A Review of Property Insurance Law in Canada and the United States.

• Author: Hayden, Harmon C.

THIS article provides a summary of some of the key principles applicable to property insurance contracts in North America. We focus on insurers, brokers, adjusters, managing general agents and lawyers attempting to navigate the law and the insurance market in jurisdictions that may not be their home territory. We will briefly review common law principles and statutory provisions regarding misrepresentations and fraudulent omissions, material changes of risk and the availability of relief from forfeiture.

1. Canada: The structure of the insurance industry and general principles

   Although Canada is a large country geographically, some 3,855,100 sq mi, it has a relatively small population of approximately 38 million people. There are 10 provinces and 3 territories. Each province in Canada has enacted its own insurance legislation. This legislation governs contract formation and provides for permissible and mandatory terms and conditions. Although the legislation is largely uniform, there are differences which may be of significance in an individual case. With the exception of Quebec, which is governed by a Civil Code that was historically modelled on French civil law, the interpretation of insurance contracts is governed by common law principles.

   A fundamental common law principle applicable to insurance relationships in Canada is the concept of uberrimae fidei, or utmost good faith. The House of Lords in England articulated this principle as the bedrock of the law of insurance and the relationship between insurer and insured. The insured's duty of disclosure is a corollary of this principle. Lord Mansfield put it in these terms in Carter v. Boehm: (1)

   First. Insurance is a contract upon speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the under-writer trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the under-writer into a belief that the circumstance does not exist, and to induce him to estimate the risque, as if it did not exist. The keeping back such circumstance is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the under-writer is deceived, and the policy is void; because of the risque run is really different from the risque understood and intended to be run, at the time of the agreement. In simple terms, the insured had a duty of utmost good faith to honestly disclose all matters relevant to the risk whether asked by the insurer or not. This principle reflected the insurance industry at that time when underwriters were arranging coverage for shipowners and their cargoes in circumstances where the only source of information was the insured and there was no way for the underwriter to verify the information disclosed or withheld. While legislation has modified the common law in part (an innocent misrepresentation of a material fact will still render a property insurance policy voidable but an omission must be fraudulent to have that effect), Carter v. Boehm still lives on in common law Canada. The good faith obligations imposed upon insurers have been expanded beyond their original scope. In Quebec, likewise, the duty of good faith is enshrined in the Civil Code. Although the principles of construction applicable to insurance contracts are generally the same as those applicable to ordinary commercial contracts, the nature of the insurance contract is such that the principles of construction have undergone considerable refinement. In a leading decision, the Supreme Court of Canada stated (2) as follows:

   [22] The primary interpretive principle is that when the language of the policy is unambiguous, the court should give effect to clear language, reading the contract as a whole. [23] Where the language of the insurance policy is ambiguous, the courts rely on general rules of contract construction. For example, courts should prefer interpretations that are consistent with the reasonable expectations of the parties, so long as such an interpretation can be supported by the text of the policy. Courts should avoid interpretations that would give rise to an unrealistic result or that would not have been in the contemplation of the parties at the time the policy was concluded. Courts should also strive to ensure that similar insurance policies are construed consistently. These rules of construction are applied to resolve ambiguity. They do not operate to create ambiguity where there is none in the first place. [24] When these rules of construction fail to resolve the ambiguity, courts will construe the policy contra proferentem--against the insurer. One corollary of the contra proferentem rule is that coverage provisions are interpreted broadly, and exclusion clauses narrowly. II. The United States: The structure of the insurance industry and general principles

   The geographical footprint of the United States is 3,531,905 sq mi, a little more than 300,00 sq mi smaller than Canada. The population of the United States, however, is much larger than its northern neighbor with nearly 333 million people. Historically, the fifty state governments regulate the insurance industry in the United States through state legislation and the creation of state departments of insurance. Over the years, the federal court has sought to regulate the industry. In 2010, the United States Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the Federal Insurance Office of the Department of the Treasury. Under the Act, the Federal Insurance Office (FIO) is authorized to monitor all aspects of the insurance industry, except for health insurance, some long-term care insurance, and crop insurance, and determine whether any gaps may exist in the regulation of insurance companies that might contribute to a financial crisis.

   Recognizing the need for some uniform insurance standards, the insurance commissioners in the states originally formed the National Insurance Convention in 1871, which is now the National Association of Insurance Commissioners (NAIC), to establish standards and best practices as well as conduct regulatory oversight.

   In January 1990, the NAIC adopted the Unfair Claims Settlement Practices Act, a guide for states to adopt to establish the standards for the investigation and disposition of claims arising under policies or certificates of insurance. The Act defines those actions that would be deemed to constitute an unfair claims practice. At the heart of each action enumerated is the concept of good faith.

   Unlike Canada, common law does not govern the basic concepts for interpreting an insurance contract. Each state has developed its own rules, as developed by case law or established by state statute. Therefore, those involved in the insurance industry in the United States must be aware of the applicable state's principles and rules governing the interpretation of a policy of insurance as well as the associated duties arising therefrom.

3. Misrepresentation and Fraudulent Omissions

   1. Canada

      Legislation has modified the insured's duty of utmost good faith to a certain extent with respect to omissions. At common law, there was no distinction between innocent misrepresentations and innocent omissions. Either would entitle the insurer to void the policy. Almost 100 years ago, however, this was changed by legislation with respect to certain classes of insurance. Insofar as property insurance is concerned, the common law provinces, through legislation, have drawn a distinction between innocent misrepresentations and innocent omissions. In British Columbia, for example, the following Statutory Condition is deemed by law to be a part of every insurance contract (apart from life insurance, accident and sickness insurance, and contracts of reinsurance): (3)

      Misrepresentation 1. If a person applying for insurance falsely describes the property to the prejudice of the insurer, or misrepresents or fraudulently omits to communicate any circumstance that is material to be made known to the insurer in order to enable it to judge the risk to be undertaken, the contract is void as to any property in relation to which the misrepresentation or omission is material. Another relevant section is this: (4)

      Misrepresentation and nondisclosure 17 (1) A contract is not rendered void or voidable by reason of any misrepresentation, or any failure to disclose on the part of the insured in the application or proposal for the insurance or otherwise, unless the misrepresentation or failure to disclose is material to the contract. (2) The question of materiality is one of fact. The test for materiality has remained consistent for many years in Canada. As originally stated, the test is:

      ...whether, if the matters concealed or misrepresented had been truly disclosed, they would, on a fair consideration of the evidence, have influenced a reasonable insurer to decline the risk or to have stipulated for a higher premium. (5) Since materiality is measured by the standard of the reasonable insurer, the fact that either the insured or the insurer thought that the facts were or were not material is irrelevant. As noted by the Supreme Court of Canada in Henwood v. Prudential Insurance Co. of America, (6) a misrepresentation does not become material "simply because it has been elicited in answer to a question devised by the insurance company." In cases where materiality is an issue, it is customary for expert evidence to be led on the point. (7)

      Some have argued that this test may not be fair to the insured. In Rethinking the Materiality Requirement for Non-Disclosure and Misrepresentation in Insurance Contracts, (8) Elizabeth Adjin-Tettey argued:

      ...the nature and scope of the disclosure duty, the construction of materiality (including the presumption of...