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<< back to all ArticlesThe Duty of Disclosure in Property Insurance Contracts
In determining the scope of coverage to provide and the premium to charge for that coverage, insurers rely heavily on information supplied by an insured. After all, the insured is typically the most reliable source of information about the risk factors that may impact an insurer’s underwriting decisions.
Because insurers rely heavily on information supplied by those they insure, Canadian law requires every insured to adhere to a stringent “duty of disclosure.” Put simply, the duty of disclosure requires an insured to provide the insurer with accurate and complete information with respect to all matters relevant to the insurance coverage at issue.
Importantly, the duty of disclosure only requires an insured to disclose facts that are material to the risk covered by the insurance contract. A fact is material if knowledge of it would cause a hypothetical “reasonable insurer” to either refuse the coverage in question or raise the premium the insured has to pay. For instance, a company’s claims history for its existing properties would be material to an insurance policy covering one of its new properties.[1]
The duty of disclosure applies both at the formation of the insurance contract and throughout its existence. When applying for insurance, Alberta’s Insurance Act prohibits an insured from misrepresenting or fraudulently omitting to communicate anything that is material to the risk that the insurer will undertake.[2] In addition, while an insurance contract is in effect, an insured must promptly give notice in writing to the insurer of any change that is material to the risk covered by the insurance contract and is within the control and knowledge of the insured.[3]
The consequences of breaching the duty of disclosure can be significant. If an insured fails to disclose a material fact or change of circumstances, the insurance contract is void in respect of any property to which the misrepresentation or omission relates.[4]
Nahayowski v Pearl Assurance Company (“Nahayowski”) — a 1964 case from the Supreme Court of Alberta — provides a cautionary tale.[5] In Nahayowski, the insured owned a building in the hamlet of Atmore, Alberta that was insured by Pearl Assurance Company Ltd. Initially, the insured had tenants that occupied the building. However, in April 1962, the tenants vacated the property. The insured did not disclose this change to the insurer. Then, in August 1962, the building suffered fire damage. The insurer denied coverage for the loss on the basis that the insured failed to disclose that the insured premises became vacant.
The court held that the insurer was justified in denying coverage. It accepted that the risk of fire or other damage to a building is heightened when those premises are vacant, particularly in remote locations. As a result, the vacancy of the insured premises was material to the insurance contract, and the failure to disclose it breached the insured’s duty of disclosure.
In conclusion, if an insured misrepresents or knowingly fails to disclose a material fact or change of circumstance to their insurer, they do so at their peril.
[1] See e.g. Nagy v BCAA Insurance Corporation, 2020 BCCA 270.
[2] Insurance Act, s 540 (Statutory Condition 1).
[3] Insurance Act, s 540 (Statutory Condition 4(1)).
[4] Insurance Act, s 540 (Statutory Conditions 1 and 4(1)).
[5] Nahayowski v Pearl Assurance Company, 1964 CanLII 718 (Alta SC (TD)).
This post is meant to provide information only and is not intended to provide legal advice. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this post to be outdated.
