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All or Nothing: Fraud in One Insurance Claim Can Forfeit All Claims

Published:

March 30, 2023

Author(s):

• Catherine Hirbour

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The Alberta Court of Appeal recently sent a strong message to insureds: utmost good faith is not only key but is required in insurance claims. The Court’s February 6, 2023 decision in Abbas v. Esurance Insurance Company of Canada confirms 200 years of common law: an insured’s fraud or false statements in one claim invalidates all the insured’s claims arising from the same event and under the same insurance contract – even if only one claim is tainted by that fraud. While the Court’s interpretation of section 554(1) of the Alberta Insurance Act isn’t binding in other Canadian provinces and territories, it is persuasive. Insurance legislation, across Canada, for example the New Brunswick Insurance Act, contains similar fraud provisions as does the Alberta Act. The message to insurers? If you’re handling multiple claims in relation to one event and the plaintiff commits fraud or makes a false statement in one of those claims, closely examine the other claims before deciding coverage.

The Fraud

The Plaintiff had a motor vehicle accident with an uninsured driver. He advanced a claim for coverage under the standard policy form No. 1 and a Standard Endorsement Form (SEF) No. 44 endorsement under his insurance policy. The Plaintiff also pursued a claim for accident benefits pursuant to Section B for an employment income replacement benefit. But the insurer learned that his section B claim was fraudulent: the Plaintiff lied about his employment and provided a false employer’s certificate and hiring letter; and he had his uncle lie on his behalf that he worked for his business under the table. The insurer denied the Plaintiff both Section B benefits and SEF 44 coverage on the basis that by committing fraud in his Section B claim, the Plaintiff forfeited his right to recover under both Section B and the SEF 44 endorsement. The Plaintiff sued for the SEF 44 benefits. The insurer applied at trial for a summary dismissal of the Plaintiff’s action for SEF 44 benefits. The parties agreed on the facts.

The Trial Decision

The Master refused to dismiss the claim, deciding the Plaintiff’s fraud related solely to the Section B benefits and it would be “draconian” to deny SEF 44 coverage because of it. The insurer appealed, arguing section 554(1)(b) and (c) of the Alberta Insurance Act only operated to invalidate his Section B coverage – and not his SEF 44 coverage:

554(1) If (…)

(b)    the insured contravenes a term of the contract or commits a fraud, or

(c)    the insured wilfully makes a false statement in respect of a claim under the contract,             

a claim by the insured is invalid and the right of the insured to recover indemnity is forfeited. (emphasis added)

The trial Court decided that if either sections 554(1)(b) or 554(1)(c) are met, a claim is invalid and the insured’s right to recover is forfeited, adding, “[t]he obvious intention behind section 554 is in keeping with the requirement of utmost good faith between insured and insurer and to provide significant consequences for clearly improper and intentional conduct by the insured.” The Plaintiff appealed.

The Appeal Decision

The Court of Appeal agreed with the trial Court – and confirmed the fraud invalidated both the Plaintiff’s Section B and his SEF44 claims, noting that while insurers include terms in their policies to protect against fraudulent claims, fraudsters will seek to exploit any weaknesses in insurance contracts. Otherwise, the cost of fraudulent claims ultimately falls on all policy holders who experience increased premiums. All Appeal justices agreed that the issue was the interpretation of section 554(1) of the Alberta Insurance Act and all agreed on the outcome. But all didn’t get to it in the same way.

Materiality. Since neither the Alberta Insurance or Interpretation Acts define fraud or false statements, the majority framed the question as whether the wording of section 554(1) of the Insurance Act clearly changes the common law rule that the fraud or false statement in one claim (here the Section B claim) does not need to be material to the related claim (here the SEF 44 claim). The Court concluded it does not.

• Insurance Act Review. The Court first noted that the Act uses the concept of “materiality” in several places, suggesting the lack of reference to “materiality” in section 554(1) means it isn’t required.

• Section Object. The Court next analyzed the Insurance Act’s objectives and the legislative history of section 554(1), concluding the rationale for the fraudulent claims rule is to “deter fraud in insurance claims”. The Court explained that under the common law rule, the fraud or false statement need only be material to one of the claims to invalidate all claims arising from the same events and under the same insurance contract. Section 554(1) codifies this common law. While strongly endorsing the trial Court’s view that it is a draconian measure, the Court confirmed the rule must remain, adding, “[n]othing less will have the desired effect. A bright-line rule is undoubtedly essential.”

• Plain & Ordinary Meaning. The Court finally examined the legislator’s choice to omit from section 554(1) any language limiting the invalidation by fraud or false statement solely to the claim to which the fraud relates. Noting the legislators could have easily added language to do so but chose not to, the Court concluded that all claims under a policy where a fraud or false statement was made are invalid. And based on the context and purpose of sections 554(1)(b) and (c), “a claim” means “all claims arising from the same event and under the same insurance contract …”.

“A Claim”. One Appeal Court justice agreed with the result but reached it in a more direct manner. This justice framed the issue as the meaning of “a claim” in the closing phrase of section 554(1). The Plaintiff argued “a” should be interpreted as “the” claim, limiting the invalidation of the claim by fraud or false statement solely to the claim in the fraud was made. The justice succinctly rejected this argument: first, the legislature didn’t use “the”; and second, dictionary definitions and legislative convention says “a” has the same meaning as “any” and “every”.

Please contact your McInnes Cooper lawyer or any member of our Insurance Defence Team @ McInnes Cooper to discuss whether you have grounds to deny an insured’s multiple claims based on fraud in one claim.

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