Developments in Relief From Forfeiture
by Murray Stieber, Caroline Gronke | Oct 19, 2016
NO HARM, NO FOUL: DEVELOPMENTS IN RELIEF FROM FORFEITURE
By Murray Stieber and Caroline Gronke
Relief from forfeiture refers to the power of the court to protect a person against the loss of an interest or a right because of a failure to perform a covenant or condition in an agreement or contract. While the doctrine of relief from forfeiture applies to contracts generally, this paper focuses on its development and application in the insurance context.
“The purpose of allowing relief from forfeiture in insurance cases is to prevent hardship to beneficiaries where there has been a failure to comply with a condition for receipt of insurance proceeds and where leniency in respect of strict compliance with the condition will not result in prejudice to the insurer.”
The power to grant relief from forfeiture is an equitable remedy and is purely discretionary. This has, at times, led to a somewhat inconsistent application of the doctrine by the courts. Generally speaking, in determining whether to grant relief from forfeiture, the court will consider the conduct of the insured, the nature of the policy condition that was breached and the prejudice that will result from either granting or not granting relief from forfeiture.
The jurisdiction to grant relief from forfeiture principally stems from two statutory provisions: section 129 of the Insurance Act and section 98 of the Courts of Justice Act. While historically, there was uncertainty as to whether section 129 was the sole provision that applied in the insurance context, the Ontario Court of Appeal made it clear in Kozel v. Personal Insurance Co., that this is not the case. Relief from forfeiture may be granted pursuant to section 98 of the Courts of Justice Act in the insurance context notwithstanding the specific relief from forfeiture provisions contained in the Insurance Act. This is significant because the broad wording of section 98 makes relief from forfeiture available in circumstances of imperfect compliance with a term or condition of the policy, before the date of loss.
Section 129 of the Insurance Act
Section 129 of the Insurance Act provides as follows:
“Where there has been imperfect compliance with a statutory condition as to the proof of loss to be given by the insured or other matter or thing required to be done or omitted by the insured with respect to the loss and a consequent forfeiture or avoidance of the insurance in whole or in part and the court considers it inequitable that the insurance should be forfeited or avoided on that ground, the court may relieve against the forfeiture or avoidance on such terms as it considers just.”
In order to determine whether relief from forfeiture is available, the threshold question is a determination as to whether the breach can be considered as imperfect compliance with a term or condition of the policy or whether the breach is non-compliance with a condition precedent. In the context of relief from forfeiture, the focus is on whether the breach of the term is serious or substantial. Where the term is incidental, its breach is deemed to be imperfect compliance; where the provision is fundamental or integral, its breach is cast as non-compliance with a condition precedent.
In Falk Bros. Industries Ltd. v. Elance Steel Fabricating Co., the Supreme Court of Canada considered whether the equivalent provision in the Saskatchewan Insurance Act applied only to statutory conditions as opposed to contractual provisions. In that case, the notice term breached was a term of the contract, not a statutory condition. In considering this issue, the Court pointed out that the section was remedial in nature and, as such, should be given an appropriately broad, large and liberal interpretation. The Court concluded that the relevant provision applies to both statutory and contractual conditions.
A second issue that arises in the interpretation of section 129 of the Insurance Act is whether it can apply to a breach of a policy condition that occurs before the loss. While there were a number of cases that suggested that relief from forfeiture could be granted pursuant to section 129 of the Insurance Act for a breach of a policy condition preceding the loss as opposed to a post-loss breach, the Ontario Court of Appeal has clearly stated in a number of decisions, including Williams v. York Fire & Casualty Insurance Co. and Kozel v. Personal Insurance Co., that this is not the case. The court’s power under section 129 is a narrow one pertaining only to those policy conditions that relate to proof of loss. It does not apply generally to all policy conditions and specifically does not apply to conditions precedent to coverage. 
In Williams v. York Fire & Casualty Insurance Co., the insured’s license was suspended only hours before the insured was involved in a motor vehicle accident. The Court of Appeal concluded that relief from forfeiture was not available pursuant to section 129 of the Insurance Act as the insured’s breach did not relate to imperfect compliance as to the proof of loss (i.e. after the loss). The provision had no application even though the breach occurred almost immediately prior to the loss. The same conclusion was reached in Pluzak v. Gerling Global where the breach involved a failure on the part of the insured to pay premiums on a life insurance policy.
It should be noted that in McEnaney v. General Accident Assurance Co. of Canada, Jurianz J.A. mused that “an act or omission could conceivably be ‘with respect to ‘ an anticipated event” and therefore found it unnecessary to say that section 129 only applies to an act or omission after the loss has occurred. That being said, he acknowledged that it was difficult to imagine an act or omission that would be “with respect to the loss” before the loss occurs.
As noted above, relief from forfeiture is only available pursuant to section 129 of the Insurance Act where there has been imperfect compliance with the conditions of the insurance policy. It is not available in situations where there has been complete non-compliance. The most common breach where relief from forfeiture is sought is delayed reporting of a claim to the insurer. Generally speaking, courts have characterized delayed reporting as imperfect compliance as opposed to non-compliance. The failure to institute an action within a prescribed time period, however, is treated as non-compliance within the meaning of section 129. This principle was articulated by the Supreme Court in Falk Bros. as follows and reiterated more recently by the Ontario Court of Appeal in Dams v. TD Home and Auto Insurance Co.:
“The case law has generally treated failure to give notice of a claim in a timely fashion as imperfect compliance whereas failure to institute an action within the prescribed time period has been viewed as non-compliance, or breach of a condition precedent. Thus, courts have generally been willing to grant relief from forfeiture when notice of a claim has been delayed. …
On the other hand, cases in which failure to meet a time requirement has been held to be non-compliance rather than imperfect compliance have largely been cases in which the time period was for the commencement of an action rather than for giving notice. …”
In Stuart v. Hutchins, the Ontario Court of Appeal considered whether relief from forfeiture was available where a claim was first presented to the insurer after the expiry of a “claims made and reported policy”. The Court concluded that relief from forfeiture was not available pursuant to section 129 of the Insurance Act as the notice requirement formed an integral part of the event triggering coverage in that coverage was only extended to actual and potential claims made and reported in writing to the insurer during the policy period. As such, the failure to give notice was considered to be non-compliance as opposed to imperfect compliance. The Court pointed out that the authorities cited in Falk Bros. dealt with “occurrence” based policies as opposed to “claims made and reported policies” and were therefore distinguishable.
Another example where the court has refused to grant relief from forfeiture on the basis that the breach constituted non-compliance as opposed to imperfect compliance is when the insured admitted liability to a third party contrary to the conditions of a liability policy. In Colliers McClocklin Real Estate Corp. v. Lloyd’s Underwriters, the insured property management company failed to finalize a natural gas supply contract, which resulted in additional costs. After notifying the insurer of a potential claim, the insured, for business reasons, made the decision to admit liability and financially compensate its client. The insurer denied coverage based upon the unauthorized admission of liability, which in its view, constituted a breach of the policy’s Insuring Agreement as it defeated the insurer’s right and duty to defend any action.
The Court of Appeal for Saskatchewan overturned the decision of the Court of Queen’s Bench granting relief from forfeiture under Saskatchewan’s equivalent provision to section 129 of the Insurance Act. The Court concluded that the insurer’s right to investigate, admit liability and participate in any process to promote settlement and approve settlement must be a “sine qua non of any insurance coverage” and that the breaches in question were “breaches of the insurer’s fundamental rights and breaches of the fundamental terms of the contract of insurance”. As a result, relief from forfeiture was not available to the insured.
A further example of a situation where the court will not grant relief from forfeiture is when the insured has engaged in fraudulent or dishonest conduct. In RBC v. Field, Emery J. stated that “relief from forfeiture under Section 129 of the Insurance Act provides no relief in the face of a fraud committed by the insured.” Once fraud is established, no matter how slight the amount, the entire claim under the proof of loss is forfeited. This, of course, does not apply to a situation where the insured commits an honest mistake.
In determining whether to grant relief from forfeiture under section 129 of the Insurance Act, the Court will consider the issue of prejudice, both to the insured and to the insurer. In some cases, the concept of prejudice is considered in determining whether or not the breach constitutes imperfect compliance or non-compliance. Where there is substantial prejudice to the insurer, courts have characterized the breach as being non-compliance while the absence of prejudice will militate in favour of a finding of imperfect compliance.
In other cases, courts consider the issue of prejudice once it is determined that the breach constituted imperfect compliance, thereby making the remedy of relief from forfeiture theoretically available, depending upon the equities of the situation. We would suggest that this is the more rational approach to the analysis. In either case, the major focus is balancing the prejudice between the insurer and the insured and will involve a fact-specific inquiry.
The issue of prejudice often comes up in cases of untimely notice to the insurer. In determining whether the insurer has been prejudiced, the court will look at whether the insurer lost a realistic opportunity to do anything it might otherwise have done by reason of the late notice. If it is determined that the insurer would not have acted any differently, the insurer will not be said to have been prejudiced, even in the face of a substantial delay. Typically, the prejudice to the insurer arises from not being able to investigate a claim properly, not being able to speak to witnesses at an early date, not being able to get medical examinations at an early date and not being in a position to have assisted the insured with treatment.
The prejudice to the insured in not being granted relief from forfeiture is obviously the forfeiture of the insurance benefits. This, however, may be offset by the ability of the insured to recover against third parties who may be liable. In Cervo v. Raimondo, Low J. concluded that the insured having to pursue his former lawyer for failing to notify his insurer of his need for statutory accident benefits in a timely fashion does not constitute substantial hardship.
Section 98 of the Court of Justice Act
Whereas section 129 of the Insurance Act has been interpreted as being available only in cases of imperfect compliance with terms of a policy related to proofs of loss, in the making of a claim, or after a loss has occurred, section 98 of the Courts of Justice Act may be available to provide relief from forfeiture in circumstances where there has been imperfect compliance with a policy term, generally. However, if the breach amounts to non-compliance with a condition precedent to coverage, section 98 of the Courts of Justice Act is not available. What constitutes imperfect compliance with a term of a contract and non-compliance with a condition precedent was canvassed in some detail in the Kozel decision.
In Kozel, an elderly insured had failed to renew her driver’s license. Approximately six months after the required date of renewal she was involved in a motor vehicle accident. A few days after the accident, she renewed her driver’s license without difficulty. The insurer denied coverage for a claim arising from the accident on the basis there was a breach of statutory condition 4(1) of the standard automobile policy in that the insured was not authorized to drive at the time of the accident due to the expiry of her license.
The insured brought an application for a declaration that there was coverage under her policy. Justice T.A. Woods of the Superior Court held that the insured had available to her the defence of due diligence and on that basis found that there was no breach of the statutory condition. Justice Woods also found that section 98 did not apply as statutory condition 4(1) was a fundamental term or condition precedent of the policy.
On appeal, the Court of Appeal reversed the lower Court’s finding, and held that section 98 of the Courts of Justice Act did apply, and that Ms. Kozel was entitled to relief from forfeiture. In reaching that conclusion, the Court found that Ms. Kozel’s breach did not constitute non-compliance with a condition precedent to coverage, stating that the insurer had not put forward an explanation as to how statutory condition 4(1) was of a fundamental nature. The Court continued as follows:
“Neither was the respondent’s breach here a fundamental one. Had the respondent’s violation of statutory condition 4(1) been more substantial – for example, if she had been drinking heavily prior to driving – she may have been barred from obtaining relief from forfeiture. This case, however, involves a relatively minor breach.”
“A Court should find that an insured’s breach constitutes non-compliance with a condition precedent only in rare cases where the breach is substantial and prejudices the insurer. In all other instances the breach would be deemed imperfect compliance, and relief against forfeiture will be available.”
This assertion of the wide availability of relief from forfeiture seems somewhat inconsistent with the Court of Appeal’s decision in Ontario (Attorney General) v. 8477 Darlington Crescent. At paragraph 87 of that decision, the Court stated:
“The power to relieve from forfeiture is discretionary and fact specific…The power is predicated on the existence of circumstances in which enforcing a contractual right of forfeiture, although consistent with the terms of the contract, visits an inequitable consequence on the party that breached the contract. Relief from forfeiture is particularly appropriate where the interests of the party seeking enforcement by forfeiture can be fully vindicated without resort to forfeiture. Relief from forfeiture is granted sparingly and the party seeking that relief bears the onus of making the case for it”. (Citations omitted)
There appears to be some recognition by the Court in Kozel of this disparity. At paragraph 51 the Court stated:
“This holding does not upset the balance in the existing relief against forfeiture jurisprudence, because an insured must still make three showings – that his or her conduct was reasonable, that the breach was not grave, and that there is a disparity between the value of the property forfeited and the damage caused by the breach – in order to prevail”.
We would suggest that the Kozel does change the threshold question as to when relief from forfeiture may be available. It seems to suggest that virtually all breaches of policy terms should be considered imperfect compliance, unless an insurer can prove that the term is a condition precedent to coverage. The primary means to do this is to refer to specific policy wording which indicates that the term is a condition precedent to coverage, and it may be insufficient to simply call a provision a “condition” or to argue that the insurer would never have extended coverage had they been aware of the subject matter of the breach. This is particularly worrisome for policies where the insurer has no discretion as to the policy wording.
In Aviva Canada Inc. v. Gravenhurst Taxi Limited the insured breached statutory condition 1.4 of the policy by failing to advise the insurer of a mid-term change in drivers. One of the taxi company’s drivers had a poor driving record, including various medical suspensions. Justice T.A. Woods, (he of the underlying decision in Kozel), found that the breach constituted imperfect compliance with a policy term rather than non-compliance of a condition precedent, notwithstanding evidence from the insurer that it would not have insured this driver had it been aware of him. Justice Woods found that there was nothing in the contract to suggest that this statutory clause required that the insurer be informed promptly of new drivers and, as such, accepted that the term was incidental and not fundamental.
In addition, the Court went on to state that the breach was not “intentional or a serious one”, which seems to address the Court of Appeal’s suggestion in Kozel that a determination should be made at this stage of the analysis as to whether the insured’s breach was substantial or minor, in order to determine whether relief from forfeiture is available. The Court in Gravenhurst found that the insured was otherwise a model insured, and that the breach was as a result of his misapprehension of the requirement to provide changes in drivers promptly, rather than simply on renewal. Based on this, the Court found that “The breach was not a serious one”. It would appear from Gravenhurst that the subjective intent of the insured is more important in the analysis of whether the breach is substantial, compared to the impact that the information may have on an insurer’s decision as to whether or not to extend coverage.
The Kozel test was further considered by the Court of Appeal in the decision of Lavoie v. T.A. McGill Mortgage Services Inc., which postdated Kozel by approximately two months. In that case, an insured failed to disclose facts in applying for professional liability coverage in March of 2008 and March of 2009 with respect to potential claims as against it. The Court of Appeal held that Kozel did not assist the appellants because:
“…the breaches in this case constituted non-compliance with a condition precedent. The misrepresentations and omissions in the applications were material and went to the heart of Echelon’s decision to provide coverage. The fundamental impact of a material misrepresentation in an application for insurance is reflected in the jurisprudence of entitling an insurer to rescind the policy in the circumstances. The motion judge did not err in refusing to grant relief from forfeiture pursuant to s. 98 of the Courts of Justice Act.”
Saskatchewan River Factors
Once the threshold test has been met as to whether the breach constitutes imperfect compliance with a policy term, whether relief from forfeiture should be granted is determined by the application of the three part test laid out in Saskatchewan River Bungalows:
“The factors to be considered by the Court in the exercise of exercising its discretion are the conduct of the applicant, the gravity of the breaches, and the disparity between the value of the property forfeited and the damage caused by the breach.”
CONDUCT OF THE APPLICANT
This factor focuses on the reasonableness of the breaching party’s conduct and requires “an examination of the reasonableness of the breaching party’s conduct as it relates to all facets of the contractual relationship, including the breach in issue and the aftermath of the breach.”This was further explained in Williams Estate v Paul Revere Life:
“The reasonableness test requires consideration of the nature of the breach, what caused it and what, if anything, the insured attempted to do about it. All of the circumstances, including those that go to explain the act or omission that caused the lapse (forfeiture) of the policy, should be taken into account. It is only by considering the relevant background that the reasonableness of the insured’s conduct can be realistically considered.”
The following are some examples of where the conduct of the breaching party was found be unreasonable. In Williams, the court held that the appellant did not qualify for relief under section 98 because his failure to pay premiums in a timely fashion occurred due to his “ongoing negligence” and general inability to keep track of his personal finances.
In Day Estate v. Pandurevic, the court found that the respondent could not obtain section 98 relief even though he had no knowledge that his license was suspended. The court emphasized the fact that the respondent’s license had been suspended twice before, and that on the day of the accident he picked up two letters from the Ministry of Transportation and continued driving without reading them.
In Lambert v Khan the court found that the Plaintiff not taking steps to secure information about who hit the taxi she was a passenger in for some two years after the collision was not acting reasonably, and as such, the claim for relief from forfeiture was denied.
Conversely, some cases where the breaching party was found to have acted reasonably are as follows. In Gravenhurst Taxi, the insured taxi company was found to be acting reasonably where it had always paid its premiums on time, always updated the insurer when a new car was added, and had always updated the status of its drivers once-yearly when requested.
In Burrman v. Dominion of Canada General Insurance Co., the conduct of the insured was found to be reasonable where the lawyer for the plaintiff was provided with the claim and due to lawyer turnover failed to submit it in the proper timeframe.
What this portion of the analysis appears to require is a determination as to whether the insured is coming to the Court with “clean hands” and that they are able to show that they have consistently otherwise complied with terms of the contract. The analysis is essentially a moral one as to whether the insured is a “repeat offender” with respect to the terms of the policy and attempts to draw conclusions as to the intent of the insured.
GRAVITY OF THE BREACH
This inquiry “…looks at both the nature of the breach itself and the impact of that breach on the contractual rights of the other party.” This factor focuses specifically on finding prejudice toward the insurer.
Cases involving an unidentified motorist claim where the reporting conditions are not met have been found create substantial prejudice to the insurer as it is important “that the insurer act quickly to ascertain whether the perpetrator could be located.”  In failing to comply with the reporting requirements in the policy, the insurer is denied its ability to conduct a meaningful investigation at an early stage which is crucial in unidentified motorist claims.
On the other hand, in Nguyen it was found that late application for LTD benefits, while prejudicing the insurer by not allowing them to conduct its own investigation on the merits of the claim from an early date, was not enough prevent relief from forfeiture.
In Gravenhurst Taxi it was also found that the failure to supply an updated list of drivers would not have caused significant enough prejudice to prevent relief from forfeiture. However, this is due to the underwriting file not supporting that each driver would have been properly investigated in a timely fashion.
In cases where the insured’s breach is immaterial as to whether or not a loss would have occurred, it will not be considered grave. The onus appears to be on the insurer to show that had it had the information, it would actually have done something with it with reference to underwriting practices and procedures, and further prove that the insurer regularly and consistently denied coverage in the circumstances. In this regard, the contents of the insurer’s underwriting file will be critical in the analysis to determine whether a Court will consider the breach grave and deny a relief from forfeiture.
Disparity between the Value
The third and final factor is the disparity between the value of the property forfeited and the damage caused by the breach. This factor entails “a kind of proportionality analysis.” In cases of insurance law this inquiry examines the disparity between the loss of coverage and the extent of damage caused by the breach. This step is described in Lambert as follows:
“The loss of coverage is of course a constant in every relief from forfeiture case. The issue this criterion is getting at is whether the loss to the insurer has in some way been aggravated by the failing for which the plaintiff seeks relief and if so to what degree (in relation to the lost coverage).”
In Gravenhurst Taxi, Wood J. states what appears to be the general consensus on this step:
“As will be the case in most denial of coverage situations the disparity between the loss that Gravenhurst Taxi will suffer and the loss to Aviva will be enormous. Should coverage be denied, the former will lose $2,000,000.00 in coverage plus the defence of the lawsuit. On the other hand if Aviva is unsuccessful it will simply be required to carry out its contractual obligation.”
In Lambert, described above, a case of delayed reporting, the court stated:
“I find that there are reasonable grounds for believing that the failure of the plaintiff in this case precluded TD from obtaining information that might have enabled the loss to be shifted back to where it belongs (with the insurer of the white van). The insurer’s interests were harmed in this case in a real and material fashion and a comparison of this harm to the plaintiff’s loss of coverage does not warrant relief from forfeiture.”
In Burrman, the court found that “the value of the property forfeited (namely, $1 million in uninsured automobile coverage) far exceeds any prejudice resulting from the breach of the notice condition.”
This section will typically work in favour of the party seeking coverage. An exception to this may be when the insured has multiple policies of insurance, and an insurer is stepping into the shoes of its insured to move for a declaration that there was coverage under another policy of insurance. In Middleton v. Pankhurst, the insured had coverage available under another policy of insurance, and would suffer no actual loss if relief were not granted, and, as such, the Court declined to grant relief.
In light the Court of Appeal’s decision in Kozel, it is now clear that relief from forfeiture may be granted in relation to policies of insurance pursuant to section 129 of the Insurance Act or section 98 of the Courts of Justice Act. Section 129 is narrower in scope and will apply only to cases of imperfect compliance relating proofs of loss. It will not apply to pre-loss breaches such as failure to pay premiums or pre-loss misrepresentation. Section 98, on the hand, will be more broadly applied.
Ultimately, a similar test will be applied under both provisions. The court will first determine whether or not the breach constitutes imperfect compliance which makes the remedy technically available: the threshold question. It will then go on to apply the three factors set out in Saskatchewan Rivers in order to determine where the equities lie. While one would think that the onus should be on the party seeking to rely on the relief from forfeiture provisions, there are conflicting decisions on this issue with some placing the onus on the insured and others on the insurer.
In light of what appears to be an expansion of the court’s willingness to grant relief from forfeiture, we would suggest that serious thought be given to this issue if an insurer is considering denying coverage for breach of a policy condition. Keep in mind that an insured seeking relief from forfeiture will typically come across as sympathetic particularly when one considers the obvious prejudice that results from the forfeiture of insurance coverage. Insurers will have to demonstrate real prejudice before a court will exercise it discretion to deny relief from forfeiture, once the threshold has been met.