When is a change of risk insufficient to allow denial of coverage?

 

This issue was addressed and answered by the New Brunswick Court of Appeal in Aviva Insurance Company of Canada v. Hubert Thomas, 2011 NBCA 96.

 

Initially, one might think the change in risk occasioned by the installation of a wood burning stove in a personal residence would afford an insurer the right to deny coverage. The risk would certainly be higher than in a residence without a wood burning stove. However, the New Brunswick Court of Appeal per Chief Justice Drapeau has decided this change of risk is insufficient to deny coverage.

 

The factual context underlying the decision is summarized as follows:

 

[1] In 2000, Hubert Thomas, an elderly gentleman with very limited formal education, secured fire insurance for his modest home by way of a “Homeowners Broad Package Form Policy” issued by Aviva Insurance Company of Canada. This multi-peril policy, which was renewed annually until its post-loss cancellation by Aviva in 2007, featured a condition providing for the avoidance of the part of the insurance contract affected by any change material to the risk, absent prompt written notification of the change to the insurer. …

 

[3] By Mr. Thomas’ original application for insurance, Aviva was advised, in answer to a very precise question on point, that his home’s primary heating source was electrical. At the time, it was the home’s sole non-natural heating source and, had he been asked, Mr. Thomas would undoubtedly have disclosed that state of affairs. At any rate, no issue is made of the statement confirming the home’s primary heating source was electrical, and I will say no more on the subject. More pertinently, no response was recorded by Aviva’s agent in answer to the application’s specific questions regarding auxiliary heating sources and any “solid fuel heating unit”. Subsequently, Mr. Thomas concluded his home needed a complementary heating source to reduce his outlay for electricity. To that end, in the fall of 2001, he installed a woodstove in the back porch. In the result, the information provided in the original application, including the fact that the home’s “primary” heating source was electrical, became punctiliously accurate. Moreover, Aviva did not, at any time post-application, draw to Mr. Thomas’ attention that the installation of a woodstove as an auxiliary heating source might constitute a change material to the risk. In fact, and as will be demonstrated, it effectively suggested the opposite in its renewal documentation. At any rate, Mr. Thomas did not volunteer, post-application, further information on the subject of his home’s heating.

 

[4] Shortly before Christmas of 2007, Mr. Thomas’ home was damaged by fire, which somehow escaped from the woodstove he had installed. As would be expected, the follow-up investigation acquainted Aviva with the stove’s presence and use in the insured property, a state of affairs that was invoked as justification for the cancellation of the insurance contract, retroactive to the date of its last pre-loss renewal.

 

Upon denial of coverage by Aviva to its insured Thomas, based upon a material change in the risk (the installation of the woodstove) the Plaintiff replied that the statutory conditions in the Insurance Act and incorporated in the policy, were not enforceable against him. The Plaintiff’s policy, a standard homeowner’s policy, was according to Mr. Thomas not a pure fire policy but rather a multi-peril policy that had fire coverage as an incidental element. It therefore followed that the insurer could not rely on the exclusion contained in the statutory conditions.

 

There is some authority supporting the Plaintiff’s primary argument, although it is not free from doubt. In the alternative, the Plaintiff argued that the denial could only be effective if the insured had actual knowledge of the materiality of the risk, i.e. what did the insured know and was he capable of understanding the concept of materiality. Thomas, due to his age and lack of education, was in the position to credibly deny any knowledge of materiality related to the installation of a woodstove.

 

Chief Justice Drapeau rejected both of these defences to the insurer’s denial. He did, however, determine that Aviva could not rely on the “material change of risk” position because:

 

It at no time acted as if, or represented to the insured that, the addition of a woodstove to supplement the household primary heating system (electrical) was material to the fire risk accepted by Aviva or put in another way.

 

Neither the application nor any associated representation by Aviva through its soliciting agent or underwriter could be said to support the insurer’s position that the auxiliary supplemental heat source was material to Aviva. Furthermore, the insured was found to have responded accurately to all inquiries made by Aviva and its agents and could not be said to have breached any term of the contract nor any of its renewals.

 

It therefore follows that the defence of Aviva could not prevail. Aviva did not establish that it would have declined or alternatively rated the risk had the installation of the woodstove been disclosed. The insured had also not breached his policy.

 

The lesson for insurers is that in defence of claims where risk has changed post application, it must be convincingly established that the new risk has been or would be treated as material. This could be demonstrated through evidence of conduct by the insurer consistent with an aversion to the new risk such that the insurer would either have declined it or rated it differently. If there is no such evidence, the risk cannot be said to be material and coverage will remain in force.