Termination of an insurance contract typically occurs in one of three circumstances: by natural expiry of the time period specified in the contract, by mutual agreement between insurer and insured, or by unilateral procedure of the insurer. The last of these circumstances may become contentious with an insured, especially when an insured has to find new coverage or experiences a subsequent loss.
Canadian courts have consistently found that either party to an insurance contract containing statutory conditions governing its termination may terminate coverage arbitrarily and without stated reasons, provided that the cancellation complies strictly within the terms of the condition. [See for example Confederation Lincoln Mercury Sales Ltd. v. Prudential Assurance Co. 1986 I.L.R. 1-2065]
A recent Alberta case considering a termination clause in a non-insurance context may test this law. Bhasin v. Hrynew , 2011 ABQB 63 has been granted leave to the Supreme Court of Canada and will be argued this month. This case arises from a dispute over the use of a discretionary non-renewal clause in a contractor's agreement, an analogous situation to that of the unilateral termination of an insurance contract. The outcome of Bhasin may have extensive implications in the insurance industry in regards to how the cancellation of insurance policies is handled in the future.
In Bhasin, good faith performance of a contract was central to Justice Moen's decision. The Plaintiff was considered an Enrollment Director under contract to Canadian American Financial Corp. (Canada) Limited ("CAFC"). In 1998 CAFC entered into a standard agreement with all Enrollment Directors, a process into which the Plaintiff had input. The Plaintiff entered into the contract after assurances by CAFC that a discretionary non-renewal clause would not be interpreted strictly as a means to end their relationship. Eventually CAFC did rely on this clause and allowed the contract to lapse rather than renewing it.
Justice Moen concluded that the discretionary non-renewal clause of the Plaintiff's contract had preconditions that were not expressly stated in the contract. A duty of good faith performance was implied into the clause even though the clause was unambiguous on its face (not dissimilar to the statutory termination condition clauses in insurance policies). Justice Moen stated that this duty of good faith was necessary where there is an imbalance of power between contracting parties. The stronger party was not permitted to rely on an 'entire agreement' clause to preclude the court from implying a duty of good faith performance. Significant damages were awarded to the Plaintiff.
This decision diverged from traditional, and predictable, contract law principles. By implying a term of good faith into this unambiguous contract, the decision could have far reaching implications, including to the insurance industry as insurers are often seen as having more bargaining power than insureds when entering into an insurance contracts. This case may well be considered when interpreting cancellation clauses in insurance policies.
The Alberta Court of Appeal (Justice Cote, Justice Paperny, and Justice Belzil) unanimously overturned the decision. The Court of Appeal's decision restored the status quo in terms of the factors typically considered in contractual disputes; particularly, that a contract should not be interfered with if it is unambiguous and clear. Furthermore, the court found that the inequality of bargaining power did not reach a level of unconscionability which is what is required at law for a duty of good faith to be implied.
The Court of Appeal's decision confirms that the fact that a contractual right is discretionary is not in itself a sufficient cause for implying good faith constraints. Rather, judges should still consider whether a good faith constraint is consistent with the text, context, and purpose of the provision and the contract as a whole. After all, parties to a contract are free to include, or not include, whatever terms they choose.
Bhasin v. Hrynew is scheduled to be heard in the Supreme Court of Canada in February 2014. The Supreme Court of Canada's grant of leave indicates the significant legal issues in question. The court will likely consider at what point, and in which circumstances, a court can imply a duty of good faith in the performance of an unambiguous contract. Another consideration will likely be the extent to which an 'entire agreement' clause can effectively preclude an implication of a duty of good faith by the courts.
The insurance industry has long abided by the doctrine of uberimmae fides or utmost good faith. This doctrine is rooted in the understanding that good faith is reciprocal between the insured and the insurer. On the one hand, Insureds must disclose all matters relevant to the risk to the insurer; while, on the other hand, insurers must deal with the Insureds openly, honestly and without unreasonable delay in the assessment of claims and in the decision of whether the claim will be paid out.
The question will be how the Supreme Court of Canada's decision reconciles with the doctrine of utmost good faith. If the Supreme Court restores Justice Moen's decision, it may magnify the latitude of what the courts are willing to take into consideration when determining whether an insurer acted with the utmost good faith in terminating an insurance contract. Furthermore, it will call into question whether unilaterally terminating an insurance contract by solely relying on the terms of the condition will be sufficient.
This could amount to an increase in litigation. By allowing Plaintiff's the expectation that an insurer owes a duty beyond the express terms of the contract, there will be no easily discernible limit to the duty insurers owe to insureds. By opening the floodgate, the manipulation of written contracts through non-express terms will set a dangerous precedent and could significantly and adversely affect the insurance industry.
The Supreme Court's decision in Bhasin could undoubtedly impact a much broader context of contracts. The basic proposition in any contract is that parties may contract to any terms they agree to. It is not for the court to make good a bad bargain in an unambiguous contract. This would go against the very nature of 'freedom of contract'. Although there is an indisputable imbalance of power between insureds and insurers, this is an issue of consumer protection for the legislative process to regulate, not the courts.
The Supreme Court must also consider the implications of creating a realm of uncertainty and unpredictability that would follow should the courts intervene in implying terms into unambiguous contracts.
It is worthwhile to keep an eye out on the Supreme Court's decision in Bhasin v. Hrynew. Contracts are a central factor in the day-to-day functioning of insurers and, as such, it will be interesting to see how, and to what degree, the outcome of Bhasin will impact the insurance industry.
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