This Document Contains Chapters 27 to 28 Chapter 27 Bankruptcy and Insolvency Instructor’s Manual–Answers by Philip King and Steven Enman V. Chapter Study Questions for Review, page 698 1. How can negotiated settlements be used when a business is in financial difficulty? Answer: The business in difficulty and its creditors can use negotiated settlements to restructure the debt if the long-term prognosis is favourable. To succeed with this strategy, all significant creditors must be in agreement. 2. What is the difference between insolvency and bankruptcy? Answer: Debtors are insolvent when they owe more than $1000 and one of the following conditions is satisfied: they are unable to meet their financial obligations as they become due, they have ceased paying their obligations as they become due, or they have assets with a fair market value that is less than the total amount of their liabilities. Debtors may be insolvent without going bankrupt. Bankruptcy, in contrast, is a legal process governed by the Bankruptcy and Insolvency Act, under which an insolvent debtor transfers its assets to a trustee in bankruptcy for distribution to the creditors of the insolvent debtor. 3. What are the purposes of bankruptcy legislation? Answer: Bankruptcy legislation has four purposes: • to assist honest but unfortunate debtors who are not able to pay their debts • to establish priorities between creditors and distribute assets fairly and equitably • to impose punishment for bankruptcy offences • to enable businesses that are struggling but still viable to reorganize their debts and avoid bankruptcy The purpose of bankruptcy legislation is, as with much other business laws, to provide predictability and certainty for businesses, to allow lenders to evaluate and manage risk, and thereby to promote trade and commerce. 4. What are the requirements for a creditor to obtain a bankruptcy order? Answer: Creditors claiming the debtor owes at least $1000 and has committed at least one act of bankruptcy can ask the court for a bankruptcy order. 5. What are two examples of an act of bankruptcy? Answer: Acts of bankruptcy, pursuant to the Bankruptcy and Insolvency Act, include the following: • defaulting on a proposal • making a fraudulent transfer of property • preferring one creditor to another • trying to avoid or deceive creditors • admitting insolvency • not meeting financial obligations as they come due 6. What is a fraudulent conveyance? Answer: A fraudulent conveyance is a transfer of property that is made with the intent to defeat, hinder, delay or defraud creditors. A fraudulent conveyance is void. 7. Who can oppose a bankruptcy discharge? Answer: The Superintendent of Bankruptcy, the trustee in bankruptcy, or any creditor can oppose a discharge from bankruptcy where a bankruptcy offence has been committed or where there is evidence of extravagance prior to the bankruptcy. 8. Who are preferred creditors? Answer: Preferred creditors are listed in section 136 of the Bankruptcy and Insolvency Act and include funeral expenses, trustee fees, employees’ wages, municipal taxes, and arrears of rent. 9. How are preferred creditors treated differently from secured and unsecured creditors? Answer: Preferred creditors have priority over ordinary unsecured creditors when the assets of a bankrupt estate are distributed to the creditors by the trustee in bankruptcy. 10. How are employees protected in the bankruptcy of their employer? Answer: Employees are deemed to be secured creditors, with a first charge on the current assets of their employer, up to $2000 per employee. In addition, employees are protected under the Wage Earner Protection Program for some unpaid wages. 11. Under what circumstances will a bankrupt likely not be discharged automatically from bankruptcy? Answer: This question applies to individuals only since corporations are discharged only when all debts are paid, which is extremely rare. Individuals will not be automatically discharged when it is the third or subsequent bankruptcy of the debtor, when a bankruptcy offence has been committed, when there is evidence of real extravagancy before bankruptcy, or when the debtor has not made the required payments. Automatic discharge may also be opposed by the trustee, creditors, or the superintendent of bankruptcy, in which case the discharge application will be determined by the court. 12. What are the duties of the trustee in bankruptcy? Answer: The trustee in bankruptcy has the legal authority to administer the bankruptcy process. The trustee will review questionable transactions before bankruptcy, gather in and secure the assets, verify and classify creditors’ claims, liquidate the assets, and distribute the proceeds according to the rules contained in the BIA. 13. What debts are not released in a discharge from bankruptcy? Answer: The following debts are not discharged as a result of bankruptcy: fines, penalties, alimony or support payments, debts arising from fraud, and, to some extent, student loans. 14. What is the purpose of a proposal? Answer: The overall goal of a proposal is to give a business or an individual an opportunity to reorganize its debts so that it may avoid bankruptcy for the benefit of all parties concerned. 15. What is the difference between a Division I proposal and a consumer proposal? Answer: Division I proposals are available to individuals and corporations with no limit on the amount of debt that is owed. Consumer proposals, or Division II proposals, are available only to individuals with total debts of less than $250 000 (not including a mortgage on a principal residence). 16. Why might a large company prefer reorganizing under the CCAA rather than making a proposal under the BIA? Answer: Reorganizing under the CCAA has the effect of staying all creditors, including secured creditors (who are not affected by a proposal under the BIA). In addition, the CCAA provides much more flexibility than a proposal under the BIA, because the court has much more latitude to make orders that it considers appropriate. Finally, if a CCAA proposal is not approved, there may be an opportunity to modify the proposal and try again, whereas if a Division I proposal under the BIA is not approved, the company is deemed to be bankrupt and, in the case of a corporation, the corporation will cease to exist as of that date. 17. What happens if unsecured creditors do not vote to approve a proposal? Answer: If a Division I proposal is not approved by unsecured creditors, then the debtor is deemed to be bankrupt. In the case of a corporation, the corporation will cease to exist as of that date. In the case of a Division II (consumer) proposal, the debtor can resubmit an amended proposal, consider other options, or make a voluntary assignment into bankruptcy. 18. What are the differences between an individual being bankrupt and a corporation being bankrupt? Answer: Individuals who are bankrupt are eligible for a discharge from most of their pre-bankruptcy debts, provided they have complied with the applicable conditions and have not committed a bankruptcy offence. Individuals who are discharged bankrupts can start fresh with a clean financial slate. Corporations who are bankrupt are not discharged from their debts, which is extremely rare (because if they could pay their debts in full they would likely not be bankrupt). Corporations cease to exist on the date of bankruptcy and thus do not emerge from the process at all. Questions for Critical Thinking, page 698 1. Business decisions made prior to bankruptcy can be challenged by the trustee if they are found to be preferences or transfers at undervalue. What is the rationale for giving the trustee this authority? How does it relate to the purposes of bankruptcy legislation? Answer: This question is designed to ensure students understand the basic purposes of the bankruptcy process as presented in the Business and Legislation feature (textbook page 675). The difficulty students (and debtors) often have is distinguishing between the concept of fairness from a personal perspective and fairness in the broader context of all stakeholders who have an interest in the outcome. From Bill Ikeda’s perspective (in the Business Law in Practice), it may seem better to pay his friends or relatives than to pay, for example, the Canada Revenue Agency (CRA). These are people who have helped him in the past and who will suffer serious personal losses if they are not paid. CRA does not have the same dependency on the outcome of this bankruptcy. Yet the broader social purpose of bankruptcy is to treat all creditors fairly and equitably. It is not up to the debtor to determine who has priority. Proof of actual intention to defraud is not required because the principal aim of the legislation is to treat all creditors fairly and not to punish bad behaviour on the part of the debtor. The rules in the BIA provide an objective standard to measure behaviour and ensure compliance. 2. Current bankruptcy law bars graduates from being discharged from their outstanding student loans for seven years after the completion of their studies or five years in cases of hardship. Why does the law deal with student loans in this way? Is it fair to treat student loans differently from other debts? Answer: Whether or not the period should be shortened depends to some extent on the average timeframe over which students pay off their student loans. The period should perhaps be long enough to deter students from easily abandoning their obligations under the loans. Seven years may be a reasonable period in this context. To completely remove the ban would destroy the integrity of the loan system. Students could easily declare bankruptcy after graduation and never have to worry about paying back a student loan. However, a similar argument could be made about other types of loans. If bankruptcy is perceived as an easy way to avoid debt, then why single out student loans for special treatment? Could it be because the same federal government that makes the rules also stands to lose if these loans are not repaid? 3. In 2009, Nortel Networks Corporation filed for protection from creditors under the CCAA. Nortel initially sought to emerge from bankruptcy protection as a viable business, but in June of 2009 Nortel announced that it would sell off all its assets and cease operations. Nortel’s share price went to $0.185 after having been as high as $1245. Ninety thousand people would lose their jobs as a result of Nortel’s demise. In the end, the amount paid to lawyers, accountants, financial experts, and consultants in connection with the bankruptcy of Nortel would surpass $1 billion. Is the CCAA an appropriate mechanism for companies to seek protection from creditors? Answer: The Nortel saga was indeed a sad story, and students are usually impressed with the sheer scale of the debacle. The issue remains: how to dismantle a complicated global enterprise that has billions of dollars in debts but still has hundreds of millions of dollars in assets? The answer, in the case of Nortel, was an arrangement under the CCAA. However, the costs of the plan, as referenced in the text, were astronomical. Students should discuss the pros and cons of using the CCAA for such a reorganization and whether the policy of the legislation is achieved in such a situation. 4. Proposals are an important part of the bankruptcy and insolvency legislation. However, despite the controls that exist, they can have the effect of delaying legal actions by creditors to protect their interests. Does the potential benefit of proposals in salvaging troubled businesses outweigh the potential losses to creditors? Answer: Provided the time lines are applied—and they typically are since creditors have a vested interest in the timeframe—the benefits generally outweigh the costs. In many cases, the business does not have a reasonable chance of a turnaround under any circumstances. When the business does have a chance of success, however, allowing it to continue and preventing individual creditors from pulling the plug may provide a greater degree of recovery for creditors overall. In addition, many stakeholders other than creditors stand to lose when a business is allowed to fail. 5. The category of preferred creditors is not found in the bankruptcy legislation of many countries. What is the rationale for the protection afforded preferred creditors in Canadian law? Is this special treatment appropriate considering the interests of all creditors? Answer: There is some controversy surrounding these provisions. The reason this category of creditors exists is to give priority for certain debts where the services incurred are considered important from a social perspective. If these creditors were not given priority, a person with limited means or whose solvency is being questioned could have difficulty obtaining rental accommodation, or a deceased’s relatives could have difficulty obtaining basic funeral services. If a trustee did not receive priority for fees and expenses, the bankruptcy would not happen. At the same time, the priority that certain institutions, such as municipalities and federal and provincial governments receive, over unsecured creditors is more difficult to justify. Another factor is the portion of assets that preferred creditors receive. If the portion is relatively small, the deprivation for unsecured creditors is of less concern. 6. Why does the bankruptcy legislation treat individuals differently from corporations regarding a discharge from bankruptcy? Is this treatment appropriate? Answer: Society has an interest in ensuring that individuals are not condemned to poverty for their entire lives as a result of poor judgment or poor financial planning. In addition, a number of circumstances beyond a person’s control may result in bankruptcy, such as physical or mental health issues, the obligations of dependants, or frauds perpetrated by others. Accordingly, bankruptcy legislation tries to rehabilitate these individuals and give them a fresh start. Corporations, however, do not present the same social policy issues, and their financial hardship is not generally viewed with the same degree of sympathy. As a result, corporations do not have the same type of protection afforded to individuals by the bankruptcy legislation. In some ways, this is analogous to the significant degree of protection that is provided to residential tenants but not to commercial tenants. Situations for Discussion, page 699 1. Before creditors can petition a debtor into bankruptcy, they must be able to show that at least one act of bankruptcy has been committed by the debtor. Review the events in the Hometown situation and identify any possible acts of bankruptcy. Do the various acts of bankruptcy have a common theme? Should it be obvious to a debtor such as Hometown that such conduct is inadvisable? When the debtor has committed an act of bankruptcy, at what point should the creditors act upon it? Answer: Hometown may have committed several acts of bankruptcy (as listed on textbook page 675): • Made an assignment to the trustee: the assignment takes place if Hometown assigns all legal title of its property to the trustee. • Made a fraudulent transfer of property: the transfers to George and GL and possibly the payments to himself, Martha, and the purchaser of the adjacent land might be considered fraudulent transfers. • Made a preference: the payments to George and GL were likely preferences as they were made when Hometown was insolvent, within three months of bankruptcy, and favoured those creditors over others. • Advised creditors that he was insolvent or could not pay his debts: Bill does this several times throughout the story. • Attempted to deceive creditors by disposing of property: the sale of the land adjacent to the business could fall within this category. • Advised creditors that he had suspended payment on debts: Bill has likely communicated with several creditors in this manner. • Stopped meeting liabilities as they fall due: we can assume that this has occurred. The common theme to the list is the failure to meet liabilities generally. The acts are mainly specific instances of this more general indicator. When Bill began to experience financial difficulty that was not temporary, he should have asked for professional advice, part of which will relate to acts of bankruptcy. Bill should also have realized that at some point, he was not carrying on business as usual. Creditors are likely to act when they perceive that pursuing legal action against Hometown will increase the amount they will receive or will prevent even greater losses. 2. Halifax Realty (HR) is a property developer based in Halifax. It is in the business of building office buildings and other commercial premises. Over the past several years, HR has overextended itself with the result that it now finds itself with more liabilities than assts. HR’s debts are $150 million and its assets at today’s values are worth $80 million. Two banks hold security for 90 percent of the debt. The balance of the debt is unsecured. The company is now unable to make regular payments on its loans and will not be able to make its regular payroll at the end of this month. John, the CEO of HR, believes the company could remain viable as long as it could find a way to reduce its immediate cash flow requirements. His discussions with HR’s two major creditors suggest that only one of them would be prepared to negotiate a more favourable payment scheme. John seeks advice from an insolvency practitioner about the pros and cons of making a proposal. What advice is John likely to receive? What factors will the creditors consider in responding to HR’s situation? What should John do? Answer: The advice John is likely to receive is that there is no practical way to avoid bankruptcy. If both creditors were open to the possibility of a restructuring of the company’s debt, then either a proposal under the BIA or an arrangement under the CCAA might be possible. However, if one of the two creditors is steadfastly opposed to such a plan, then there is no possibility that it will be approved which is required in order for either type of plan to succeed. Since the two largest creditors are both secured, it would probably not be possible for HR to carry on business after one of them had enforced its security. In fact, enforcement action by one secured creditor would almost certainly bring about enforcement by the other. If John can convince both secured creditors to consider some type of restructuring, then a proposal or arrangement is possible. In considering John’s request, the creditors would try to determine whether they would be better off by accepting and participating in a restructuring or, instead, forcing HR into bankruptcy. The creditor would look at the amount they would likely receive in a bankruptcy versus the risk-adjusted present value of the amount they would likely receive if HR were to continue to carry on business. The creditors will also be keenly interested in the terms of any such restructuring, and whether or not they will be asked to advance more credit. John should consider the advice he is given, speak with HR’s creditors about their concerns, and determine whether there is any possibility that HR can continue in business. 3. Designer Shirts is a supplier to Classic Stores (Classic), a major national retail outlet. There are rumours that Classic is in trouble, but the company has been in trouble before and has managed to recover. Industry experts say that there is too much at stake to allow the company to fail. Classic has recently announced an infusion of cash from a major investor. On the basis of this news, Designer Shirts agrees to make deliveries, although it insists on a shorter payment period than normal. Designer makes the first delivery of summer stock at the end of March. It receives its payment within the specified 20 days. It then makes a second delivery, but this time payment is not forthcoming in 20 days. Based on further promises that the payment will be made within two days, Designer makes a third shipment. Within 10 days there is an announcement that Classic has made an assignment in bankruptcy. Designer has received payment for neither the second nor the third shipment and is owed $1.5 million. What are Designer’s options? Could Designer have better managed its risk in this situation? Answer: However unfortunate it is for Designer, it has little protection against the actions of Classic. These events often occur before a bankruptcy, with the debtor sending signals that it is viable when in fact it is not. Yet if it were to tell the financial truth, there would be immediate failure and the slim prospects for success would vanish. At this stage, Designer is an unsecured creditor. Designer will not have to return payment received for the first shipment. This payment was made in the normal course of business. The only other protection Designer has is over some of the stock shipped. Designer is entitled to recover any goods shipped within 30 days of a bankruptcy order. Designer was, or ought to have been, aware of the difficulties that Classic was in, but Designer chose to make another shipment in the hope that the business would survive and a valuable customer would be retained. The result was that Designer will lose some of its account receivable; however, this is a cost of doing business, particularly in high-risk sectors, such as retailing and the fashion industry. 4. Falcon Gypsum Ltd. is in the business of manufacturing wallboard, largely for the U.S. housing market, which has been growing for many years. In recent months, several developments have caused Falcon management to become concerned. The U.S. housing industry has slowed considerably. This has caused wallboard prices to fall sharply. In addition, the Canadian dollar has risen in relation to the U.S. dollar, making Canadian manufacturers such as Falcon less competitive in export sales. Falcon currently employs 40 workers. The company owes $32 million to 90 different creditors. The major creditors are the bank and the provincial government, who hold secured loans. Management’s strategy is to attempt to wait out the current adverse conditions and hopefully return to prosperity. In order to do that, Falcon needs some breathing room from creditors and some additional bridge financing. What are Falcon’s options? What should Falcon do? If Falcon makes a proposal, are creditors likely to approve the proposal? [footnote deleted] Answer: Falcon is caught in an unfortunate confluence of negative economic factors that are not directly related to its management. Falcon nevertheless must cope with the current climate. The major issue is whether this climate will improve in time for Falcon to survive and prosper. Falcon must do its own analysis and planning before deciding whether the industry and the company are viable in the long term. Only then can Falcon consider whether it is a good strategy to try to convince creditors to participate in some kind of settlement or reorganization. If Falcon pursues this strategy, then Falcon and its advisors must convince creditors that they have a reasonable chance of recovering more by waiting than demanding whatever is available at the moment. The two major creditors—the bank and the government—may require different approaches. 5. Kim owns a family business that is experiencing serious difficulties because of changing economic circumstances. It operates as a sole proprietorship and has borrowed from a number of sources (originally commercial, but lately from friends and family) over the last three years to keep the business afloat. There are three employees, without whose services Kim could no longer run the business. He is beginning to feel overwhelmed and needs some basic advice as to what he can and cannot do. For example, should he create a corporation and sell the business assets to that corporation? Should he consolidate his loans and pay off as many as he can now by extending his borrowing with the bank? If he repays his friends and family, is there any risk in doing so? What should Kim do? Answer: This question calls for basic advice as to the status of different creditors and the legality of preference payments. Kim has some awareness that prior payments can be recovered on bankruptcy, if they have been made under certain conditions. He should be advised of the rules relating to preference payments. If consolidating debt means borrowing to repay certain creditors, it is likely this will involve preference payments. The business is likely insolvent at this time and the intent is to give certain creditors priority over others. Kim needs to understand that, as a sole proprietor, there is no separation between his business and his personal assets and debts. It will be Kim personally who becomes bankrupt if the business fails. He could sell the business to a corporation that he forms and then be in the position of creditor as in Salomon v Salomon (Chapter 15). Unfortunately, given the precarious state of the business at this stage, it is unlikely that such a sale is permissible. If the business fails, any funds he has received will be recoverable as preference payments. If the business is no longer viable, Kim should be advised to cease operations now rather than extend the process and increase the liabilities for which he is personally liable. He then needs to be advised of the status of the various creditors. Unfortunately, his friends are unsecured creditors and will likely receive little in the way of payment unless he is able to turn the business around. 6. In 2011, DVD rental chain Blockbuster announced that it was going out of business. The success of video streaming and video-on-demand services such as Netflix was insurmountable competition for Blockbuster’s traditional video rental business. Blockbuster initially tried to reorganize and reduce its debt but, ultimately, it was not able to obtain adequate DIP financing. Blockbuster closed its 400 Canadian stores and terminated all of its employees. What could Blockbuster have done differently to avoid bankruptcy? What can a company do if its business model becomes obsolete in the face of new competition? Answer: It is difficult to imagine how Blockbuster could have remained a viable business, considering the technological shifts in its industry. Blockbuster probably would have had to radically alter its business plan, but it is not at all clear how it could have done so within the traditional bricks-and-mortar business model that it had built. Sometimes, changes in an industry simply render a company and its business model obsolete. 7. Gaklis was the sole director, officer, and shareholder of Christy Crops Ltd. He controlled the company and made all major decisions. The company had financial difficulty and was placed in receivership. Gaklis had guaranteed substantial debts of the company and was unable to respond to demands for payment. He was forced into bankruptcy and eventually applied for discharge. The trustee and the creditors opposed his application based on his conduct. Gaklis had disposed of land belonging to the company. He had given a security interest for $60 000 on an airplane and transferred ownership to his father. He had failed to cooperate with the trustee by refusing to disclose particulars of bank accounts and insurance policies. Should Gaklis be discharged from bankruptcy and released from his unpaid debts? If so, on what terms? [footnote deleted] Answer: Gaklis is not entitled to a discharge because he is guilty of fraud. The attempted security interest on the airplane was fraudulent. Gaklis failed to disclose the particulars of bank accounts and insurance policies. The transfer of land before bankruptcy was possibly a fraudulent conveyance or a transfer at undervalue. Gaklis’ application for discharge will likely be opposed by the trustee and the creditors. Gaklis is not an “honest but unfortunate debtor,” and as a result his discharge should be refused based on fraud, the commission of bankruptcy offences, and his failure to perform his statutory duties as a bankrupt. 8. Gregor Grant was the president and sole shareholder of Grant’s Contracting Ltd. On application by a major creditor, an order of bankruptcy was issued against the company. In the course of investigating the company’s affairs prior to bankruptcy, the trustee discovered that a cheque received in payment from a supplier had not been deposited in the company’s account but had been diverted to another company owned by Gregor’s brother, Harper. Harper had kept some of the money for himself and returned the remainder in smaller amounts to Gregor. What, if anything, can the trustee do about this transaction? What could be the impact on the two companies, the two brothers, and the customer who sent the cheque? [footnote deleted] Answer: If Gregor’s company owed a debt to Harper’s company, the trustee could make a court application to have the payment made to the company owned by Harper returned on the grounds that it was a preference. If there was no debt, then the diversion of the cheque is still potentially a fraudulent conveyance. The amount retained by Harper’s company would be returned to the estate and any debt would be grouped with the other unsecured debts. It is likely that Harper was well aware of the bankruptcy proceedings. In this case, the court held that the amount retained by Harper was a preference, even though it was applied against a legitimate debt owed to Harper. In terms of consequences, Gregor’s company cannot be discharged unless all debts are paid in full. If Gregor is personally bankrupt, his discharge is in jeopardy. Both brothers may be investigated for bankruptcy offences. The customer who sent the cheque has discharged its liability to the company. Chapter 28 Insurance Instructor’s Manual–Answers by Dorothy DuPlessis V. CHAPTER STUDY Questions for Review, page 723 1. What is the purpose of an insurance contract? Answer: The purpose of an insurance contract is to shift the risk of various kinds of losses to an insurance company. 2. What is a premium? Answer: A premium is the price paid for insurance coverage. 3. Every province has enacted insurance legislation. What are the purposes of insurance legislation? Answer: Insurance legislation has several purposes: • mandating the terms that must be in insurance contracts • regulating the insurance industry generally by setting out licensing requirements for insurance companies, insurance brokers, and insurance adjusters • putting in place a system for monitoring insurance companies, particularly with respect to their financial operation The main goal of insurance legislation is to protect the public from unscrupulous, financially unstable, and otherwise problematic insurance companies. It also provides working rules that create stability within the industry at large. 4. What are the three main types of insurance? Answer: The three basic kinds of insurance are as follows: • Life and disability insurance provides payment on the death or disability of the insured. • Property insurance (also known as fire insurance) provides payment when property of the insured is damaged or destroyed through accidents. It can also cover the costs of machine breakdown. • Liability insurance (also known as casualty insurance) provides payment in circumstances when the insured is held legally responsible for causing loss or damage to another, known as a third party. 5. What is a deductible? What effect does it have on insurance premiums? Answer: A deductible is that part of a loss for which the insured is responsible. Agreeing to a deductible generally reduces the premiums that the insured must pay for the coverage. 6. What does it mean to say that an insured has a duty to disclose? What happens if the insured fails in this duty? Answer: A duty to disclose refers to the insured’s obligation to provide the insurer with all information that relates to the risk being insured against. Failure in this duty may permit the insurer to refuse to honour the policy. 7. What is an insurable interest? Why is it important? Answer: An insurable interest refers to a financial stake in what is being insured. The classic common law test is that the insured benefits from the existence of the thing insured and would be prejudiced from its destruction. The rationale is to prevent incentives for insureds to intentionally destroy property to make an insurance claim. 8. Why are contracts of insurance known as contracts of indemnity? Answer: Contracts of insurance indemnify the insured—this means that the insured is not supposed to profit from the happening of the insured-against event but, at most, will come out even. 9. What is a coinsurance clause? What is its purpose? Answer: Some policies, such as fire insurance policies, require the insured to have coverage for a specified minimum portion of the value of the property to fully recover from the insurer in the event of a fire. This requirement takes the form of a coinsurance clause, which is intended to discourage the insured from insuring the property for less than its value on the gamble that any loss is likely to be less than total. If such a clause is in place, and the insured carries less insurance then the amount specified in the clause, the insurer will pay only a specified portion of the loss, and the insured must absorb the remainder. 10. What is the right of subrogation? When does the right of subrogation arise? Answer: The right of subrogation refers to the insurer’s right to recover the amount paid on a claim from a third party that caused the loss. It arises when the insurer pays out under an insurance policy. 11. What is the difference between a rider and an endorsement in an insurance policy? Answer: A rider is a clause altering or adding coverage to a standard insurance policy. An endorsement is written evidence of a change to an existing insurance policy. 12. How do “no-fault” liability systems differ from tort-based liability systems? Answer: A “no-fault” system involves the diminution of the ability to sue a tort-feasor for compensation. In this system, the emphasis is on providing accident benefits without regard to the victim’s fault. This is a marked departure from the traditional tort system with its emphasis on fault-based liability. 13. Describe comprehensive general liability insurance. How does it differ from warranty insurance? Answer: The purpose of comprehensive general liability insurance (also known as CGL insurance) is to compensate insureds, in a comprehensive way, for liabilities they incur during the course of business. Warranty insurance, by way of contrast, responds to losses directly suffered by the insured, as when, for example, a customer of the insured refuses delivery on the grounds that the product is defective. 14. What is the purpose of errors and omissions insurance? Answer: Through errors and omissions insurance, the insurer promises to pay, on the insured’s behalf, all sums that the insured is legally obligated to pay as damages resulting from his or her performance of professional services. Investigation costs and legal expenses (i.e., the costs of a defence) will also be covered. 15. When should a business consider buying key-person life insurance? Answer: Key-person life insurance finances the purchase of the deceased’s share in a business by the surviving owners. This kind of insurance should be considered when partners in a firm or shareholders of a small corporation want their business to continue to be operated by the surviving owners if one of them dies. 16. What does an insurance broker do? Answer: A broker is someone who provides advice and assistance to the insured in acquiring insurance. The broker reviews the business’s operation, assess the risks it faces, and helps the insured understand the coverage that is available and the policy costs. 17. What is the purpose of an insurance adjuster? Answer: The purpose of an insurance adjuster is to investigate the events and evaluate the loss. She also advises the insurer on the settlement of claims. 18. Does the insurer have a duty of good faith? Explain. Answer: Yes. In addition to the obligations specified in the insurance policy, an insurer owes the insured a duty of good faith, including a duty to deal with an insured’s claim in good faith. Factors considered in determining whether an insurer has fulfilled its obligation to act in good faith include whether the insurer carried out an adequate investigation of a claim, whether the insurer properly evaluated the claim, whether the insurer fairly interpreted the policy, and whether the insurer handled and paid the claim in a timely manner. Questions for Critical Thinking, page 724 1. A manufacturing business is in the process of applying for property insurance. What kind of information must the business disclose to the insurance company? Why can insurance companies deny coverage on the basis of nondisclosure or misrepresentation of information? Answer: A manufacturing business would need to disclose all pertinent information about the type of product being manufactured, the processes used, and so on. It should also disclose “any amendments to business activities, acquisition of new premises or the disposal of existing ones, additions or amendments to buildings or contents, changes to processes, together with changes of use or practice in the storage of hazardous goods, installation, alteration or disconnection of fire/security systems, sprinklers and water supply.” In short, the insurance company should be notified of any material changes, preferably in writing. See, generally, Nigel P. Kent and Jonathan L. Hodes, “The truth, the whole truth and nothing but the truth: Misrepresentation, non-disclosure and the insurer’s duty to inquire,” Clark, Wilson LLP (2009) online: Clark Wilson https://www.cwilson.com/publications/insurance/whole-truth.pdf.However, the insurance company is also expected to be “worldly wise,” so although all pertinent details must be disclosed, the company is expected to have common knowledge and be able to make logical deductions about the risk it is accepting. The rationale behind denying coverage based on non-disclosure and misrepresentation is that the insurer has been denied the opportunity to accurately assess the risk. Since this lack of opportunity is caused by the insured, it is the insured who must pay the price of having coverage denied. The law puts a very heavy onus on the insured to be candid and honest with the insurer at all times, particularly in light of the insurer’s dependence and vulnerability. Note that when coverage is denied, the insurance company has to return any premiums paid under the policy. 2. What does it take to establish an insurable interest? For example, does an employer have an insurable interest in an employee’s life? A retired executive’s life? Does a creditor have an insurable interest in a debtor’s life? The owner of property has an insurable interest in the property. Do mortgagees and lien holders have an insurable interest in property? Does a tenant have an insurable interest in the landlord’s property? Does a thief have an insurable interest in stolen property? Answer: An important role of the legal requirement of an insurable interest is to prevent an insured from destroying the thing insured to collect on the policy or not caring sufficiently whether the thing is destroyed or not. A related objective is to prevent an insurance contract from being used as means of speculating or gambling. An “insurable interest” arises when someone has a financial stake in what is being insured. The test is whether the insured benefits from the existence of the thing and would be prejudiced from its destruction. Therefore, an employer could have an insurable interest in an employee’s life, especially a top-level executive or someone with unique or uncommon skill. A retired executive’s life could not be covered unless he or she was still actively involved in the company, for instance, if the person sat on the board of directors and were still an influential force in the company. Otherwise, the company would not have a financial stake in the person’s life. A creditor could have an insurable interest in a debtor’s life, but such an arrangement may be considered void as against public policy. A mortgager and lien holders have an insurable interest in property because they have a financial stake in it. A tenant can have an insurable interest in the landlord’s property in the sense that they would be prejudiced by the loss of their belongings and the loss of their home. A thief cannot have an insurable interest in stolen property for public policy reasons—the property is not the thief’s to begin with and thus he or she cannot have an insurable interest in it. The common law would certainly deny the thief recovery on the policy grounds against benefiting from your own wrongdoing. See also: John Jaffey, “Owner of stolen car had no insurable interest in vehicle,” The Lawyers Weekly (5 July 2002) 9. 3. In many regions of the world, kidnapping for ransom has become a thriving business. The victims of this crime have included not only journalists, diplomats, and aid workers but also business executives. What role, if any, should insurance play in addressing the risk of being kidnapped in a foreign country? Do you think that the presence of insurance might exacerbate the risk? Aside from having money to pay a ransom demand, what are the other advantages of having kidnapping insurance? Answer: The kidnapping of businesspeople has increased in frequency in the past few decades, particularly in Latin America, and the amount of money demanded as a ransom has also increased. If a company is doing business in a region that is prone to kidnapping, it would be wise to have Kidnap, Ransom, and Extortion (KRE) insurance as the ransom demand can be $1 million or more. Of course, insurance is only one part of a risk management plan. Presumable, the primary focus of the plan is on preventing a kidnapping. As kidnappers are often aware of KRE polices, this can be an incentive for them to demand even more in ransom payments. In that sense, the presence of insurance may exacerbate the risk. Indeed, some have argued that the presence of insurance undermines counter-kidnapping measures. An insurance policy can provide benefits apart from providing money to meet a ransom demand. It can also cover loss of income, medical care, and other related expenses associated with the kidnapping. In addition, an insurance company can also give expert advice on not only preventing a kidnapping but also on dealing with the situation if it arises. See Samantha Kenney, “Regional shortcomings and global solutions: Kidnap, ransom, and insurance in Latin America,” 14 Colum International LJ 557, online at . 4. Serving on the board of directors of a corporation entails significant risks particularly the risk of being sued. To mitigate the risk, corporate legislation in Canada generally allows corporations to indemnify directors for legal proceedings that arise out of actions taken by a corporation. In addition, a person who serves on the board may enter into an individual indemnification agreement with the corporation. If indemnification rights are contained in corporate bylaws or in an indemnification agreement, is there any need for directors and officers liability insurance? Explain. Answer: Indemnification by the corporation does not provide complete protection for directors and officers, as the corporation may become insolvent or have insufficient funds to pay losses and expenses; or the board, in cases where indemnification is discretionary, may refuse to indemnify the officers and directors; or the claim, as a matter of law, may not be indemnifiable. For example, indemnification for a derivative action must be approved by the court, and, when approval is obtained, typically only defence costs are indemnified. For these reasons, D&O liability insurance is needed to fill the gap between liabilities imposed on directors and officers and indemnification by the corporation. Sources: David R. Street, “Director & officer liability: 8 tips for protecting your personal assets,” Lerners LLP (31 March 2012), online: Lerners ; Jasmine Samra & Lauren Dalton, “Courts clarify important limitations on Canadian corporations’ capacity to protect directors who are sued,” Blaney McMurtry LLP (9 June 2014), online: Mondaq . 5. In Whiten v Pilot, the court upheld an award of punitive damages against an insurer for breach of the insurer’s duty of good faith. Should the courts award punitive damages against claimants who make fraudulent insurance claims? For example, there have been instances where a group of individuals have conspired to stage motor vehicle accidents and then submitted false property damage and personal injury claims. What factors should the courts consider in awarding damages for insurance fraud? Answer: “The purpose of an award of punitive damages is not to compensate the plaintiff but to express society’s condemnation of certain kinds of conduct, and to deter the defendant and others from engaging in similar conduct in the future.” Fraudulent insurance claims are a serious problem with adverse effects not only on insurance companies but also on the public, as fraud ultimately is reflected in insurance premiums. Individuals who commit minor frauds are not likely to face punishment through the criminal justice system; therefore, punitive damages provide the insurance industry with a vehicle for addressing the problem of fraud. In Insurance Corporation of British Columbia v Hoang, 2002 BCSC 1162, a case involving the staging of motor vehicle accidents), the court summarized the factors to be considered in awarding punitive damages: • whether the defendants’ conduct includes criminal conduct • whether the conduct have an effect on the public interest and taxpayers • aggravating factors, such as the degree of planning, the number of fraudulent claims, any specialized knowledge used to implement the fraud, the recruitment of others to the scheme, and involvement of family and children • mitigating factors, such as limited financial means, playing a minor role in the fraud, and motivation to protect a friend rather than for personal gain Source: Richard Hayles and Yasmin Visram, “Punitive damages for insurance fraud” (2005) 23 Can J Ins L 1. 6. In early 2014, cyber attackers broke into eBay’s database and affected 145 million customers. The database included customers’ names, encrypted passwords, email addresses, physical addresses, phone numbers, and dates of birth. What are the potential costs to eBay as a result of this hacking incident? What are the insurance issues? Answer: The potential costs to eBay include the expense of responding to the breach (e.g., informing customers of the breach), cost of repairing the damage (e.g., hiring forensic investigators, bolstering security systems), compensation of customers if their data is compromised and is used to commit financial fraud, loss of future sales, and damage to business reputation. The major insurance issue in whether eBay’s insurance policies provide coverage for the losses. A traditional CGL insurance policy may not cover cyber-risks. It protects against claims arising from bodily injury, damage to tangible property, or personal and advertising injury. Cyber-risks do not generally fall into these categories. For example, a data breach does not involve tangible property. Furthermore, it is likely that there is an electronic data exclusion that excludes coverage for damages arising from the loss of data or damage to electronic data. Also, the third party claims do not arise from bodily injury or property damage so these may not be covered either. However, if eBay has a specialized cyber-risk insurance policy, it may fill the gaps and exclusions in traditional insurance coverage. Source: Gordon Hilliker, “Cyber risks and liability insurance,” The Lawyers Weekly (19 August 2011) 9; Belinda A. Bain and Mark Coombes, “Help—We’ve been hacked! Cyber risk insurance and related legal issues,” Gwoling Lafleur Henderson LLP (15 September 2014), online, Gowlings ; Doug Drinkwater, “eBay counts the cost after ‘challenging’ data breach,” SC Magazine (17 July 2014), online: SC Magazine . Situations for Discussion, page 724 1. Athena Aristotel operates a retail clothing store in West Vancouver. The store is located on the bottom floor of a building owned by Athena. One of Athena’s friends rents the top floor for a residence. Recently, Athena suffered major property damage when a three-alarm fire destroyed her building. The cause of the fire is not known, although faulty wiring is suspected. As a result of the fire, Athena was required to temporarily move her retail operations to a nearby location. Her friend had to find a new place to live. What type of insurance coverage will respond to Athena’s loss? Assume that Athena discovers that she is not covered for the full extent of her losses. Must Athena absorb the uninsured portion of the loss, or does Athena have any other options? Explain. What steps should Athena take to ensure that she has optimal insurance coverage? [footnote deleted] Answer: The types of insurance coverage that will respond to Athena’s loss are property insurance and business interruption insurance. Property insurance provides payment for the damage to the building, replacement of inventory, and rental of alternative premises during the repair period. Business interruption insurance will cover loss of earnings or profits, depending on the form of the policy. Business interruption insurance is normally an endorsement to the property policy. Most businesses will have some form of business interruption insurance but it is possible that Athena does not have this coverage. If Athena has any uninsured losses, either she will have to absorb them or if someone is found responsible for the losses, she can initiate legal proceedings to recover damages. In an effort to cover all bases, businesses run the risk of overinsuring or having too many policies. The best way to avoid confusion and overspending is to get qualified advice, consolidate as much as possible, and review renewals annually. It is important, especially for a small business, to develop a relationship with a broker who knows the insurance business. It is also important to provide detailed information to the broker and to ask many questions to ensure that there are no gaps in coverage. Source: Denise Deveau, “Lost: A workplace, and a living,” Edmonton Journal (6 October 2008) A14. 2. In an increasing number of residential communities, dwellings are being used for marijuana grow operations. In many instances, a rented house is converted to a hot house to cultivate the plants. The conversion causes extensive structural damage, a compromised electrical system, excessive condensation, and mould, and it is unlikely that the damage is covered under the homeowner’s insurance policy. This is because it is common practice in the insurance industry to include a clause that excludes damage that results from illegal activity, whether the homeowner is aware of the illegal activity or not, and a clause that specifically excludes damage that arises from marijuana growing operations. How can a business that rents out real estate manage the risk posed by marijuana grow operations? What steps should the business take before renting out its property? What steps should the business take after the property has been rented out? Answer: As insurance policies will likely exclude coverage for damages caused by marijuana-growing operations, it is incumbent on homeowners to mitigate their risk by being extra prudent. See “Preventing your rental property from being a grow op,” Western Direct Insurance (29 September 2014) online for advice for the landlord. Before renting out the premises, the landowner should do the following: • Have a formal application to rent, which includes the name and address of the most recent landlord. • Check credit references. • Get information on the tenant’s current employment. • Include terms specifically barring illegal activities. • Require the tenant to maintain tenant’s insurance. • Inform the tenant that regular inspections of the premises will be carried out pursuant to applicable residential tenancies legislation. Before renting premises, there are often signs that serve as a warning to the landlord. They include the tenant wanting to pay in cash, providing vague and incomplete answers on application forms, lacking references, showing great interest in the electrical system, showing little interest in the layout of the premises, and providing no current home phone number. After renting premises, the landlord should check the premises and be aware of circumstances that may indicate illegal activity: • windows totally covered • changes made to electrical systems • presence of odours • little or no furniture in the dwelling • lack of normal residency activity • constant high humidity 3. Dorothy is a sole proprietor who recently incorporated her business in order to take the benefits of limited liability. As part of this change, she transferred all her business assets over to her corporation, Dorothy Ltd. Unfortunately, she forgot to change her insurance policies naming the company as the new insured. The property remains insured in Dorothy’s name. Soon after the transfer, there was a break-in at Dorothy Ltd.’s corporate offices and much of the company’s expensive computer equipment was stolen. Dorothy made a claim on her policy but the insurance company took the position that she did not have an insurable interest in the corporate property. Explain why the insurance company refused Dorothy’s claim. What can she do now? What arguments can she make in support of her claim? What practical advice would Dorothy now give to other small-business owners? [footnote deleted] Answer: This scenario is based, in part, on the following case: Kosmopoulos v Constitution Insurance Co of Canada, [1987] 1 SCR 2, 34 DLR (4th) 208. Kosmopoulos transferred his leather goods business, which he had previously carried on as a sole proprietorship, to a corporation of which he was the sole director and shareholder. He did not arrange to have his insurance changed to reflect that change in ownership. The insurance agency, however, knew that the business was being carried on by the incorporated company. A fire in the adjoining premises damaged the company’s assets and the rented premises. The insurer refused to pay on Kosmopoulos’ claim, on that basis that the corporate director/shareholder does not have an insurable interest in the property of the corporation. The Supreme Court of Canada observed that, as a general rule, a corporation is a legal entity distinct from its shareholders. However, Kosmopoulos did have an insurable interest in the company’s property. The court observed that Kosmopoulos, as sole shareholder of the company, was so placed with respect to the assets of the business as to have the benefit from their existence and the prejudice from their destruction. He had a moral certainty of advantage or benefit from those assets but for the fire. He therefore has an insurable interest in them and is entitled to recover under the policy. (end of case summary) The insurer refused Dorothy’s claim on the theory that she did not have an insurable interest in property owned by someone else—here, a company that Dorothy single-handedly controls. Based on Kosmopoulos, however, Dorothy should be able to collect under the insurance policy; even though she does not own the insured property, her corporation does. She meets the test of having an insurable interest as she benefits from the existence of that property and would be prejudiced from its destruction. That said, it is much preferable for businesspeople to alert their insurers and make the necessary changes to the policy when property is rolled into a corporation from a sole proprietorship. Such a change, in advance of a loss being suffered, simply means that the any claim under the policy will be more easily processed. 4. Twelve-year-old Aaliyah Braybrook was babysitting two boys, aged three and five, when a fire broke out in their home. Braybrook was able to get the boys and the family pet out but the fire destroyed the home and damaged two neighbouring homes. It is alleged the fire was started by the five-year-old playing with a lighter in the bathroom. TD Insurance, the insurance company for the owners of one of the damaged neighbouring homes, filed on their behalf a $350 000 lawsuit against Braybrook and the father of the boys, who was the owner of the destroyed home. After a public outcry, including a speech by the local Member of Parliament in the House of Commons, TD Insurance dropped the suit against Braybrook. What was the likely basis of the lawsuit by the neighbours against Braybrook? On what basis could TD Insurance sue Braybrook on behalf of the neighbours? What do you think was the reason for TD Insurance naming Braybrook in the lawsuit? What was the risk to TD Insurance in naming Braybrook in the lawsuit? [footnote deleted] Answer: The likely basis of the lawsuit by the neighbours against Braybrook is negligence—acting as a babysitter with inadequate training and experience, failing to supervise the five-year-old’s activities, and falling below the standard of care of a reasonably prudent babysitter. Braybrook was probably named in the lawsuit as a tactic by the insurance company to put pressure on the father/owner’s insurer. Obviously, the insurance company is unlikely to collect damages from a 12-year-old. TD Insurance sued Braybrook on behalf of the neighbours on the basis of subrogation. In this case, one insurance company sues another for damages by filing a lawsuit in the names of its insureds. The risk to TD is negative publicity from launching a lawsuit against a child who is a hero for helping two small boys escape unharmed from a burning house. See CBC News, “TD Insurance drops babysitter from suit,” (7 May 2010) at . 5. Precision Machine Ltd. manufactures pistons and rings for draglines and excavators that are used in oil sands exploration. Demand for these components is unpredictable but critical, as machines cannot operate without them. In an effort to ensure that customers are satisfied, Precision keeps about $100 000 worth of components in inventory at all times. The value of the inventory is covered by property insurance from SPADE Insurance Ltd. The policy contains a coinsurance clause that requires Precision to hold 80 percent coverage. Precision, however, only carries $60 000 worth of coverage. An electrical fire destroys some of Precision’s inventory, and Precision makes a claim of $30 000 on its policy. How much of the claim is Precision entitled to receive from SPADE? Why would Precision underinsure its inventory? How much is Precision entitled to receive from SPADE if its loss is $40 000? Answer: Precision may underinsure its property for less than its value on the gamble that any loss is likely to be less than total and by insuring for a lesser amount it pays less in insurance premiums. If Precision’s loss is $30 000, it can collect $22 500 from SPADE. This is calculated as follows: Amount of insurance coverage purchased divided by the minimum required under the coinsurance clause multiplied by the actual loss = $60 000/$80 000 (0.80 × $100 000) × $30 000 If Precision’s loss is $40 000, it can collect $30 000 ($60 000/$80 000 × $40 000). 6. Nathalie Blanchard took a medical leave for depression from her job as an IBM technician. Shortly thereafter, she began receiving monthly disability benefits from her insurer, Manulife Financial Corp. A year later, and without warning, the payments ceased. When Blanchard called Manulife to find out why her benefits were discontinued, she says she was told that her Facebook photos showed she was able to work. Investigators had discovered several pictures Blanchard posted on Facebook, including ones showing her drinking at a Chippendales bar show, at her birthday party, and frolicking on the beach during a sun holiday. Manulife would not comment on Blanchard’s case but confirmed that it uses the social networking site to investigate clients. It also stated to CBC news: “We would not deny or terminate a valid claim solely based on information published on websites such as Facebook.” Do insurers’ use of social networks to check on people impinge on privacy rights? Should insurance companies be able to use information culled from sites such as Facebook to deny or terminate an insurance claim or to investigate fraud? [footnote deleted] Answer: Whether the use of social networks to check on people is an infringement of privacy is debatable. If the social network is public and the person’s privacy settings are public, then there is unlikely to be an infringement on privacy rights. However, if privacy settings are violated, then there is likely to be an infringement of privacy rights, similar to hacking into a private telephone conversation. It is also debatable whether insurance companies should be able to use information from sites such as Facebook to deny or terminate an insurance claim or to investigate fraud. On one side is the argument that if it is a public site, then why not? Insurance fraud costs the insurance industry and consumers millions of dollars. The end may justify the means. On the other side is the argument that information on these sites can be misleading—for example, people usually want to present themselves in the best light and are unlikely to post negative information or images. As a result, investigators get a one-sided or distorted view of the person. Also of concern is photos—when was the photo taken? Is the photo taken out of context? 7. Thieves broke into the home of Paul and Judy Bronfman while they were out for the evening. They stole a safe that contained expensive jewellery, $50 000 in cash and other valuables including two 1970s-era Montreal Canadiens Stanley Cup rings. The thieves were never found and the property was never recovered. The Bronfmans discovered, when making a claim, that their insurance policies only provided for $20 000 in coverage for jewellery and $1500 for cash. The Bronfmans sued their insurance broker for $3 million alleging the broker was negligent for failing to ensure that their policy reflected their standard of living. The broker countered that the Bronfmans were well aware of the coverage limits, which were spelled out in form letters sent to them. How far must an insurance broker go to ensure a client’s insurance policies are adequate? [footnote deleted] Answer: The facts in this situation are based on Bronfman v BFL Canada Risk, which at the time of writing is under appeal. Justice Stewart noted that the duty of an insurance broker is straightforward. An insurance broker is required to use a reasonable degree of care and skill when asked to obtain a specific type of coverage and to inform the client promptly if such coverage is not available If the client provides no specific instruction on the type of coverage required and instead relies on her broker, then the broker, if she agrees to act on those terms, must inform herself of the client’s circumstances in order to assess the foreseeable risks and to insure his client against them. Justice Stewart held that the broker was negligent as he did not meet with the Bronfmans to discuss their insurance needs and coverage, nor did he review the nature of their personal property or tour their home. Although he sent out renewal letters that outlined the policy limits, Justice Stewart was of the view that the broker only did the bare minimum with little consideration of the Bronfmans’ insurance needs. The standard form letter did not discharge the insurance broker of his duty of care as he was aware of the Bronfmans’ wealth and lifestyle and should have discussed with them the inadequate coverage for their jewellery. Justice Stewart also held that if the Bronfmans knew of the gap in their coverage they would have obtained the insurance as they could afford it. In other words, the broker’s failure to meet the standard of care caused the Bronfmans’ damages. Based on the trial decision in this case, brokers should investigate any obvious coverage gaps and they should not rely on form letters outlining insurance coverage as a means of fulfilling their professional duties. See: Bronfman v BFL Canada Risk, 2013 ONSC 5372, 28 CCLI (5th) 72; Belinda A. Bain & Kathryn Higgins, “But my broker never told me the jewels weren’t covered!” Gowling Lafleur Henderson LLP (8 May 2014), online: Mondaq . 8. In 1999, John Jacks signed a long-term car lease agreement, which was assigned by the dealership to GMAC Leaseco. On the same day, Jacks contacted a representative of the Wawanesa Mutual Insurance Company to insure the vehicle. The representative asked Jacks a few questions related to driving. In particular, the representative asked Jacks how many accidents he had had in the previous six years, whether he had ever been convicted of impaired driving, and whether his driver’s licence had ever been revoked or suspended. In 2002, Jacks had an accident and his car was destroyed. In response to his claim for compensation, Wawanesa conducted an investigation and discovered that the insured had been convicted of several crimes between 1980 and 1991, including break and enter, theft, possession of property obtained by crime, abetting in fraud, identity theft, fraud, and possession of drugs. Wawanesa refused to pay compensation on the basis that Jacks had failed in his duty to inform. What is the purpose of the insured’s duty to disclose? What is the content of the duty to disclose? Who has the onus of proving whether the duty to disclose has been fulfilled? Did Jacks fulfill the duty to disclose? Discuss. [footnote deleted] Answer: This situation is based on the following case: Compagnie mutuelle d’assurances Wawanesa v GMAC location ltée, [2005] RRA 25 (Que CA). The facts set out above are a serviceable summary of the facts in the case. The court noted that the burden of proof is on the insurer to show that information omitted was such as to influence a reasonable insurer; once the insurer discharges this burden, the insured has the burden of showing that he acted like a normally provident insured. The court stated that the insurer proved that a reasonable insurer would have considered that an insured’s participation in such crimes as theft, the receiving of stolen goods, and fraud are relevant in assessing the risk of a fraudulent claim. The court also stated that a person who was familiar with the insurer’s policies would not have thought it relevant to disclose his criminal record as the criminal offences were unrelated to driving or possession of a car and a certain amount of time had passed since the last offence. These assumptions were supported by the fact that a reasonable person questioned about certain types of offences would have concluded that the insurer was not interested in other types of offences. A reasonable person could also conclude that the insurer was not interested in older offences because one of the questions was about the existence of claims in the last six years. On this reasoning, the court upheld the insurance policy. (End of case summary) The purpose of the insured’s duty to disclose is to ensure that the insurer has all relevant information that relates to the risk being insured. The insurer needs to be in a position to fully assess the risk against which the insured wants protection so that it can assess whether it wants to sell coverage and at what price. The only way the insurer can properly assess risk is if the insured discloses all material facts relevant to the risk being insured against. As noted in the case, the burden of proof is on the insurer to show that information omitted was such as to influence a reasonable insurer; once the insurer discharges this burden, the insured has the burden of showing that he acted like a normally provident insured. Jacks did fulfill the duty to disclose. This case illustrates the importance of asking all of the right questions on application forms for insurance. Source: “Criminal record: The Court of Appeal clarifies an insured’s duty to inform,” Insurance Law and Professional Liability (13 April 2005) online: Ogilvy Renault . Solution Manual for Canadian Business and the Law Philip King, Dorothy Duplessis, Shannon O'byrne 9780176570323, 9780176509651, 9780176501624, 9780176795085
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