The Insurer’s appeal of a trial judgment awarding damages, including punitive damages of $2.5 million, to insured owners and tenants was allowed where the Court held that the trial judge misdirected the jury on the misrepresentation defence and the “shut down” exclusion

Pereira v. Hamilton Township Farmers’ Mutual Fire Insurance Co., [2006] O.J. No. 1508, Ontario Court of Appeal

In August 1993, a fire destroyed an industrial building that also housed two residential units. The building had been used as a mushroom growing facility prior to 1991 and was insured under a standard commercial loss policy. No mushrooms were grown between February 10, 1993 and the date of the fire. The Insurer claimed the lack of activity demonstrated that the farm was completely shut down and indicated that the Insureds represented that the farm was back in business when the policy was issued. The owners and tenants of the building brought actions against the Insurer for recovery which were heard before a jury. The jury awarded to the Insureds full compensation for the fire loss and also awarded $2.5 million in punitive damages against the Insurer. The Insurer appealed the decision.

On appeal, the Insurer argued that the trial judge misdirected the jury in respect of Statutory Condition 1 which concerned misrepresentations by an applicant for insurance, by indicating that an element of dishonesty was required in a misrepresentation. The Insurer further argued that the trial judge misdirected the jury on the policy’s “shut down” clause which excluded coverage for loss or damage to property at locations that had been shut down for more than 30 consecutive days.

The Ontario Court of Appeal allowed the appeal, set the judgment aside and ordered that a new trial take place. The Court found that the trial judge had misdirected the jury in respect of the misrepresentation defence. The errors in the instructions to the jury relating to the misrepresentation were compounded by further misdirection and non-direction in respect of the shut down exclusion clause. The Court noted that the trial judge’s discussion of fraudulent omissions was unnecessary because it was not part of the Insurer’s case. Statutory Condition 1 was engaged by innocent misrepresentations and no element of fraud or deceit was required. The Court held that the Insurer was entitled to rely on the statement that the farm was back in business, particularly because it came from an insurance agent who would have known that the status of the farm was important. The Court held that the Insurer was not required to conduct a further investigation. The Court noted that the policy contained a shut down exclusion which demonstrated that the state of business was material to the Insurer and that this was known by the insurance agent.

The Court found that the trial judge’s instructions did not respect the proper roles of judge and jury and consistently left the jury to decide competing legal propositions put forward by the parties. In the result, the judgment was set aside and a new trial ordered.

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