 2011. The whole regime (amendments plus regulations) will take effect July 1, 2012, by which time insurers will have to revise policy wordings to reflect the necessary changes.

The new regulations include the following changes to BC's property and casualty insurance regime:

  • The statutory conditions are excluded for certain classes of insurance but will still be applicable to most property and all liability coverages;
  • The current fifty (50) separate classes of insurance are being reduced to twenty (20) so as to harmonize insurance classification with the federal regime;
  • Insurers must provide written notification to a claimant of the limitation period applicable to any coverage enforcement action within as little as five (5) business days of any claim denial and failure to comply with such notice provisions operate to suspend that limitation period;
  • Only "natural persons" (human beings) will have the benefit of the "innocent coinsured" provision in the Act and in order to obtain such protection, such insureds must cooperate with the loss investigation, submit to examinations under oath and produce requested documents;
  • Arson can be a fire coverage exclusion but it is subject to the "innocent co-insured" provision;
  • Fire coverage is mandatory for any fire loss occurring while the insured property is vacant for up to thirty (30) days;
  • Exclusions for fire following earthquake are not permitted;
  • Notice of termination of a contract pursuant to a statutory condition or for nonpayment of premium cannot be delivered electronically;
  • Insurers must provide the insured with written notice of the dispute resolution process (appraisal) under the Act within ten (10) days after a dispute has arisen or within seventy (70) days after submission of a Proof of Loss if no coverage/payment determination has been made; and
  • With only some limited exceptions, all insurers who are authorized to conduct business in BC must be a member of the General Insurance OmbudService for the purpose of addressing "insurer complaints".

Obviously, several of these changes will require "tweaking" of policy wording, whether with respect to statutory conditions, limitation periods or the narrowing of exclusions. Mind you, even though the Supreme Court of Canada ruled in 2003 that the one (1) year limitation found in the fire statutory conditions did not apply to coverage enforcement actions under the modern "allrisk" policy, virtually no insurers changed their wording to reflect that decision. Presumably there will be a little more interest in amending wording this time around given that the changes are effectively mandated by legislation.

Transitional provisions have been included in the New Act to cushion the blow to insurers in some cases until policies are renewed or replaced.

Essentially the same changes are being made in Alberta as well. That particular province has been somewhat swifter in both amending its Act and issuing the supporting regulations, but Alberta's changes also do not come into effect until July 1, 2012.

Introduction

In 2003 a lawyer's negligence case resulted in the Supreme Court of Canada declaring that B.C.'s Insurance Act was "outmoded", "incapable of coherently addressing the modern multiperil policy", and resulted in "unproductive, wasteful litigation about technicalities": KP Pacific Holdings Ltd. v. Guardian Insurance [2003] 1 S.C.R. 433 ("KP Pacific").

In KP Pacific the insured claimed for a fire loss under an all risk policy. The policy contained the standard statutory conditions mandated by the "Fire Part" of the BC Insurance Act which included the litigation limitation period of one year following occurrence of the loss. The question in the case was whether the limitation period was the one stipulated by the statutory condition or the longer limitation period stipulated in the "General Provisions" of the Act, namely, one year from the filing of a proof of loss. The more general issue was whether the modern all-risk policy was governed by the Fire Part of the Act (including the statutory conditions) or the General Provisions of the Act.

The Court ultimately held that an all-risk policy could not be "shoe-horned" into the Fire Part of the Act and instead applied the longer limitation period stipulated by the General Provisions (thereby saving the arguably negligent lawyer from liability for missing the limitation period). The Court noted the history of the legislation which was "built on the premise of discrete policies for discrete subject matters, with limited overlap" which was now an "outmoded paradigm incapable of coherently addressing the modern multi-peril policy". The Court urged,

"It is our hope that legislatures will rectify this situation by amending the Insurance Act to provide specifically for comprehensive [all-risk] policies. In an insurance era dominated by comprehensive [all-risk] policies, it is imperative that Canada's Insurance Acts specifically and unambiguously address how these statutes are to operate and the rules by which comprehensive policies are to be governed.

It would be highly salutary for the Legislature to revisit these provisions and indicate its intent with respect to all-risks and multi-peril policies. In the meantime, the task of resolving disputes arising from this disjunction between insurance law and practice falls to the courts. Brown and Menezes lament: "Surely there can be little which is less productive, or more wasteful, than litigation about such technicalities": C. Brown and J. Menezes, Insurance Law in Canada (2nd ed. 1991), at p. 16. I wholeheartedly agree. "

It took a long time but in due course the legislatures of both Alberta and British Columbia responded to the challenge. Both provinces passed legislation amending their respective Insurance Acts. Some of the amendments to the Acts contemplated terms, conditions or exceptions to be clarified by government regulation. It took almost three years for those regulations to be introduced and the new regimes (amendments plus regulations) in Alberta and British Columbia will come into force on July 1, 2012. Significant changes are being introduced and the wordings of both property and liability policies will have to be modified.

This paper reviews the amendments and regulations which are being brought into force in British Columbia and urges insurers to revise policy wordings to reflect the necessary changes.

II. Summary of Changes by Topic:

A. Structural Reform

The Supreme Court in KP Pacific, supra noted that:

The Insurance Act was passed in 1925 (S.B.C. 1925, c. 20). Despite repeated housekeeping amendments, it remains essentially unchanged. It was designed for a world where insurers issued policies geared to specific risks and subjects, such as fire insurance, theft insurance, business loss insurance, and so on. Accordingly, it lays down rules, including limitation periods, based on different and discrete categories of insurance.

The current Insurance Act in British Columbia contains separate provisions applying to Life Insurance (Part 3), Accident and Sickness Insurance (Part 4) and Fire Insurance (Part 5), prior to it's repeal in June 2007 Auto Insurance (Part 6) and Miscellaneous Insurance (Part 7). An omnibus General Provisions (Part 2) applies to virtually all other forms of insurance, including the now commonplace "all risk" property policy, as well as all forms of general liability insurance.

Under the new regime Part 5 relating specifically to Fire Insurance is completely eliminated and consequently largely all forms of property and liability policies will now be governed by the General Insurance Provisions in Part 2 of the New Act.

The New Act sees many of the former Part 5 provisions, which related solely to property insurance, transferred in slightly amended form into the new Part 2. In several instances, it appears the legislature may not have given much thought to the application of property insurance concepts to liability insurance policies.

Part 2 of the New Act retains the concept of "Statutory Conditions" (the new section 27.1). Section 27.1 (3) says that Statutory Conditions 1 and 6-13 apply only to property insurance, which means that Statutory Conditions 2 (property of others), 3 (change of interest), 4 (material change and risk) and 5 (termination of insurance) all apply to liability policies. In other words, it will now be possible for a liability insurer to void coverage because there has been a "material change to the risk" that has not been promptly notified to the insurer.

Similarly, Section 28.1 of the New Act re-enacts the proportionate contributions clause into Part 2 General Provisions and provides:

(1) If, on the happening of loss or damage, there is in force more than one contract covering the loss or damage, the insurers under the respective contracts are each liable to the insured for their rateable proportion of the loss, unless it is otherwise expressly agreed in writing between the insurers.

(2) For the purpose of subsection (1), a contract is deemed to be in force despite any term or condition of it that the contract does not cover the loss or damage or attach, come into force or become insurance with respect to the loss or damage until after full or partial payment of any loss under any other contract.

(3) Nothing in subsection (1) affects

(a) the validity of any divisions of the amount of insurance into separate items,

(b) the limits of insurance on specified property,

(c) a clause referred to in section 28.2, or

(d) a contract condition limiting or prohibiting the having or placing of other insurance.

(4) Nothing in subsection (1) affects the operation of a deductible clause, And

(a) if one contract contains a deductible clause, the prorated proportion of the insurer under that contract must be first ascertained without regard to the clause, and then the clause must be applied only to affect the amount of recovery under that contract, and

(b) if more than one contract contains a deductible clause, the prorated proportions of the insurers under those contracts must be first ascertained without regard to the deductible clauses, and then the highest deductible must be prorated among the insurers with deductibles, and these prorated amounts affect the amount of recovery under those contracts.

(5) Nothing in subsection (4) is to be construed to have the effect of increasing the prorated contribution of an insurer under a contract that is not subject to a deductible clause.

(6) Despite subsection (1), insurance on identified articles is a first loss insurance as against all other insurance.

On its face, this provision applies to liability policies as well as property policies and it remains to be seen whether it has the (inadvertent?) effect of overriding the overlapping coverage analysis as set out by the Supreme Court of Canada in Family Insurance Corp. v. Lombard Canada Ltd. 2002 SCC 48.

The provisions in Part 7 involving livestock insurance are also eliminated and it is left to the legislature to make regulations applying specified provisions of Part 2 to home warranty insurance or deposit protection contracts.

The General Provisions (Part 2) will not apply to life insurance or accident and sickness insurance, which remain governed by Parts 3 and 4 respectively.

As an aside, Bill 6 also repeals the Insurance (Marine) Act. In its News Release the government stated that "(m)arine insurance contracts are exclusively a matter of federal jurisdiction, and are subject to the federal Marine Insurance Act".

Regulations concerning Structural Reform

The following classes of insurance were defined as being excluded from the application of the Statutory Conditions: aircraft insurance, boiler and machinery insurance, credit insurance, credit protection insurance, hail insurance, mortgage insurance, product warranty insurance, title insurance and travel insurance or vehicle warranty insurance. However, the Statutory Conditions will still be applicable to most property and all liability coverages.

Also, the current fifty (50) separate classes of insurance are being reduced to twenty (20) so as to harmonize insurance classification with the federal regime.

B. Clarifying Limitation Periods

In its March 2007 Discussion Paper, the BC government indicated that during the consultation process clarification of limitation periods was identified as a priority issue by many stakeholders:

Streamlining the current inconsistent limitation periods is seem as necessary to reduce confusion for consumers, advisors and insurers, all of whom need certainly in order to appropriately deal with insurance claims.

Given the uncertainty with the current state of affairs, this is not surprising. In 2003 the Supreme Court of Canada in KP Pacific Holdings, supra and Churchland v. Gore [2003] 1 S.C.R. 445, 2003 SCC 26 held that the limitation period for property claims under an all risk policy was one year from the furnishing of a "reasonably sufficient proof of a loss" on a claim under the contract. However, left uncertain was what constituted such "reasonably sufficient proof" and such debate became the cornerstone of limitation litigation.

The New Act attempts to streamline the limitation period debate so as to "reduce confusion for consumers, advisors and insurers all of whom need certainty in order to appropriately deal with insurance claims." [Discussion Paper].

Under the New Act, limitation periods will change with two years being the norm. Under Section 22 the limitation period for property policies will be two years after the insured knew or ought to have known the loss or damage occurred and, in any other case, two years after the cause of action against the insurer arose.

With life insurance the limitation period under section 65 will be two years after proof of claim is furnished or six years from the date of death or in the case of insurance money payable on a periodic basis, the date the insurer fails to make a periodic payment.

Section 2.4(1) applies section 7 of the Limitation Act to limitation periods under the New Act, which has the effect of extending those limitation periods for persons under a legal disability. For example, if the insured is a minor the limitation period only starts to run once they reach 19 years of age. In regards to other persons under a legal disability the time only begins to run once they are no longer under such a disability.

In short, the limitation provisions in the New Act can be summarized as:


Regulations concerning Limitation Periods

Under the New Act, insurers must provide written notification to a claimant of the limitation period applicable to any coverage enforcement action within as little as five (5) business days of any claim denial. Failure to comply with such notice provisions operate to suspend that limitation period.

C. Subrogation

At common law in order for the insurer to have full subrogation rights, including the exclusive right to control the litigation, the insurer must have fully indemnified the insured for the loss. This does not mean that the insurer has paid out the maximum allowable under the policy; it means that the insured must have been fully indemnified for the loss. So, at common law, and subject to statute and contract, where an insurer is attempting to enforce the insured's rights against a third party, the insurer must have fully indemnified the insured before it can recover from the third party or have exclusive control over the litigation [Farrell Estates Ltd. v. Canadian Indemnity Co.(1990), 69 D.L.R. (4th) 735 (BCCA)].

Many insurers' policies contain provisions which apply for the insurer to exercise the right of subrogation as soon as any payment is made under the policy, and not only in the instance of full indemnity. Section 130 of the Current Act eliminates the prerequisite of full indemnity for subrogation in regards to policies covered under the Fire Part.

Subrogation

130 (1) The insurer, on making any payment or assuming liability therefore under a contract of fire insurance is subrogated to all rights of recovery of the insured against any person, and may bring action in the name of the insured to enforce those rights.

(2) If the net amount recovered after deducting the costs of recovery is not sufficient to provide a complete indemnity for the loss or damage suffered, that amount must be divided between the insurer and the insured in the proportions in which the loss or damage has been borne by them respectively.

Section 28.7 of New Act provides that:

Subrogation

28.7 (1) The insurer, on making a payment or assuming liability under a contract, is subrogated to all rights of recovery of the insured against any person, and may bring an action in the name of the insured to enforce those rights.

(2) If the net amount recovered after deducting the costs of recovery is not sufficient to provide a complete indemnity for the loss or damage suffered, that amount must be divided between the insurer and the insured in the proportions in which the loss or damage has been borne by them respectively.

The re-enactment of this section within the "General Insurance Provisions" extends the right of subrogation absent full indemnity to virtually all types of insurance policies.

D. Unjust Contracts Provision

Section 3 of the New Act expressly stipulates that Part 2 (General Insurance Provisions) applies to every contract, with certain exceptions that will not be applicable to the property and casualty industry. This means the sections in question apply to not just property insurance, all-risk or otherwise, but every conceivable form of liability insurance as well, including Commercial General Liability (CGL), Directors and Officers insurance (D&O), professional Errors and Omissions insurance (E&O), excess/umbrella policies and so on.

The Fire Part of the Current Act contains a provision respecting "unjust exclusions" as follows:

129 If a contract

(b) contains any stipulation, condition or warranty that is or may be material to the risk, including, but not restricted to, a provision in respect to the use, condition, location or maintenance of the insured property,

the exclusion, stipulation, condition or warranty is not binding on the insured if it is held to be unjust or unreasonable by the court before which a question relating to it is tried.

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