Where an insurance application specifically asks whether an insured property will have renters or tenants, and the insured answers ‘no,’ an insured who subsequently rents out that property may void their insurance coverage if they do not declare this change upon renewal

Insurance law – Homeowner’s insurance – Policies and insurance contracts – Material change in risk – Rights and duties of insured – Notice of material change – Agents and brokers – Duties and liabilities of agent – Alleged failure to explain coverage – Non-delivery of policy

Zheng v. John Galon Insurance Services Ltd., [2016] S.J. No. 352, 2016 SKPC 90, Saskatchewan Provincial Court, June 27, 2016, P. Demong J.

This action arose out of a fire that damaged the plaintiff’s home (the “Property”) in October, 2013. A subsequent investigation revealed that the plaintiff had three paying tenants living at the Property. It was found as a fact that the plaintiff did not have any renters at the time he purchased his insurance policy. However, at the time of his March 2013 policy renewal, the plaintiff had as many as four renters at the Property. The plaintiff’s insurer (the “Insurer”) denied coverage on the basis that the plaintiff’s decision to rent his premises constituted a material change to the risk.

The plaintiff brought an action against both the Insurer and his insurance broker (the “Broker”). The plaintiff alleged that the Broker was negligent for failing to advise him that taking tenants could void his insurance. The plaintiff further alleged that because his attention was not drawn to this fact, and because he had no subjective knowledge that renting his property could constitute a change in risk, the Insurer was in breach of contract for failing to indemnify his losses.

The Broker argued that it had satisfied, and indeed exceeded, the requisite standard of care. It further argued that the plaintiff had actual knowledge that renting his home might constitute a material change which could void his coverage. The Insurer agreed with the Broker and relied on its materials. It further argued that the only relevant issue before the Court was whether, objectively and subjectively, an insurer would have declined to offer the plaintiff coverage or charged a higher premium to insure the Property.

The plaintiff and the Broker provided differing evidence as to what occurred during the purchase of the relevant policy. The plaintiff gave evidence that he met with the Broker for approximately 10 minutes. He claimed he was not asked questions about renters, and that he only had a ‘cursory’ read of the relevant documents. In contrast, the Broker’s evidence was that he assisted the plaintiff with the application form and asked questions about rental income, the number of weeks the property would be rented to others, and the number of rooms that might be rented. The Broker advised that the plaintiff was given an opportunity to review the relevant materials in detail. The Broker’s evidence was that these practices were mandated in the brokerage firm and that he followed his usual practice in this case.

After identifying several concerns with the plaintiff’s testimony, Justice Demong concluded that he preferred the Broker’s evidence. He noted that the plaintiff had turned down insurance for rental income, and answered in the negative to the other questions relating to renters. He did not accept that the meeting lasted only 10 minutes or that the plaintiff completed the application form with minimal assistance.

After considering the relevant legal principles and the Broker’s expert evidence on standard of care, Justice Demong concluded that the Broker was not negligent. He made the following comments in this regard:

[37] …. [the Broker] did not breach its duty of care to Mr. Zheng. First, I have found on the facts the Mr. Romanow did in fact review the application form and the consent and disclosure form with Mr. Zheng [the Plaintiff]. Second, it was unnecessary for Mr. Romanow to alert Mr. Zheng to the existence of any insurance that might be available to him if he decided to accept paying tenants. This is so because Mr. Zheng not only failed to ask any questions in this regard, but in fact the matter was addressed in the Habitational Insurance application form which Mr. Zheng had full opportunity to read before signing—Mr. Zheng did not seek that coverage.

[38] Nor was Mr. Romanow negligent in failing to provide Mr. Zheng a copy of the SGI Canada Booklet once his original meeting was concluded. I say this because there is no evidence before me whatsoever to suggest that the failure to receive this booklet in any way impacted on Mr. Zheng’s loss. If his assertion is that by not having it he had no opportunity to review its contents, I find this disingenuous. He had confirmation, both when he received notice that his insurance was in place, and again, on renewal, that if he did not have a copy he need only ask and one would be provided to him. I am left to conclude that Mr. Zheng, more likely than not simply chose not to read the materials that were provided to him by mail following his meeting with Mr. Romanow or when his renewal insurance came to him in the mail.

[39] Finally, I decline to find that Mr. Romanow’s failure to discuss the meaning and importance of a ‘material change to the risk’ and in particular, that taking in paying tenants might constitute such a change in risk (with the ensuing consequences) was negligent. In the absence of any questions asked on this point or even any possible concern that could reasonably have been divined by Mr. Romanow when the insurance was placed and renewed, (particularly when considered in the context of the answers Mr. Zheng gave on the written forms), Mr. Romanow did not have the obligation to gaze in a crystal ball and anticipate that this particular problem could, or would, arise.

Justice Demong similarly concluded that the Insurer was not in breach of contract. He accepted the Insurer’s evidence that it would have raised its premiums and required an inspection, had it been informed that the plaintiff had tenants at the Property. Further, the insurer testified that coverage may have been denied because of fire safety issues at the rental suite.

Justice Demong did not accept the plaintiff’s position that his coverage should remain in place due to the plaintiff’s lack of subjective knowledge. Justice Demong found that the application form made it clear that renters were important to the insurer. He found that the plaintiff knew, or ought to have recognized, the potential repercussions of taking in renters.

Justice Demong dismissed the claim as against both defendants.

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