In assessing a proof of loss claim, the court must assess the credibility of the insured

20. July 2009 0

The appeal by an Insurer from judgment requiring it to pay a claim by the Insured in the amount of $4,534,345 in losses associated with fire damage was allowed in part. The trial judge did not err in refusing to allow the Insurer to rely on non-disclosure by the Insured of financial difficulties to void the policy because the Insurer cannot argue that the non-disclosed facts are material if it fails to make the proper inquiries. However, the trial judge’s failure to address the Insured’s credibility in assessing proof of loss was a reversible error.

Sagl v. Cosborn, Griffiths & Brandhm Insurance Brokers Ltd., [2009] O.J. No. 1879, May 8, 2009, Ontario Court of Appeal, S.E. Lang, R.G. Juriansz and G.J. Epstein JJ.A.

On Appeal, the Court upheld the trial judge’s finding that there had been no material misrepresentation at the time of the application for coverage. While the applicant has a duty to disclose all material facts, an insurer’s conduct may be relevant to the analysis of whether a particular fact is material. An insurer’s failure to ask a question may be evidence that the particular insurer does not consider the issue to be material, even if, objectively, the information would have been regarded as relevant by a prudent insurer. It runs contrary to the good faith obligation that the insurer owes to the insured for the insurer to agree to insure a risk, whether at the binder stage or at the time the policy is issued, when it knows or should know that there is information relevant to the risk that it does not have. On September 30, 1997, by the execution of a binder of insurance, the Insurer placed homeowner’s insurance on both of the Insured’s properties and their contents. The binder indicated that it was prepared for convenience only and was subject to the terms and conditions of the Insurer’s standard policy. On December 16, 1997, one of the Insured’s premises was destroyed by fire.

The Insurer pursued neither the completion of a detailed application for insurance nor an inspection of the properties, the contents, the jewelry or the fine art collections during the eleven weeks between the date the binder was issued and the fire. Nonetheless, there was extensive communication between the parties and oral negotiations about coverage.

The policy of insurance was issued on January 13, 1998.

At trial the Insurer defended the claim by denying coverage on the basis that the fire was the result of arson and that the Insured had intentionally made material misrepresentations both in her initial application for coverage and in presenting her claim under the policy. With regard to the Insured’s misrepresentations at the time of coverage, it was argued that the Insured did not disclose that she was in financial difficulties and that her husband was no longer registered on title as joint owner.

The trial judge rejected the argument that the Insured had anything to do with the fire at her residence. With regard to coverage, he found that, relying on s. 124 of the Insurance Act, none of the orally agreed upon modifications made subsequent to the issuance of the binder affected the extent of the coverage. Furthermore, he found that there had been no intentional material misrepresentation since, as the policy had not been issued prior to the fire, the Insured had no knowledge of her duty to disclose all material facts. Also, the judge found that the Insurer had not proven that the facts were “material” because the Insured had not been asked about any of these facts. He stated that any of the information that was argued to be material could have been gained from a proper application form.

The trial judge also rejected the argument that the Insured made misrepresentations in presenting her claim under the policy. He accepted a valuation of the Insured’s home and contents that was based on her recollection of the items in the home. Although he expressed reservations about the Insured’s claim of loss, he found that she had nonetheless established the loss because of an inadequate response by the Insurer. He rejected the argument that the Insured’s appraiser had overvalued the claim because the Insurer’s appraiser had not reviewed and rebutted the report. He held the Insurer accountable for not properly appraising the collection prior to providing coverage.

On Appeal, the Court upheld the trial judge’s finding that there had been no material misrepresentation at the time of the application for coverage. While the applicant has a duty to disclose all material facts, an insurer’s conduct may be relevant to the analysis of whether a particular fact is material. An insurer’s failure to ask a question may be evidence that the particular insurer does not consider the issue to be material, even if, objectively, the information would have been regarded as relevant by a prudent insurer. It runs contrary to the good faith obligation that the insurer owes to the insured for the insurer to agree to insure a risk, whether at the binder stage or at the time the policy is issued, when it knows or should know that there is information relevant to the risk that it does not have.

The Court of Appeal also agreed that s. 124 of the Insurance Act applies to binders as well as policies of insurance. Thus, changes to the binder of insurance must be agreed upon in writing in order to be enforceable.

However, the Court of Appeal allowed the appeal on the basis that the trial judge erred by not dealing with the challenges to the Insured’s credibility. The Insured’s credibility was intertwined with every major aspect of the trial judge’s decision; the proof of loss was no exception. It followed that in order to consider the Insured’s obligation to prove her loss and the Insurer’s argument that she intentionally misrepresented the amount of the loss, the trial judge had to address the challenges to the Insured’s credibility. He did not do so. Furthermore, the trial judge erred in curtailing his analysis of the Insured’s proof of loss for the reason that the Insurer did not call expert evidence to refute the Insured’s valuation, and in concluding that therefore he had “no basis” upon which to find that the valuation was flawed. This conclusion demonstrates that the trial judge’s reasoning missed an essential step in the analysis of the Insured’s evidence in relation to her loss. Before turning to whether the Insurer had proved that the Insured’s valuation was flawed, the trial judge first had to satisfy himself that the Insured had proved, on balance, that her evidence in support of her loss was credible and reliable. In ignoring this step, the trial judge effectively relieved the Insured of her burden to establish the existence and the amount of her loss. Also, there is no legal requirement to call expert evidence. The trial judge was required to critically examine the evidence in support of the Insured’s loss in relation to her art, even without the assistance of an expert.

Accordingly, the appeal was allowed, the judgment below set aside and a new trial ordered solely on the issue of the Insured’s proof of loss and whether the policy was void due to intentional misrepresentation in the proof of loss.

This case was originally summarized by Natasha D. Morley, and originally edited by David W. Pilley.

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