In the recent decision, Trial Lawyers Association of British Columbia v Royal & Sun Alliance Insurance Company of Canada, the Supreme Court of Canada considered the application of promissory estoppel in the insurance context. Specifically, the Court considered whether an insurer was estopped from denying coverage because it had already provided a defence, before it had actual knowledge of material facts that constituted a breach of the insured’s policy. The Court held that promissory estoppel did not apply in this case. Additionally, the Court canvassed the duty to investigate the facts of a claim, as it relates to both the insured and third parties.
On May 29, 2006, Mr. Devecseri, Mr. Bradfield and Mr. Caton were involved in a motor vehicle accident which resulted in the death of Mr. Devecseri and injuries to both Mr. Bradfield and Mr. Caton. At the time of the accident, Mr. Devecseri had alcohol in his system, which constituted a breach of his motor vehicle insurance policy. His insurer, Royal & Sun Alliance Insurance Company of Canada ( “RSA”), appointed an adjuster to investigate the accident. The adjuster interviewed Mr. Bradfield, who, despite having been with Mr. Devecseri prior to the accident, did not mention that Mr. Devecseri had been drinking alcohol. Nor was this fact revealed by the police report provided to the adjuster.
RSA defended Mr. Devecseri’s estate in two lawsuits started by the other two injured in the accident. Three years later, it was revealed in examinations for discovery that Mr. Devecseri and Mr. Bradfield had been consuming alcohol at a restaurant shortly before the accident. Shortly thereafter, a coroner’s report was obtained confirming that Mr. Devecseri had a modest quantity of alcohol in his system when he died.
RSA stopped defending Mr. Devecseri’s estate and advised the parties it was denying coverage. This change in position meant that the vale of Mr. Devercseri’s policy was no longer $1 million but instead was reduced to the statutory minimum of $200,000.
One of the actions proceeded to trial, resulting in a judgment against Mr. Devecseri’s estate and Mr. Bradfield, and a judgment for Mr. Bradfield on a cross-claim against the estate. In enforcing his judgment in the cross-claim, Mr. Bradfield sought a declaration that RSA’s exposure on behalf of the estate was not confined to the statutory minimum of $200,000. He advanced two submissions: waiver by conduct and promissory estoppel. The trial judge found that RSA waived its right to deny coverage by failing to take an off-coverage position and by providing a defence to Mr. Devecseri’s estate as the litigation progressed. Having granted the declaration for this reason, he did not consider the estoppel argument [2018 ONSC 4477].
The decision was reversed at the Ontario Court of Appeal [2019 ONCA 80]. The Court rejected Mr. Bradfield’s waiver argument because, at that time, s.131(1) of the Insurance Act precluded recognition of waiver by conduct. The Court also rejected the promissory estoppel argument, saying that RSA could deny coverage even though it had provided a defence because it did not know of the policy breach.
Although leave to the Supreme Court of Canada was granted, Mr. Bradfield settled with RSA and dropped his appeal. The Trial Lawyers Association of British Columbia was substituted as the appellant before the Supreme Court.
The Supreme Court’s Reasoning
Since the appellant conceded that waiver by conduct was precluded by the Insurance Act as it read at the time, the sole issue before the Supreme Court was promissory estoppel. That is, ignorance of Mr. Devecseri’s alcohol consumption notwithstanding, could RSA be held to an assurance, by words or conduct, that it would not deny coverage on the basis of the policy breach?
The Court reiterated that the established test for the equitable defence of promissory estoppel requires that:
– The parties be in a legal relationship at the time of the promise or assurance;
– The promise or assurance be intended to affect that relationship and to be acted on; and
– The other party in fact relied on the promise or assurance [para 15].
Justices Moldaver and Brown, writing for the majority, held that:
“[The requirement] that a promise or assurance must be intended to affect the parties’ legal relationship signifies that the promisor must know of the facts that are said to give rise to that legal relationship, and of the alteration thereto in this case, that Mr. Devecseri would be covered to the full policy limits despite having breached the policy.
[T]he significance of intention depends entirely on what the promisor knows. A promisor, such as RSA, cannot intend to alter a relationship by promising to refrain from acting on information it does not have. If RSA is to be taken, by having furnished a defence, as having intended to affect a relationship with mr. Bradfield by extending coverage notwithstanding Mr. Devecseri’s breach, it must be shown to have known of the facts which demonstrate that breach” [para 21]. [Emphasis in original].
Justices Moldaver and Brown were of the opinion that knowing of the facts demonstrating a breach leaves a very narrow role for imputed knowledge in this context. Had RSA known or had possession of the fact that demonstrated Mr. Devecseri’s breach – i.e. that he had consumed alcohol prior to the accident – but failed to appreciate its legal significant (that this was a breach), knowledge of that legal significance could be imputed to RSA [para 24]. However, since RSA had no knowledge of the alcohol consumption in the first place, they couldn’t fail to appreciate its legal significance.
The Trial Lawyers submitted that constructive knowledge arising from a breach of a duty to investigate was enough. They argued that RSA had a duty to thoroughly and diligently investigate the claim against its insured and to “know the things that were within [its] grasp” [para 34].
The Court disagreed and held that the obligation an insurer owes to the insured in the context of a liability claim is to “investigate each claim “fairly”, in a “balanced and reasonable manner”, and not engage in a relentless search for a policy breach” [para 33]. This approach tempers the incentives of insurers to go the extra mile to find policy breaches, while the approach advanced by Trial Lawyers could augment them. In this case, the coroner’s report was neither in the possession of the insurer nor was it publicly notorious.
The Court also held that the duty to investigate fairly, in a balanced and reasonable manner, is owed only to the insured and not to third party claimants such as Mr. Bradfield. Were such a duty owed to third parties, it would undermine the duties of utmost good faith and fair dealing that govern the relationship between the parties to an insurance contract.
If a duty was owed to third parties, there would be no mutuality or reciprocity because third parties are under no obligation to disclose facts to the insurer. The Court held that this would effectively mean that a contract of liability insurance provided greater protection to and imposed fewer obligations upon third parties as compared to the first-party insured [para 38].
This decision clarifies the doctrine of promissory estoppel in the insurance context and specifically, the knowledge that can be attributed to an insurer before it is estopped from denying coverage.
While a thorough investigation of the claim against their insured will lead to informed decisions at the outset, an insurer is not expected to know every single detail of the claim. Insurers should, however, have a clear understanding of what facts would constitute a policy breach from the beginning. If the insurer has knowledge of the facts constituting a breach but fail to appreciate its legal significance (i.e. that it was a breach), knowledge of the legal significance could be imputed.