Insurer fails to show materiality to risk of criminal conviction omitted in application: case

Widow should receive $250,000 death benefit of insured, Superior Court says

Insurer fails to show materiality to risk of criminal conviction omitted in application: case
Brian Goldfinger, founder and directing lawyer at Goldfinger Injury Lawyers

A court found that an insurer was not entitled to void the life insurance policy of the deceased, who was criminally charged and convicted, because it did not show that he omitted or misrepresented a material fact in the application.

In Estate of Kareem Watson et al v. RBC, 2021 ONSC 5305, the applicant and her common law partner visited the respondent insurer’s office in September 2016, where they filled up a standard application form for life insurance. The applicant’s partner answered “no” to the question of whether he had been found guilty or was facing pending charges of impaired driving or of any other alcohol, criminal or drugs-related offence. The life insurance company approved the application on the spot and issued the policy, which named the applicant as sole beneficiary in the amount of $250,000.

Following her partner’s death in July 2018, the applicant filed a death benefit claim. In March 2019, after conducting a review, the insurance company denied coverage on the basis that the deceased misrepresented or failed to disclose a material fact in his application, as required by the insurance policy, by s. 183(1) of the Insurance Act, RSO 1990, c I.8, and by common law. It then returned the premiums paid and denied further liability. According to the insurer, it had found out that the deceased had been charged with human trafficking and assault in October 2015, then had pleaded guilty to assault and had received a suspended sentence and 12-month probation.

The applicant brought an application under s. 218 of the Insurance Act and under Rule 14.05(3) of the Rules for Civil Procedure, R.S.O. 1990, Reg. 194. She submitted that the insurer breached the insurance contract and sought punitive damages for bad faith and full indemnity costs.

The Superior Court of Justice of Ontario ordered the insurer to pay the applicant $250,000 in damages, plus prejudgment interest and $14,668.47 in costs. It found that the insurer had failed to show that the omission or misrepresentation in the application was a material fact to insurance risk and had pursued the matter in a heavy-handed way that justified awarding costs on a full indemnity basis. The court, however, did not award punitive damages because there was no evidence of the insurer’s bad faith or independent actionable wrong.

The court noted that, to prove that the deceased’s criminal charges were material to insurance and required to be disclosed in the application, the insurer had relied exclusively on an unsworn and unsigned two-page internal memorandum in which the corporate underwriting manager said that the insurer would have denied coverage if it had known about the deceased’s criminal history.

The insurer, which has not shown that the deceased omitted or misrepresented a material fact in the application, was not lawfully authorized to void the policy, the court ruled. The memorandum was hearsay and was not entitled to any weight, given that the insurer failed to make the corporate underwriting manager available for cross-examination and failed to provide an affidavit from her, in violation of Rule 39.01, the court said.

This “cover-your-butt” memorandum, according to the court, only offered conclusions and provided no supporting analysis or information on why the criminal charges were material to issuing the policy or to evaluating insurance risk. The court added that the insurer could benefit from asking clearer questions in its insurance application, given that the question on criminal history was “multi-pronged and confusing.”

Among situations where an applicant for insurance does not disclose the truth or omits certain facts, insurers have denied 80 to 95 per cent of these cases, and the court has often upheld such denials, said a blog post on the website of Goldfinger Injury Lawyers, which discussed this case.

“It’s a strong and surprising win for the Plaintiffs,” says Brian Goldfinger, the firm’s founder and directing lawyer. “I say surprising because it cannot be denied that the Plaintiff did not answer truthfully to the question in relation to the ongoing criminal charges.”

Goldfinger guesses that the insurer could have improved its defence by presenting a sworn affidavit from the manager.

“Whether or not the charges are material to a life insurance policy is subject to debate,” Goldfinger says. “But I suspect there is underwriting evidence to suggest that this would place the applicant in a higher risk profile which would impact premiums.”

Had the insurer known about the charges, it would have likely raised its premiums or would have undertaken an investigation of such charges, Goldfinger says. He notes, however, that this case may very well be overturned on appeal, if the parties opt for that route.

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