Give An Inch, But They Can't Take A Mile: Where An Insurer Is Bound To Coverage Through The Implied Or Ostensible Authority Of A Broker, Coverage Will Be Limited To The Scope Of The Representation Made To The Insured

An agent may bind an insurer to coverage through implied or ostensible authority, but the extent of coverage will be limited by the scope of coverage that flows...
Canada Insurance
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An agent may bind an insurer to coverage through implied or ostensible authority, but the extent of coverage will be limited by the scope of coverage that flows from the precise representation the agent makes to the insured. Coverage will not be interpreted more broadly than the representation made, regardless of an agent's intention when arranging coverage.

Insurance law – Commercial general liability insurance – Interpretation of policy – Named insured – Duty to defend; Bad faith; Agents and brokers

Deasan Holdings Ltd. v. Continental Casualty Co., [2024] B.C.J. No. 631, British Columbia Supreme Court, April 12, 2024, D.A. Betton J.

On September 29, 2018, a landslide occurred near Fort St. John, B.C. It caused damage to public and private property, and a civil claim was filed in relation to that damage (the "Lawsuit"). The plaintiff in this case, Deasan Holdings Ltd. (the "Affiliate") is an affiliate of D.R.S. Energy Services Inc. (the "Insured"). The Affiliate owned 70 acres of land where the landslide occurred, and it had commenced gravel mining on that land one month before the landslide. The Affiliate was named as a defendant in the Lawsuit.

At the time of the landslide, the Insured had an insurance policy with CNA Canada (the "Insurer").

In this action, the Affiliate sought a declaration of coverage in respect of the Lawsuit pursuant to the Insured's policy. The Affiliate argued it was included as an insured under the policy, and that coverage extended to its gravel pit operations. The Insurer denied coverage and any obligation to provide a defence to the Lawsuit on behalf of the Affiliate.

A brief timeline of events provides necessary context. In October 2016, the Affiliate purchased the gravel pit with the initial objective of housing equipment owned by the Insured. At that time, and for about three years prior, the Insured had obtained insurance through CMB Insurance Brokers ("the "Broker") and had purchased policies with Specialty Wholesale Services ("SWS").

In the summer of 2017, the Affiliate began preparing to commence gravel pit operations. The Insured asked the Broker to arrange for coverage and advised of its intention to begin gravel pit operations. The Broker contacted SWS to add the Affiliate to the Insured's policy. SWS responded that, based on the terms of the policy, the Affiliate was automatically included.

Later that year, the SWS policy came up for renewal, and the Broker looked at other options. The Broker approached the Insurer for a quote. The Broker then submitted an application for coverage without any reference to the Affiliate or the gravel pit operations. The application sought coverage for "a broad definition of insured." The Insurer sent a quote, and on December 29, 2017, the Broker emailed the Insurer asking it to bind coverage. The Broker then created a certificate of insurance based on the quote and the coverage discussed with the Insurer. Under the heading "Additional Insured," the Broker listed "Deasan Holdings Ltd. [the Affiliate] wrt Ownership of Building at 9817-77 Avenue Fort St. John B.C." The premium was paid.

On January 26, 2018, the Insurer sent the policy to the Broker. The policy identified the Insured as the named insured. There was no reference to the Affiliate.

On August 31, 2018, the Affiliate contacted the Broker to advise it was going to commence gravel pit operations. The Broker asked for more information regarding the equipment to be used. On September 4, 2018, the Broker called the Insurer to discuss adding coverage for the gravel pit operations (the "Telephone Call"). They spoke for two minutes and 42 seconds. As further discussed below, the Broker said coverage was confirmed on the Telephone Call. The Insurer said more information was requested on the Telephone Call, which was required before coverage could be confirmed.

On September 10, 2018, the Broker representative who was on the Telephone Call asked staff to send an email to the Insurer adding on the gravel pit operations, equipment, and building. On September 28, 2018, staff asked a representation of the Affiliate and Insured for address information. They responded that day. On September 29, 2018, the landside occurred.

On the morning of October 1, 2018, the Broker emailed the Insurer: "Effective September 24, 2018, can we please add new operations for a gravel pit to [the Insured's] insurance policy? There will be common ownership with the following company: [the Affiliate]. ..." Later that afternoon, the Broker sent another email to the Insurer informing them of the landside. On December 3, 2018, the Insurer denied coverage for the Affiliate in respect of the landslide. On April 18, 2019, the Insurer denied coverage for the Affiliate in respect of the Lawsuit.

In this action, the Affiliate sought coverage on two grounds: first, on the wording of the policy, and second, through the operation of the principals of agency.

The Court reviewed the relevant sections of the insurance policy and found that the policy language was not ambiguous and did not provide for coverage for the Affiliate.

The Court then reviewed the law of agency. There are three sources of authority by which an agent can bind its principal:

  1. Actual express authority, in which the principal has given the agent authority wholly or in part by means of words or writing.
  2. Actual implied authority, in which the principal has given the agent authority by means of their relationship and dealings. Implied authority exists when the agent holds a reasonable belief, because of the conduct of the principal towards the agent, that the principal desired or consented to the agent acting as he did.
  3. Ostensible authority, in which an agent is giving the authority to bind a principle to agreements made with third parties in circumstances where the agent has no actual authority to do so. This authority is a form of estoppel. It requires an agent who is a person with authority to manage the business of the principal, a representation made by the agent that they had authority to enter into a contract on behalf of the principal, reliance on that representation by a third party, and an alteration of the third party's position resulting from that reliance. Even if all of these elements are established, the principal will not be bound to the contract at issue if it does not have the capacity to enter into such a contract under its memorandum or articles of association.

The parties agreed the Broker was an agent of the Insurer, the Insured, and the Affiliate. The issue was whether the Broker had authority to act on behalf of the Insurer and commit it to coverage.

Authority may be limited by agreement or special instructions, but is largely governed by the class of agent employed, provided he or she is acting within the limit of his ordinary avocation; by the relation of the agent to the principal; or by the customs of particular trades and professions. Section 18 of the Insurance Act, R.S.B.C. 2012, c. 1 also provides that an insurer is bound by a policy on delivery of a policy or receipt for the premium under a contract, even if the delivery was made without authority or the premium was not in fact paid.

In analyzing these facts, the Court noted that the Broker and Insurer had entered into an agreement whereby the Insurer appointed the Broker with authority to receive proposals for coverage. The Court also looked at past practice between the Broker and the Insurer in arranging coverage, which typically involved an exchange of emails confirming the request for coverage, and then a further email confirming coverage itself. After the Telephone Call, the Insurer emailed the Broker confirming the request for coverage and asking for additional information. There were no further communications until after the landslide had occurred.

The Court considered the perspectives of the Broker and the Insurer in detail. The Broker had assumed the Affiliate had been included as an insured under the policy, because it had been an insured with SWS, and the Broker had requested a "broad definition of insured" when submitting an application to the Insurer. The Broker believed the gravel pit was covered by the policy, as it had asked the Insurer to request that coverage during the Telephone Call, and was apparently told "that shouldn't be a problem if there was common ownership."

On the other hand, the Insurer had never heard of the Affiliate prior to the Telephone Call. After the Telephone Call, the Insurer requested additional information regarding the Affiliate before it confirmed coverage. The information was not provided until after the landslide occurred.

The Insurer also had not been involved in preparing or approving the certificate of insurance listing the Affiliate as an insured. The Insurer gave evidence that it was the Broker's responsibility to provide the certificate of insurance to the Insured, and it was expected that would occur prior to the policy being delivered so the Insured could provide immediate evidence of coverage to third parties. The Court concluded the Broker had implied actual authority, or, in the alternative, ostensible authority, to deliver the certificate of insurance, thereby extending coverage as indicated in the certificate.

The certificate states the following under the heading "additional insured:"

[The Affiliate]
Wrt: Ownership of Building at 9815-77 Avenue, Fort St. John, B.C.

The Court found that all that was communicated to the Affiliate, by way of the certificate, was that the Affiliate was an additional insured with respect to that address. There was nothing to suggest that coverage extended to the Affiliate itself and any liability it may have. Coverage was limited to that specific representation made.

Regarding a duty to defend, the Court noted that duty only arises when a lawsuit raises a claim that could potentially fall within coverage. The notice of civil claim filed in the Lawsuit alleges damages were caused by the conduct of the Affiliate. As the Court concluded the coverage available to the Affiliate was limited to what was indicated in the certificate, which did not extend to the Affiliate's liability, there was no duty to defend.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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