The legal pitfalls of online and over-the-phone insurance applications

A property insurer can be stuck paying out on a claim even though the client made a “material omission” on their insurance application, but the industry can mitigate this risk by being especially careful when taking applications over the phone or online, a Vancouver insurance lawyer suggests.

“When placing policies by telephone or online, where the insured is not there to explain and clear up any ambiguities, there is a risk for the insurer,” said Satinder Sidhu, a partner with Clark Wilson LLP.

“If an insured was placing an application for insurance in person, they would be handed the application form. They would complete it. They would return it to the broker,” she said July 13 during Top Cases & Industry Developments in P&C Insurance, a webinar hosted by the Insurance Institute of British Columbia.

But this is not what happened when Zoltan Nagy and Margaret Kuhn applied for home insurance with BCAA Insurance Corporation in early 2016. BCAA did insure Nagy and Kuhn’s home, which was later destroyed by fire. Their claim was denied by BCAA, who was represented by Sidhu when Nagy and Kuhn sued BCAA.

That coverage dispute lawsuit has since been settled.

When it initially denied Nagy and Kuhn’s claim, BCAA argued the policy was void ab initio. Essentially this means that no valid contract existed in the first place. BCAA alleged, among others things, that the clients failed to disclose that a previous insurer declined to renew insurance coverage and failed to list all claims in the past 10 years.

It was undisputed that Nagy did not disclose to BCAA over the phone that Wawanesa had declined to renew his policy in 2016 (due in part to claims history). Nagy disclosed one, but not all, of his previous claims. After the initial phone call, Nagy was emailed an application form, which he printed, signed, scanned, and returned by email.

According to Nagy, after he emailed the application to BCAA, he later, printed, signed, and sent a paper application form by postal mail. BCAA says it did not receive a paper application.

Nagy said he included an addendum in his mailed paper application that listed other previous claims. Also, he said, the mailed application contained a letter from his previous broker telling Nagy that Wawanesa would not renew his previous policy once it expired in 2016. Nagy asserts he called BCAA to confirm receipt of the mailed form, which BCAA denies.

“Insurance companies should review their [application forms] for insurance and the process by which they obtain applications to limit opportunities to omit information. An insurer should seek to elicit positive representation instead,” Sidhu said during the webinar.

Initially, in Nagy v. BCAA Insurance Corporation, Supreme Court of British Columbia Justice Veronica Jackson ruled against BCAA. She found that BCAA could not void Nagy’s home insurance policy on the grounds of either a material change in occupancy or on the grounds of fraudulent omission on an application form.

But Justice Jackson made some errors in law and factual findings, the B.C. Court of Appeal ruled in October 2020. The appeal court did not go so far as to rule that BCAA can deny the claim. Instead, the appeal court remitted the dispute to a new trial.

Since the 2020 appeal court decision, BCAA has settled with Nagy, so there will not actually be a new trial, Sidhu said July 13, 2021, during the IIBC webinar.

Key to the appeal court ruling was the distinction between an omission and a misrepresentation on an insurance application form.

B.C. statutory condition 1 reads as follows:

“If a person applying for insurance falsely describes the property to the prejudice of the insurer, or misrepresents or fraudulently omits to communicate any circumstance that is material to be made known to the insurer in order to enable it to judge of the risk to be undertaken, the contract is void as to any property in relation to which the misrepresentation or omission is material.”

Ontario’s Statutory Condition 1 has the same wording as in B.C.

When a consumer fails to communicate material facts to an insurer when applying for insurance, this does not automatically mean the policy is void, said Sidhu, commenting on B.C.’s statutory conditions.

“An omission will void the contract only if it is made fraudulently. A misrepresentation will void the contract whether or not it is fraudulently made,” she said.

Insurers should try their best to minimize opportunities for prospective clients to omit key facts on an application, suggested Sidhu.

When he applied in 2016 for home insurance with BCAA, Nagy was asked the following question: “Has any insurer cancelled, declined, refused or imposed any special conditions on habitational insurance for the applicant in the past 10 years?” Nagy answered “No,” both by telephone and on the application form that he claimed to have submitted by email. BCAA disputes Nagy’s assertion that he later mailed in a letter from his previous broker indicating Wawanesa was refusing to renew his home insurance in early 2016.

In its 2020 ruling, the B.C. Court of Appeal found that Nagy’s initial answer was a misrepresentation rather than an omission. This means BCAA did not need to prove that the negative answer was made fraudulently. Originally, Justice Jackson of the B.C. Supreme Court had found that in denying over the phone that his previous insurer declined to renew, Nagy had made an omission rather than a misrepresentation.

Nagy was also asked to list previous losses when applying for a BCAA home insurance policy in 2016. During the early 2016 phone call, Nagy disclosed a theft claim from December 2014. But there had been other claims, including a total fire loss in 2008, that were not disclosed.

The B.C. court of appeal ruled this was an omission and not a misrepresentation on the part of the claimant. Because it was an omission, it only voids the policy if the insurer can prove it was made fraudulently. But had the question on previous claims been worded in such a way that the response was a misrepresentation, then a false response would void the policy whether or not the applicant was being fraudulent.

“What if the insurance application had a follow-up question that said: ‘And I represent that the losses and claims listed above truly and accurately reflect all the claims made by the applicant in the past 10 years?’” Sidhu said during the IIBC webinar. “What you could do there is take the responsibility on the part of the insured to list information and possibly omit information and turn that into a representation, bringing it within the lower standard of proof.”

Feature image via iStock.com/katleho Seisa