In April 2023, the Saskatchewan Court of Appeal heard and dismissed with costs an insurer's appeal in Wynward Insurance Group v. Smith Building and Development Ltd., 2023 SKCA 57, affirming the trial decision at 2021 SK QB 54.
Policyholder Smith Building and Development Ltd. ("Smith Ltd.") owned a commercial building insured at the date of loss by Wynward Insurance Group ("Wynward"). Smith Ltd. rented units out to various tenants, including Regens Disposal. In 2012, before vacating the premises, Regens subleased part of its premises to two subtenants, one being a motorcycle club called the Reapers Riders, which at some point, changed its name to the Heretics Motorcycle Club (the "Heretics"). When Regens vacated, the Heretics provided Smith Ltd. with three post-dated rent cheques but they never entered into a written lease agreement.
In February 2016, Smith Ltd.'s principal and business manager did a walkthrough of the premises. He found nothing out of the ordinary; the property was clean and in good order.
On April 13, 2016, the building was destroyed by fire. An investigation concluded the fire had been caused by an unknown arsonist. Nothing in the fire investigation implicated either Smith Ltd. or the Heretics. Smith Ltd. submitted a claim to Wynward pursuant to its policy seeking indemnity for its losses. The maximum coverage under the policy was $640,000.
Wynward assigned a senior claims examiner (the "examiner") to investigate and adjust the loss. He conducted certain post-loss internet and local media searches where he learned of alleged links between the Heretics and the Hell's Angels Motorcycle Club. He concluded the Heretics were affiliated with the Hells Angels, which he described at trial as a notorious motorcycle club with suspected links to criminal activities.
In a May 30, 2016 letter based on his investigation, and apparently without consulting the underwriter, the examiner denied coverage. The letter asserted Smith Ltd. (1) failed disclose a material change in risk due to the tenancy of "a motorcycle club related to the outlaw biker club 'Hells Angels'", and (2) failed to provide details of the subleases it entered into with the Heretics and another subtenant.
Smith Ltd. commenced an action against Wynward in contract and negligence for (a) the value of the insured property, (b) business interruption losses, and (c) various costs and expenses.
As of the date of trial, the building had not been rebuilt.
Saskatchewan King's Bench Trial Decision
The principal issues at trial were (1) whether a material change in risk was shown by the act of Smith Ltd. allowing the Heretics to be a subtenant; and if not, (2) given Smith Ltd. had taken no steps to rebuild, whether it was entitled to actual cash value ("ACV") or the more generous replacement cost value ("RCV"). For trial purposes, the parties agreed that ACV was $406,000, RCV was $812,000, the cost of debris removal was $18,290, and the maximum coverage under the policy was $640,000.
The trial evidence showed Wynward's underwriters prepared an inspection report in 2012. The underwriter expressed no concern with the presence of a motorcycle club on the premises and concluded "Renew normally". When she testified at trial, the underwriter advised the Court that Wynward had no policies in place to ask about, nor had it queried Smith Ltd. about motorcycle clubs generally. Wynward also did not ask for criminal records or explore the character of Smith Ltd.'s tenants or subtenants.
In reviewing all of the insurer's evidence, the trial judge noted the examiner's testimony asserted Wynward only discovered Smith Ltd. had a motorcycle club tenant after the fire. This testimony was directly contradicted by both the underwriter's oral evidence and the written records. The examiner's fire investigation consisted of an internet search, the review of newspaper articles, and visits to specific weblogs. It seems he either overlooked the underwriting file or chose to ignore it. The denial was therefore based solely on social media research leading to the examiner's conclusion that the Heretics were an "outlaw motorcycle gang".
The trial judge found that Wynward had not led admissible evidence required to meet its onus to show if and when the Heretics were involved in the illegal activity which supported its coverage denial. The trial judge also concluded that Smith Ltd. was entitled to postpone rebuilding given the coverage denial until entitlement to coverage was determined in the litigation. Smith Ltd. was therefore granted judgment for the maximum RCV limit under the policy and costs in the total amount of $693,690.
Saskatchewan Court of Appeal
1. Material Change in Risk
On appeal, the Panel reviewed the evidence in the context of both the historic and as updated in 2020 Statutory Condition 4 of Saskatchewan's Insurance Act which requires a policyholder to "promptly give notice in writing to the insurer or its agent of a change that is:
- material to the risk; and
- within the control and knowledge of the insured."
The Panel cited the well-known legal principle established by the Supreme Court of Canada that a fact material to the risk is shown where "if the facts had been truly represented they would have caused a reasonable insurer to decline the risk or required a higher premium." The Panel, quoting from a Canadian Underwriter article, went on to state the objective nature of the test to be applied, as follows:
"The test of materiality is not what is material to the particular insurer, but what a reasonable insurer would have done or how a reasonable or prudent insurer would have reacted to the true facts...Thus, the fact that a particular insurer regards a fact as being material does not necessarily determine its materiality in objective terms."
The Panel upheld the trial judge in finding that Wynward had not demonstrated through admissible evidence that the presence of the Heretics in the insured premises was a fact material to the risk.
2. Obligation to Rebuild the Insured Premises
As noted, the trial judge awarded Smith Ltd. full RCV to the extent of the policy limit or $640,000. On appeal, Wynward argued that the trial judge erred in law when he concluded that Smith Ltd. was not required to rebuild within a reasonable period of time after the fire. Wynward argued that unless an effort to rebuild was shown, a policyholder could only recover ACV.
The Panel disagreed with Wynward and confirmed the trial judge's finding that Smith Ltd. was not obliged to rebuild the premises until it received confirmation of entitlement to proceeds under the insurance policy.
- Claims personnel should always review the underwriting file and/or discuss with the underwriter(s) on the account before concluding that there was a failure to disclose a material change in risk.
- An insurer denying coverage for this reason should have a strong factual basis for doing so, including both (a) subjective evidence from its underwriting department and (b) preferably independent objective evidence from a knowledgeable broker or competing underwriter, to best meet its onus for showing that the change in risk is "material".
- Depending on the wording and facts in evidence, a policyholder denied coverage based on a failure to disclose a material change in risk may not be required to rebuild until litigation confirms entitlement under the policy.
See Wynward Insurance Group v Smith Building and Development Ltd., 2023 SKCA 57 (CanLII),
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