Inform your Insurer of Material Changes in Risk or You Could Lose Coverage

On January 21, 2014, Mr. and Ms. Schellenberg suffered losses when a building on their property was damaged by a fire. They submitted a claim to their insurer, Wawanesa Mutual Insurance Company (“Wawanesa”). Wawanesa denied the claim on the basis that the insurance policy was voided because the Schellenbergs’ failed to inform Wawanesa of a material change in risk, being the construction of a licensed marijuana grow operation and related upgrades. The Schellenbergs brought a claim against Wawanesa for failing to make payment further to the policy coverage and against Hub International Canada West ULC (“HUB”), the insurance broker, for failing to secure adequate coverage.

At trial, the Schellenbergs were unsuccessful and they brought an appeal. That reasons from that appeal were recently published in Schellenberg v. Wawanesa Mutual Insurance Company, 2020 BCCA 22 (CanLII) and are a useful basis for discussion of some denial of coverage issues that might arise as a result of “material changes” for items covered by an insurance policy.

In the case Hub provided an annual renewal package to the Schellenbergs which included information about what the insurer considered a material change. The document defined a material change as “…something important enough to change the original agreement between the insurance company and the policyholder…” and provided the following examples of material changes:

  • starting a home-based business/farm use;
  • using an auxiliary wood heat source without the insurers’ knowledge;
  • renovations or alterations to the building; and
  • changes in occupancy.

The Schellenbergs denied reviewing the annual renewal package information.

The Court of Appeal noted s. 29 of the Insurance Act, R.S.B.C. 2012, c. 1 which sets out certain statutory conditions deemed to be part of every insurance contract. Condition four of those conditions includes the statutory definition of a material change which is as follows:

4.(1) The insured must promptly give notice in writing to the insurer or its agent of a change that is

(a) material to the risk, and

(b) within the control and knowledge of the insured.

(2) If an insurer or its agent is not promptly notified of a change under subparagraph (1) of this condition, the contract is void as to the part affected by the change.

The Court of appeal cited Henwood v. Prudential Insurance Co. of America, 1967 CanLII 17 (SCC), [1967] S.C.R. 720 at 726–727 for the common law definition of a material change which is: “ A change material to the risk is one that if disclosed would have caused a reasonable insurer to decline the risk or stipulate a higher premium.”

Wawanesa successfully argued at trial that the Schellenbergs’ policy was voided as a result of (1) there being a change material to risk; (2) the change being within the Schellenbergs’ control; (3) the Shcellenbergs having knowledge of the change and (4) the Schellenbergs did not notify Wawanesa or Hub of the change.

More specifically, the Court of Appeal noted the trial judge’s reasons which found that the Schellenbergs:

  • knew they were obliged to tell Hub or Wawanesa about significant changes to their property or its use;
  • did not inform Hub or Wawanesa about the grow operation or electrical upgrades related to it, took some time to plan and execute the upgrades including obtaining related licencing;
  • had multiple occasions to inform Hub or Wawanesa about the upgrades;
  • were alerted to the fact that the upgrades could be material because of the annual renewal documents; and
  • knew or ought to have known that the presence of a grow operation would have been relevant to the consideration of their insurance;

all of which lead the trial judge to conclude that the Schellenbergs misled Hub by failing to disclose the facility where the grow operation occurred and the operation itself.

The Court of Appeal noted authorities including Marche v. Halifax Insurance Co., 2005 SCC 6 which clearly reject the requirement for the insurer to causally tie the material non-disclosure to the loss suffered in order to void a policy. In other words, it does not matter if the material thing an insured does not tell its insurer about caused or is related to a loss, the simple act of non-disclosure is enough to potentially void a policy.

With respect to the claim against Hub, the trial judge and Court of Appeal noted that a broker’s duty of care is to provide advice to a customer about the coverage available to meet the customer’s needs, including gaps in coverage and how to protect against such gaps (citing Beck v. Johnston, Meier Insurance Agencies Ltd., 2011 BCCA 250, aff’g 2010 BCSC 719). The trial judge found that, in the circumstances, Hub had no reason to make inquiries as to whether the Schellenbergs upgraded their electrical system or started a marijuana grow operation nor necessarily any obligation to do so. Further, there were findings that the Schellenbergs did not volunteer any information which would have elicited such inquiries or intend to be forthright if specific inquiries about the grow operation had been made.

The Court of Appeal upheld the trial court’s findings and further noted that no expert evidence was submitted by the Schellenbergs to support the notion that Hub’s duty of care as a brokerage included undertaking an inquiry into whether the Schellenbergs upgraded their electrical system or started a marijuana grow operation.

As such, the Court of Appeal upheld the denial of the claims against Wawanesa and Hub.

Schellenberg v. Wawanesa Mutual Insurance Company is a reminder that insurance policies, while generally being interpreted generously in favour of the insured, are still dependent on an insured making full, frank and proper disclosure of those facts which may be material  to the policy and to advise their insurer or broker of any material changes in the underlying risks of the policy when such changes occur. Failure to provide proper disclosure can void a policy from the moment of the failure to provide such disclosure. It is far better for insureds to provide proper disclosure and to explore additional, different or alternative insurance coverage rather than to have their policy voided in its entirety.

Schellenberg v. Wawanesa Mutual Insurance Company can also serve as a reminder that insurers are looking for any way to avoid making payment under their policies. Insureds should not simply accept an insurer’s declaration that a policy has been voided or denied for an alleged failure to disclose material facts or material changes without careful consideration of whether such a position is solidly grounded in fact and law. Similarly, insureds should also consider whether any alleged failure to disclose material facts or material changes resulted from their own conduct or if such alleged failures resulted from their broker failing to properly record such information from an insured or communicate such information to the insurer.

If an insured finds themselves being denied coverage for an allegation of a failure to disclose material facts or material changes, legal advice should be sought on how to proceed next.

For additional information related the issues covered in this article, please consider my previous articles:

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