Saskatchewan Court of Appeal confirms proof of a material change in risk requires strong evidentiary foundation

Introduction

Wynward Insurance Group v Smith Building and Development Ltd, 2023 SKCA 57 highlights significant considerations for insurers who are considering denying claims on the basis of an insured’s failure to disclose a material change in risk.

Background facts

The plaintiffs, Mr. and Mrs. Smith (the “Smiths”), owned a commercial building in Estevan, Saskatchewan insured with Wynward Insurance Group (“Wynward”). The Smiths leased the building to several tenants, one of which entered into a sub-lease agreement with a motorcycle club the Reapers Riders. The club later became known as the Heretics Motorcycle Club (the “Heretics”).

In April 2016, the building was damaged by a fire that was determined to be the result of arson (the “Fire”). The Smiths submitted a claim to Wynward immediately after the Fire. Mr. Henderson, a senior claims examiner at Wynward, was assigned to investigate the Smiths’ claim. He found that the Heretics were an affiliate of the Hells Angels biker gang, a known criminal organization. He denied the Smiths’ claim on the basis that they had neglected to inform Wynward of the material change in risk posed by the presence of the criminal-affiliated motorcycle club in the building.

Trial decision

The Smiths commenced an action against Wynward, claiming that they were entitled to be indemnified under their policy. Wynward argued that they were not informed of the Reapers Riders transition to the Heretics, and that the presence of this particular “outlaw motorcycle club” with an “unsavoury connection” to the Hells Angels constituted a material change of risk. The Smiths maintained that this so-called transition did not constitute a material change in risk and that, even if it did, they did not possess the requisite knowledge of the connection between the Heretics and the Hells Angels or any other criminal activity which would obligate them to disclose such knowledge to Wynward.

In reviewing the applicable law, the trial judge noted that whether a change constitutes a material change of risk pursuant to a contract of insurance is a question of fact. Additionally, the insurer has the onus of establishing, on a balance of probabilities, that the change at issue is a material change in risk. The court ultimately rejected Wynward’s arguments and found that it had not discharged the burden of proof required to establish that the Heretics’ presence in the building as a sub-tenant constituted a material change in risk.

In his reasons, the trial judge considered the evidence led by Wynward in support of its arguments. First, the court considered the results of an internet search which described the Heretics as a “Hells Angel puppet club.”  The accuracy and truth of the contents of the report could not be verified, and as such, carried little weight.  In addition to this search result, Wynward sought to rely on the testimony of Cst. Shewchuk, a member of the Estevan Police Service involved in monitoring the Heretics and the Hells Angels. Cst. Shewchuk testified that the Heretics hosted three social events per year which were attended by members of other motorcycle clubs, regular citizens and a few members of the Hells Angels from nearby cities. Hells Angels merchandise was sold at these events. Wynward maintained that the foregoing established a direct link between the Heretics and the Hells Angels. The trial judge disagreed and reasoned that neither the presence of members of the Hells Angels nor the sale of Hells Angels merchandise at the Heretics’ events were indicative of criminality, a connection between the clubs or a material change in risk. Thus, Wynward failed to prove that there had been a material change in risk.

The trial judge noted that even if there had been a material change in risk, the insured would have to be shown to have effectively known of this change. The trial judge found no evidence to suggest that the Smiths were aware of or ought to have been aware of anything “untoward” about the Heretics. Since Wynward failed to establish that a material change in risk had occurred and that the Smiths knew about the change, the trial judge ruled that the Smiths were entitled to indemnity under their policy. Wynward appealed the trial judge’s decision.

On appeal

On appeal, Wynward argued that the trial judge erred in finding no evidence of a material change in risk. The Court of Appeal reviewed the law on material change and disclosure. It cited the doctrine of uberrima fides which describes the relationship of mutual vulnerability and utmost good faith that exists between insurers and an insured. This relationship imposes a duty on the insured to be forthcoming in disclosing information to their insurer that may be relevant to the risk. This duty is not without limitations and extends only to facts which the insured has actual or constructive knowledge of and which are material to the risk being insured.

The Court of Appeal also clarified that a fact material to the risk is one that “if the facts had been truly represented, they would have caused a reasonable insurer to decline the risk or required a higher premium.”[1] The test for materiality requires an objective assessment of what a reasonable insurer would have decided if they were in possession of the relevant facts at the time the parties entered into the policy. The fact that Wynward viewed the club’s transition to an outlaw motorcycle club as material was not determinative of its materiality in objective terms.

The Court found that the trial judge was alert to the applicable law and made no palpable or overriding error. Accordingly, the Court of Appeal upheld the lower court’s judgment that the evidence led by Wynward did not establish a connection between the Heretics and the Hells Angels that resulted in a change of risk that was material to the insurance contract.

Takeaway

The insurer bears the burden of proving that a particular change is material to the risk. In this case, Wynward’s argument that a material change in risk occurred when the Heretics became affiliated with a criminal entity lacked a reliable evidentiary foundation. When considering the issue of an insured’s failure to disclose a material change of risk when assessing a claim, insurers should consider whether they have sufficient evidence in support of their position. It is crucial to demonstrate that the change in question truly qualifies as a material change in risk.

Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s Insurance Defence group.

[1] Henwood v Prudential Insurance Company of America, [1967] SCR 720 at 737.