In October of 2019, the Ontario Court of Appeal ruled in the case of Bradfield v Royal Sun Alliance Insurance, 2019 ONCA 800, that an insurer had the right to withdraw its defence of its insured when the insurer discovered evidence of a policy breach three years after the accident giving rise to the claim.
On November 18, 2021, the Supreme Court of Canada affirmed the Court of Appeal decision in Trial Lawyers Association of British Columbia v Royal & Sun Alliance Insurance Company of Canada, 2021 SCC 47.
Bradfield and Devecseri were riding their motorcycles in May of 2006 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"). Bradfield also brought a claim against Devecseri's estate.
RSA retained 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 in the 2006 Coroner's report and was known to Bradfield and a second friend who had been drinking with Devecseri before the collision. All parties agreed that RSA did not have this information before Examinations for Discovery. Within two weeks of learning that Devecseri had been in breach of his policy at the relevant time, RSA took an off-coverage position, withdrawing its defence of the Devecseri estate and reducing available proceeds on the RSA policy to the statutory minimum.
The trial Court held both Bradfield and Devecseri liable for Caton's damages and Bradfield succeeded on his cross-claim against the Devecseri estate. Bradfield then sought a declaration that he was entitled to recover from RSA on two 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, RSA was estopped from denying coverage on the basis of its conduct between the May 2006 accident and its July 2009 denial, as Bradfield relied on RSA's initial position and would suffer prejudice if RSA's 2009 coverage denial was allowed to stand.
The Lower Court Decisions
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 it was appropriate to impute such knowledge to RSA as the information was available in the Coroner's report, which RSA should reasonably have obtained. As RSA defended when, the Court found, it reasonably should have known of the breach, it had thereby waived the right to later rely on the breach to deny coverage.
The Court of Appeal overturned the trial court's decision. RSA had no actual knowledge of the breach and the Court of Appeal declined to impute such knowledge to RSA, 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 then in force, and there was no evidence that Bradfield relied on RSA's initial coverage position to his detriment.
The Supreme Court of Canada Decision
The Supreme Court of Canada first dealt with the issue of waiver, confirming that s. 131(1) of the Insurance Act prevented a "waiver by conduct" argument, as the statute required waiver to be given in writing, which had not occurred in this case. The decision primarily considered the issue of promissory estoppel, an equitable defence that requires (1) the parties be in a legal relationship at the time of the promise or assurance; (2) the promise or assurance be intended to affect that relationship and to be acted on; and (3) the other party in fact relied on the promise or assurance.
The Supreme Court found that RSA had not given any promise or assurance intended to affect its legal relationship with Bradfield. Knowledge of the facts, the Court said, is required to impute knowledge of the legal significance of those facts in promissory estoppel. The court would therefore not impute the knowledge necessary for RSA to have made a promise "notwithstanding the breach" because RSA did not know Devecseri had consumed alcohol. The estoppel argument therefore failed.
The Supreme Court particularly considered the difficulties that arise when a third-party claimant (Bradfield) attempts to raise an estoppel defence against another party's (Devecseri's) insurer. The Supreme Court recognized that RSA was under a duty to Devecseri to investigate the claim against him "fairly", in a "balanced and reasonable manner." RSA was under no additional duty to Bradfield or other third-party claimants to investigate policy breaches at all, much less on a different and more rigorous standard than that which it owed to its insured. The well-established mutual duties of utmost good faith and fair dealing in insurance relationships apply between the insured and the insurer, and the Supreme Court rejected the argument that this duty extends to third-party claimants attempting to "piggy-back" on the relationship.
This case provides important clarification on the scope of an insurer's duty to investigate a claim and on who can benefit from that and other duties inherent in the relationship between an insured and insurer. This case also aligns with previous jurisprudence of the Supreme Court in which it has sought to eliminate incentives for an insurer to use "wilful tunnel vision" to look for policy breaches where there is "nothing to go on."
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