Devesceri, while operating a motorcycle, crossed over the centre line of traffic and collided head-on with a car being driven by Caton. The resulting collision killed Devesceri and injured Caton. Caton sued Devesceri’s estate, and his insurer, RSA, defended the action. Two other motorcycle riders, Bradfield and Latanski, were also sued.
Over one year into the litigation, and after the discovery of Bradfield and Latanski, RSA advised the parties that it was taking an off-coverage position. RSA learned at discovery that Devesceri was seen consuming alcohol before the accident. RSA then obtained the coroner’s report, which confirmed that Devesceri had a modest quantity of alcohol in his system when he died. This contravened his M2 motorcycle licence and was a breach of his automobile policy.
At trial, Devesceri and Bradfield were both found liable for the accident (Devesceri 90% and Bradfield 10%). Bradfield obtained judgment on a crossclaim against Devesceri’s estate. In a second action, Bradfield sought a declaration to recover judgment against RSA. Bradfield argued that RSA was both estopped and had waived its right to deny coverage. The declaration of coverage was granted based on a finding of waiver at the trial level, but then overturned on appeal. In an interesting turn of events, the Trial Lawyers Association of British Columbia was substituted as the appellant on appeal to the Supreme Court of Canada, after Bradfield settled with RSA.
Waiver
The Court made short work of the waiver argument raised by the appellant. Section 131(1) of the Insurance Act, as it read at the time, required that any waiver be given in writing. The parties agreed that RSA did not waive any rights in writing. Therefore, this ground of the appeal failed.
Promissory Estoppel
The issue of promissory estoppel formed the main thrust of the appeal. The appellant argued that RSA was estopped from denying coverage because it responded to and defended the claims on behalf of its insured “long after it could have discovered evidence of the policy breach”.
Promissory estoppel is an equitable defence, articulated by the Court as follow:
The party relying on the doctrine must establish that the other party has, by words or conduct, made a promise or assurance which was intended to affect their legal relationship and to be acted on. Furthermore, the [promisee] must establish that, in reliance on the [promise], he acted on it or in some way changed his position. [Emphasis added.] (Maracle v. Travellers Indemnity Co. of Canada, [1991] 2 S.C.R. 50 at p. 57)
The Court noted that the equitable defence of promissory estoppel requires the following:
- the parties be in a legal relationship at the time of the promise or assurance;
- the promise or assurance be intended to affect that relationship and to be acted on; and
- the other party in fact relied on the promise or assurance. It is implicit that such reliance be to the promisee’s detriment.
The Supreme Court dealt primarily with the intention part of the test. To establish promissory estoppel, a promise or assurance must be intended to affect the parties’ legal relationship. The intention depends on what the promisor knows. Promissory estoppel requires that the insurer know the facts demonstrating a breach in order to be bound by its promise to offer coverage notwithstanding the breach.
Ultimately, the promissory estoppel argument failed because RSA did not have knowledge of Devesceri’s policy breach. Because it did not have knowledge, it could not have made an assurance intending to affect its legal relationship with its insured.
The Court also analyzed whether knowledge under the circumstances could be imputed to RSA. Where the insurer knows of the facts demonstrating a breach but fails appreciate their legal significance (that there was a breach), an appreciation may be imputed to the insurer, and the insurer may be estopped from denying coverage. This argument also failed on the basis that RSA did not have knowledge of Devesceri’s breach.
Trial Lawyers also argued that RSA should have known of the breach had it investigated the claim better (i.e., that RSA had constructive knowledge of the breach). This argument led to a discussion regarding the duty owed by the insurer to the various parties.
The Court commented that RSA owed a duty to its insured, Devesceri, to investigate the claim against him “fairly”, in a “balanced and reasonable manner”, and not to engage in a relentless search for a policy breach.
Trial Lawyers argued that RSA had a duty to investigate “thoroughly” and “diligently”. This argument was explicitly rejected by the Court, as the standard proposed by Trial Lawyers was too zealous. Additionally, RSA was under no duty to any third-party claimant to investigate policy breaches at all. The duty to investigate fairly is only owed to insureds. Were such a duty owed to third-parties, this would undermine the duties of utmost good faith and fair dealing that govern the relationship between the parties to an insurance contract.
In addition to a lack of intention on RSA’s part, the Court also noted that the insurer had not made a “clear and unequivocal” promise that it would cover the claim regardless of a later-discovered policy breach.
The issue of whether “detrimental reliance” was made out of the facts was not decided.
The Court also refrained from deciding on whether a third-party seeking direct recovery from the insurer under s.258 of the Insurance Act was entitled to make certain equitable arguments as though in the insured’s shoes. It was unnecessary to decide this issue, and the Court left it for another day.
Takeaways
The Supreme Court has affirmed that insurers have an obligation to investigate coverage in a fair and balanced manner, nothing more. This duty is owed to insureds, not to third-parties. Where an insurer has done so, and subsequently discovers a policy breach, it will not be estopped from taking an off-coverage position. An insurer may reverse course even after it has defended a claim on its insured’s behalf. This decision also serves as a reminder that insureds owe a reciprocal duty of good faith to disclose facts material to their claim. If an insured fails to disclose facts relevant to a policy breach, this would preclude the insured from later asserting estoppel against their insurer.
See Trial Lawyers Association of British Columbia v. Royal & Sun Alliance Insurance Company of Canada, 2021 SCC 47 (CanLII)
