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Court Puts Brakes on Estoppel Claim: 3 Insurer Take-Aways

Published:

November 23, 2021

Author(s):

• Jillian M. Kean

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On November 19, 2021, in Trial Lawyers Association of British Columbia v. Royal & Sun Alliance Insurance Company of Canada, the Supreme Court of Canada offered some needed clarity on the current state of the law of estoppel and waiver in the context of liability insurance. Insurers will welcome the Court’s confirmation that an insurer can’t promise away a defence it didn’t know it had. The fact that in this case, the party asserting estoppel wasn’t the insured, but was instead the third party suing the insured, also gave the Court the opportunity to set boundaries on the relationship between an insurer and a third party to the insurance contract.

Here’s a look at the case, the third party’s estoppel and duty to investigate arguments, and three key take-aways for insurers.

The Case

This case arose out of a motor vehicle accident that occurred on May 29, 2006. At issue was a drink the insured had at lunch prior to the accident.

Accident. Mr. Devecseri had a condition on his policy that his insurance coverage was void if he consumed any alcohol and then drove. On May 29, 2006, Mr. Devecseri had an alcoholic drink at lunch just before driving his motorcycle. He was involved in an accident with a fellow motorcyclist, Mr. Bradfield, and another motorist, Mr. Caton. Both Mr. Bradfield and Mr. Caton were injured; Mr. Devecseri was killed.

Investigation. The insurer appointed an adjuster to investigate the accident. The adjustor interviewed Mr. Bradfield, who did not mention that Mr. Devecseri had consumed alcohol at lunch just prior to the accident. Neither the adjuster nor the insurer took steps to obtain a coroner’s report, which would have shown alcohol in Mr. Devesceri’s system.

Claims. In October 2007, Mr. Bradfield brought action against Mr. Devcseri’s estate. In May 2008, Mr. Caton brought action against Mr. Bradfield and Mr. Devecseri’s estate; Mr. Bradfield crossclaimed against Mr. Devecseri. Pursuant to its duty to defend, the insurer appointed counsel and in March 2009 entered defence on behalf of Mr. Devecseri’s estate to all claims. In June 2009, discoveries took place. To this point, everything appeared to be running like a usual MVA defence matter. But at discovery, one of the other motorcyclists testified that he had seen Mr. Devecseri and Mr. Bradfield consume alcohol at a restaurant shortly before the accident. Mr. Bradfield also testified, but did not recall Mr. Devecseri consuming alcohol. The insurer then obtained the coroner’s report, which showed a “modest” quantity of alcohol in Mr. Devecseri’s system when he died.

Off-Coverage Position. In July 2009, the insurer advised all parties that it was taking an off-coverage position. The insurer wasted no time investigating Mr. Devecseri’s breach, then communicated this fact right away. Swift action is essential in cases, like this, where an insurer discovers an off-coverage position after a defence has been entered and is in the process of being executed. By operation of the provisions of Ontario’s Insurance Act, this change in the insurer’s coverage position meant its liability coverage to Mr. Devecseri’s estate, and therefore Mr. Bradfield’s and Mr. Caton’s recovery, was reduced from $1M to the statutory minimum of $200,000. Mr. Caton obtained judgment against Mr. Bradfield (10% at fault) and Mr. Devecseri’s estate (90% at fault) for $1.8M. This created a significant shortfall between the amount of the judgment and the recoverable liability insurance.

Waiver & Estoppel

As a result of this shortfall, Mr. Bradfield – a non- party to the insurance contract – sought a declaration the insurer had either waived its right to rely on a policy breach, was estopped from denying coverage, or both, because it had conducted itself in defence of Mr. Devecseri’s estate for over three years. Before the Supreme Court of Canada heard the appeal, the insurer and Mr. Bradfield settled, but Trial Lawyers Association of British Columbia requested that the appeal continue despite it being moot. The Court allowed Trial Lawyers to continue and argue in Mr. Bradfield’s favour.

Waiver. Mr. Bradfield abandoned his waiver argument because the applicable provisions of Ontario’s Insurance Act specifically state a waiver must be in writing. The Insurance legislation of each of the four Atlantic Canadian provinces include similar provisions with respect to waiver by words and conduct. Waiver is a closely related – but legally distinct – concept from estoppel, and the two are frequently argued together. However, it’s important to remember that the legislation deals specifically with waiver, but not with estoppel.

Estoppel. As a result, the only issue before the Court was whether the insurer was estopped from denying coverage. Usually, it’s the insured who argues their insurer is prevented from denying coverage. But in this case, Mr. Bradfield (and presumably his own liability insurer) stood to gain from forcing Mr. Devecseri’s insurer to accept full coverage. However, the difference in the legal relationship as between the insurer and its insured (Mr. Devecseri), and as between the insurer and a non-party to the contract (Mr. Bradfield) was key to how this case was resolved. Estoppel is an equitable concept meant to cure unfairness. As the Court pointed out (at para. 16), “[i]n the insurance context, estoppel arises most commonly where an insurer, having initially taken steps consistent with coverage, then denies coverage because of the insured’s breach of a policy term or its ineligibility for insurance in the first place. To prevent the insurer from denying coverage, the insured will attempt to show that the insurer is estopped from changing its coverage position based on its prior words or conduct.” (emphasis added). Mr. Bradfield asserted it was unfair for Mr. Devecseri’s insurer to discontinue its coverage of the Devecseri estate because it had represented it for three years before learning that Mr. Devecseri had consumed alcohol. Mr. Bradfield argued the insurer was therefore estopped from denying coverage. The Court rejected this argument. The Court confirmed estoppel involves a three part test:

1. The parties must be in a legal relationship at the time of the promise or assurance. While not in a contractual relationship, the Court held there was a legal relationship between Mr. Devecseri’s insurer and the third party, Mr. Bradfield, by virtue of Ontario’s Insurance Act. The Act allows a third party to sue a liability insurer where they have denied coverage to their insured. The Insurance legislation of each of the Atlantic Canadian provinces has similar provisions.

2. The promise or assurance must be intended to affect that relationship and to be acted on. It was at this stage that Mr. Bradfield’s argument fell down. The majority of the Court found the insurer made no promise or assurance that demonstrated an intent to affect its legal relationship with Mr. Bradfield. It wasn’t possible that the insurer intended to affect its relationship with the parties by abandoning its zero alcohol defence: it couldn’t abandon a defence it didn’t know it had at the time it was alleged to have abandoned it.

3. The other party in fact relied, to its detriment, on the promise or assurance. There doesn’t appear to be any doubt in this case that there would have been detrimental reliance by the third party on the insurer’s coverage for the third party’s damages.

The Court held the insurer wasn’t estopped from asserting its coverage defence on the basis of zero alcohol. It didn’t know about the policy breach until discovery. Therefore, its conduct up to that point couldn’t stand for an informed abandonment of its rights or an assurance to Mr. Bradfield that it wouldn’t assert a defence it didn’t know it had. But if the insurer knew that Mr. Devecseri had consumed alcohol, but defended him anyway, the story would be completely different.

Duty to Investigate

Mr. Bradfield also proposed the Court impose a duty on the insurer to investigate much earlier whether alcohol was a factor in the accident. To overcome the insurer’s lack of knowledge of the policy breach, Mr. Bradfield argued the Court should impose constructive knowledge of that fact on the insurer because the information was readily available from the coroner –  but in spite of Mr. Bradfield’s failure to mention alcohol in his statement at the outset of the claim. The Court firmly rejected this argument.

Duty to Insured. The Court found the insurer discharged its duty to its insured to investigate the claim fairly. It further held that, at para. 18, “[The insurer] was under no additional duty to Mr. Bradfield or other third-party claimants to investigate policy breaches at all, much less on a different and more rigorous standard than that which it owed to its insured.” (emphasis added)

Duty to Third Party. The Court held it would undermine the insurer’s duty of good faith to its insured to require the insurer go on a mission to uncover possible policy breaches, all in service of a third party’s interests. The insurer’s duty is to its insured first, and “the duty to investigate fairly, in a balanced and reasonable manner, is owed only to the insured, not third parties. Were such a duty owed to third parties, it would sit uneasily, and indeed would undermine, the duties of utmost good faith and fair dealing that govern the relationship between the parties to an insurance contract – in this case, between [the insurer] and Mr. Devecseri.” Therefore, if there was no reason to obtain toxicological information at the time of the accident, the Court should not later impose such an affirmative duty, with the benefit of hindsight, in service of a non-party to the contract.

3 Key Take Aways for Insurers

Insurers can take these three points way from the Court’s decision in Trial Lawyers Association of British Columbia v. Royal & Sun Alliance Insurance Company of Canada.

Don’t Wait to Investigate. The biggest take-away from this decision: if the insurer is aware of any fact that could compromise coverage down the road, the insurer has a duty to its insured to investigate those facts and to make the insured aware of any coverage problems as soon as reasonably possible. Otherwise, the insurer risks being estopped when it later attempts to withdraw from defending the insured. In those circumstances, the longer an insurer continues on as if nothing’s the matter with coverage, the more likely the insured will have a successful estoppel argument. However, this same duty doesn’t extend to third parties, nor should it, since it would undermine the insured’s duty of good faith to its insureds. In liability insurance, the insured’s interests are frequently (if not always) diametrically opposed to the third party claimant’s. Any conduct to the benefit of the third party would – as a natural corollary – be contrary to the insured’s interest as a defendant in the lawsuit.

Hold the Insured to Their Duty. Another significant point, though made in passing, insurers will welcome is the Court’s reminder, sometimes forgotten, that the duty of good faith is reciprocal, at para. 35: “the obligations between the insurer and the insured are reciprocal; while the insurer has the aforementioned duty to investigate fairly, in a balanced and reasonable manner, the insured is also under a reciprocal duty to disclose facts material to the claim.” (original emphasis) This pronouncement could come in handy with uncooperative or unresponsive insureds.

Reserve Your Rights. Finally, in the liability insurance context, if an insurer sees the potential for coverage problems, it can protect itself from estoppel and waiver by issuing a reservation of rights prior to entering a defence. This will ensure there is no confusion over the position the insurer has reserved the right to take in the future, if necessary. Unfortunately, in this case, the insurer would not have had any reason to issue a reservation of rights, since it had no knowledge of the breach. However, in most cases, a well-drafted reservation of rights letter can save the insurer a lot of headache down the road.

Please contact your McInnes Cooper lawyer or any member of our  Insurance Defence Team @ McInnes Cooper to discuss how this decision might impact claims against you.

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