Articles & News

BY CARY N. SCHNEIDER, PARTNER, SCHNEIDER LAW FIRM
October 20, 2021

Introduction

The denial of insurance coverage based on a pre-exiting health condition is a significant issue.   On the one hand it is unfair for an insurer to be forced provide insurance coverage for a policy that it would never have originally written had it known all the facts.   On the other hand, it is unjust for an insured to be denied insurance coverage for a pre-existing health issue that was inconsequential and for which he did not intentionally mislead anyone.   Whereas the sympathy factor lies with a legitimately disabled insured the brain appreciates that there are important implications to the insurance industry as a whole.   The law attempts to reconcile this dilemma by providing guidance, but there is no clear answer.    

The Case Of Stevey

We will apply the law to a fictional situation which is based on a real case.   A 50 year old self- employed man (let’s call him “Stevey”) had a full time job in construction when he purchased a private policy of disability benefits.   Among other things, in the application for insurance he was asked whether he had ever suffered any form of back disorder over the past three years to which he responded “no”.  The insurer knew Stevey’s profession and knew his age when he answered this question.   The insurer accepted the policy of insurance.   Stevey slipped and fell on ice on the street and suffered a significant fracture to his leg that requires the insertion of a metal plate and several screws.   Stevey may never be able to work in construction ever again.  He has a grade 12 education and always worked in this field since the age of 18.  

The insurance company does not dispute that he has suffered a disability.   After reviewing the clinical notes and records of the treating family physician pre-accident it is discovered that two years prior to the fall that Stevey saw his family doctor on two occasions about back pain and was prescribed orthotics to help alleviate same.  Stevey never filled the prescription for orthotics and continued working full time in construction up until the time of his fall.   The insurer does not assert that the fall occurred on account of any pre-existing back pain.   However, the insurer asserts that had Stevey disclosed this pre-existing condition that it would not have written the policy.   It asserts that Stevey conducted a material misrepresentation and that the policy is void thereby he is not entitled to any insurance benefits.  

Is the insurer correct?   The short answer is maybe. 

Ambiguity In A Policy Of Insurance Is Construed In Favor Of The Insured

Surprisingly, the law with respect to the above scenario is far from definitive.   We do know that the general principle of insurance policy interpretation is supposed to favor the insured over that of the insurer where there is any ambiguity[1]:

1.   The objective in construing coverage of liability must be to give effect to the policy’s dominant purpose of indemnities;

2.   Ambiguity in an insurance contract must be construed in favour of the insured;

3.   The court should normally strive to give effect to the objectively reasonable expectations of the insured.

It is recognized that an insurer has the ability and prerogative to draft the policy of insurance to reflect the perils in wishes to insure and exclude the risks that it does not.   This is fair and should be well recognized.   However, when the insurer has not asked a clear question in the application process it will not be given the benefit of the doubt if this becomes a contentious issue later on.   The Supreme Court of Canada explained as follows[2]:

“The insurers put such questions and in such form as they please, but they ‘are bound so to express them as to leave no room for ambiguity.’  To such a case the rule contra proferentum is eminently applicable.”

Getting back to Stevey, the question posed appears to be pretty straightforward and the answer given is pretty definitive.   However, has Stevey given a correct answer to a clear question?   

Has There Been A Material Misrepresentation

The question is whether Stevey reasonably understood the question being asked of him.   The courts have explained that if an insured reasonably believed that he has given a truthful answer to the question posed that he has not engaged in a material misrepresentation[3].

*An applicant can reasonably expect that, having honestly answered the questions in the negative, the conditions required by the insurer have been met, and insurance coverage will issue upon approval of the mortgage;

*In answering questions posed by the insurer, the applicant’s concern must be for the condition for which a physician was consulted, not for any condition which the applicant thought material to the insurance;

*An applicant’s response should be assessed on the basis of whether it was a truthful response to a reasonable lay person’s interpretation of the questions asked.

In most cases, the burden of proof lies with the insured person.   It is the insured that must establish that he has suffered a disability and to prove the value of his damages.   However, in cases involving the voiding of insurance contracts, the burden of proof shifts.  It is the insurer’s responsibility to prove that the insured has engaged in a material misrepresentation with respect to the policy of insurance.  This is not an easy task as an insurer must prove that an insured has acted improperly.  

Further it is not enough for the insurer to prove that a misrepresentation occurred, but rather an it must establish that the misrepresentation is material.[4]  For example, even if Stevey did misrepresent that he did not have any back problems before the fall, there is a live question as to whether seeing a doctor on two occasions is material.   The test in a nutshell is as follows:[5]

(1) that the representation in question was material; and

(2) that there was a misrepresentation or inaccuracy in the information supplied:   

The test of materiality is measured by the standard of a reasonable insurer. An inaccuracy in an answer on an application for insurance does not permit the insurer to void the policy unless accurate answers would have led a reasonable insurer to act differently by refusing to accept the risk or imposing special conditions.[6]  Accordingly, if virtually all insurers who wrote the same policy of insurance would have also not written Stevey’s policy had they known about the pre-existing back issues than perhaps the inaccuracy was material.   If this insurer was following industry standard in its decision making than this is strong evidence to show that a material misrepresentation has occurred.

In terms of the questions asked of the insured on the questionnaire, the test is what a reasonable layperson would understand the question that is being asked.  An insured is not expected to be an expert in insurance law.   If a reasonable layperson would not understand the nuances of the question being posed than an insurer will not be able to rely on the answers given in order to void a policy.

Back Disorder v. Back Pain

In Batanova v. London Life (2019)[7] one of the issues is what a reasonable layperson would come to understand the question on the application for insurance to mean a “back disorder”.  The Court found that a layperson would not reasonably believe that back pain is necessarily a back disorder.   The test is not whether the claimant has any sort of medical health issue, the question is whether the medical disorder is a long-term ongoing problem.  In this case it was determined that a “back disorder” means that an individual has a long-term back problem and not merely a temporary strain.  The Judge explained the difference between a back disorder and back pain as follows:

“It means something that is not “in order” or something is wrong with the back, not on a temporary basis, but on a more long-term basis. For example, a temporary back strain arising from lifting a heavy box would not normally be considered a “back disorder”.

Accordingly, the test is not whether the claimant has any sort of medical health issue, the question is whether the medical disorder is a long-term ongoing problem. 

Conclusion

Insurers are routinely taking tough positions on cases to which they legitimately believe to be correct.   It is incumbent for advocates on both sides of the case to properly inform themselves as to the law and how it applies to specific cases.   A basic understanding of “material misrepresentation”  will not suffice in order to negotiate a good deal or have success at trial.   For an insurer there is the real risk of an adverse bad faith ruling if it improperly voided a policy of insurance.   For a plaintiff’s advocate, there is the risk of doing a disservice to your client by failing to understand the nuisances of the law.   The law does not provide a definitive mathematical answer but it does provide us with the tools to assess our cases.   In Stevey’s case, both sides were willing to bring a summary judgment motion but ultimately worked out a settlement.   Had Stevey’s counsel not advocated on his behalf with knowledge of the law, he would have received nothing.  

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Cary N. Schneider is a co-founder of Schneider Law Firm who specializes in civil litigation including personal injury litigation, real estate litigation, cyber / privacy breaches, and commercial litigation.   After working on behalf of insurance companies for 19 years he now uses that inside knowledge to the benefit of his clients.  He is proud to have received referrals from insurance defence lawyers and represents adjusters in their personal injury matters.  He has been recognized for his litigation skill by Best Lawyers Canada, Lexpert Ranked Lawyer, Martindale-Hubble. If you or a loved one has suffered a personal injury contact Cary to let him assist them in their time of need.  Email cschneider@schneiderlawfirm.ca or call at 9416-849-6633 x 201 .   www.schneiderlawfirm.ca. 

[1] 548810 B.C. Inc. v. Toronto Dominion Life Insurance Company et al. 2000 BCSC 1700

[2] Ontario Metal Products Company v. Mutual Life Insurance Company of New York, 1923 CanLII 8 (SCC), [1924] S.C.R. 35, at 41

[3] Ibid 1

[4] Insurance Act, R.S.O. 1990, c. I.8 section 124(5) and (6)

[5] Sayle v. Jevco Ins. Co. Ltd., 1984 CanLII 346 (BC SC); cited with authority by McNeil v. Kansa General International Insurance Company Ltd., 2000 CanLII 22279 (ON CA)

[6] Ibid 5.

[7] Batanova v. London Life (2019) BCSC 1147