Insurer not Estopped from Denying Coverage, SCC finds in Trial Lawyers Association v Royal and Sun Alliance Insurance Company of Canada
On November 18, 2021 the Supreme Court of Canada (“SCC” or “The Court”) released its decision in Trial Lawyers Association of British Columbia v Royal & Sun Alliance Insurance Company of Canada 2021 SCC 47 [Trial Lawyers]. At issue was whether an insurer is estopped from denying coverage if it was previously not aware of a breach in policy.
A majority of the SCC dismissed the appeal and held that insurance companies are not estopped —that is, prevented from doing something contrary to what they had promised, such as denying coverage—if they had no prior knowledge of the breach of policy. In her concurring judgement, Justice Karakatsanis agreed with Justices Moldaver and Brown in the result, but differed in her analysis of what is required for promissory estoppel to apply. In Justice Karakatsanis’ view, promissory estoppel does not require actual knowledge and does not go to the subjective intent of the promisor. While the majority opinion grants leeway for insurance companies in similar circumstances to opt out of coverage, the decision is, in some respects, beneficial to insured persons. On one hand, insurance companies, in response to the decision, do not have to adopt a more aggressive investigative approach when it comes to policy breaches. On the other hand, insured persons now have less assurance that their coverage will not be revoked at a later time.
In May of 2006, Steven Devecseri, Jeffrey Bradfield and others were riding their motorcycles on an Ontario highway when Mr. Devecseri drove into oncoming traffic and crashed into a car, driven by Jeremy Caton (Trial Lawyers, para 5). As a result of the accident, lawsuits were brought against Mr. Devecseri’s estate by Mr. Bradfield, Mr. Caton, and another motorcyclist (Trial Lawyers, para 7). Mr. Devecseri’s estate was defended by Royal & Sun Alliance Insurance Company of Canada (“RSA”) with whom Mr. Devecseri had his motor vehicle insurance policy. An insurance adjuster had investigated the incident, and noted that it was unknown whether substance use was a factor in the accident (Trial Lawyers, para 6). Neither the insurance adjustor nor RSA followed up with obtaining the coroner’s report (Trial Lawyers, para 6).
Once the parties proceeded to examinations for discovery, one of the motorcyclists involved noted that Mr. Bradfield and Mr. Devecseri had been drinking before the accident (Trial Lawyers, para 8). In the wake of this information, RSA obtained the coroner’s report, which showed that Mr. Devecseri had “a modest quantity of alcohol in his system when he died” (Trial Lawyers, para 8).
Given that alcohol was involved, RSA concluded that Mr. Devecseri had breached his auto insurance policy. RSA proceeded to take an “off coverage” position, meaning that Mr. Bradfield and Mr. Caton would not be able to access Mr. Devecseri’s $1 million in coverage (Trial Lawyers, para 9). Although, they could still access the statutory minimum coverage under the Insurance Act, RSO 1990, c I.8 [Insurance Act] (Trial Lawyers, para 9). Mr. Bradfield eventually settled with Mr. Devecseri’s estate (Trial Lawyers, para 10). Mr. Caton proceeded with litigation against both Mr. Bradfield and Mr. Devecseri and was awarded a judgement of $1.8 million (Trial Lawyers, para 11). In this same action Mr. Bradfield brought a cross-action against Mr. Devecseri’s estate (Trial Lawyers, para 11).
Subsequent to this judgement, Mr. Bradfield brought a motion asserting that he was entitled to judgement against RSA, since RSA had either waived Mr. Devecseri’s breach or was estopped from denying coverage (Trial Lawyers, para 12). The trial judge agreed with Mr. Bradfield that RSA had waived its right (Bradfield v Royal and Sun Alliance Insurance Company of Canada, 2018 ONSC 4477). RSA appealed and the Ontario Court of Appeal (“ONCA”) overturned the judgement because s. 131(1) of the Insurance Act precluded recognition of waiver by conduct. The ONCA held that the estoppel argument failed for two reasons: first, because RSA did not know that Mr. Devecseri had alcohol in his system, and second, because detrimental reliance could not be made out by Mr. Bradfield (Bradfield v Royal and Sun Alliance Insurance Company of Canada, 2019 ONCA 800). Mr. Bradfield subsequently appealed to the SCC and was granted leave, but ultimately settled with RSA. The Trial Lawyers Association of British Columbia (“TLA”) then replaced Mr. Bradfield in the action and asked the Court to consider whether RSA was estopped from denying coverage given it discovered Mr. Devecseri’s policy breach after engaging in litigation.
The Majority Decision: The Inapplicability of Promissory Estoppel
At the SCC, the Court did not consider the doctrine of waiver because at the time of litigation, the Insurance Act legislated that waiver must be in writing (Trial Lawyers, para 14). As such, the Court only considered the promissory estoppel issue. The majority held that RSA was not estopped from denying coverage due to the fact that RSA had no inclination of Mr. Devecseri’s breach (Trial Lawyers, para 18). As an equitable remedy, there must be injustice for the doctrine of promissory estoppel to apply (Trial Lawyers, para 18). Being that RSA was not aware of the breach, the Court was loath to acknowledge any wrongdoing on RSA’s part.
In contemplating the applicability of promissory estoppel, the Court reiterated the elements stated in Maracle v Travellers Indemnity Co. of Canada,  2 SCR 50 [Maracle]:
(1) the parties be in a legal relationship at the time of the promise or assurance;
(2) the promise or assurance be intended to affect that relationship and to be acted on; and
(3) the other party in fact relied on the promise or assurance. It is, as we will explain, implicit that such reliance be to the promisee’s detriment (Maracle, para 57)
It was important for the Court to spend time clarifying the difference between imputed versus constructive knowledge, since TLA operated on the assumption that constructive knowledge was enough to find that RSA knew of the breach and failed to act. The fact that RSA had not acquired the medical report before examination for discovery was not enough for the majority to make out that RSA had constructive knowledge of the breach (Trial Lawyers, para 18). Given that RSA had an adjuster investigate the matter, it was not unreasonable that the information did not emerge. For this reason, the Court held that promissory estoppel requires more than constructive knowledge. It requires imputed knowledge (Trial Lawyers, para 24).
Intention: Imputed Knowledge versus Constructive Knowledge
In addressing intention under the Maracle test, which has long been discussed in the jurisprudence (see Maracle, 57‑59; John Burrows Ltd. v Subsurface Surveys Ltd.,  SCR 607 615) the Court emphasized that what matters is what the promisor knows (Trial Lawyers, para 21). Prior to discovery, no party alerted RSA to the breach, nor was it outlined in any documents that RSA reviewed. TLA argued that RSA had constructive knowledge of the breach since they could have gone to greater lengths to obtain the coroner’s report (Trial Lawyers, para 22). The Court dismissed this argument. Instead, it posited that had the evidence of the breach been provided to RSA, and RSA still failed to realize that alcohol consumption nullified the vehicle insurance, then imputed knowledge would be made out and RSA was estopped from denying coverage (Trial Lawyers, para 24).
While the majority entertained what subjective knowledge RSA had, for Justice Karakatsanis, the nature of the analysis should have been objective, focusing on “whether it was reasonable in the circumstances to interpret the promisor’s words or conduct as an intent to change legal relations” (Trial Lawyers, para 66). In Mr. Bradfield’s case, Justice Karakatsanis found that promissory estoppel was not achieved because there was no “promise or assurance that can be reasonably interpreted as intending to alter legal relations” (Trial Lawyers, para 79). The subjective/objective dichotomy was not explored by the majority who found that it was enough that there was no factual evidence provided to RSA (Trial Lawyers, para 3).
Addressing imputed knowledge, the Court distinguished cases where insurers failed to appreciate a breach which they factually knew about (see Western Canada Accident and Guarantee Insurance Co. v Parrott (1921), 61 SCR 595). RSA never received evidence of Mr. Devecseri’s alcohol consumption, which would have met the factual awareness component. Similarly, the Court distinguished between when an insurer is wilfully blind to the significance of a breach (Trial Lawyers, para 25). Had RSA obtained the coroner’s report which revealed the presence of alcohol earlier, but remained ignorant to the fact that alcohol consumption invalidated the insurance coverage, they would have been estopped from denying coverage (Trial Lawyers, para 24). As exemplified in the case law, the fact that there is knowledge of the breach vis-à-vis factual evidence is enough to warrant promissory estoppel. In light of the facts, the Court held that this is not a case of imputed knowledge (Trial Lawyers, para 24).
Having established that imputed knowledge is the applicable standard (which was not met here), the Court cautioned that allowing constructive knowledge to fulfil the requisite intention threshold would be an “unwise and unnecessary” modification to the insurer/insured relationship (Trial Lawyers, para 37). Given the “strong economic incentives to deny coverage”, the Court was wary that lowering the requisite intention/knowledge threshold will inordinately impact the ability of insured persons to access coverage (Trial Lawyers, para 33). Put differently, if the Court held that insurers could be estopped from denying coverage, insurers might go to greater lengths to ensure that they are not entering litigation that would be costly and unproductive. The Court’s emphasis on public policy considerations is important given the sheer number of Canadians that rely on motor vehicle insurance on a daily basis, especially within the litigation context.
Moreover, the Court clarified that the insurer’s duty is owed only to the insured, not to third parties. In this case, Mr. Bradfield (albeit later replaced by the TLA) argued that RSA owed him a fair investigation. As a third party, however, the Court said Mr. Bradfield was not owed any duty because it would “undermine the duties of utmost faith and fair dealing that govern the relationship between the parties to an insurance contract” (Trial Lawyers, para 22). Going further, they noted that there was “a certain absurdity” to the TLA’s position, given they asked the Court to acknowledge that third parties have more rights than the first-party insured (Trial Lawyers, para 38). In light of the legislative intent of s. 258(11) of the Insurance Act, the Court asserted that the TLA’s position was incompatible with the proper reading of the governing framework. Section 258(11) reads:
(11) Where one or more contracts provide for coverage in excess of the limits mentioned in section 251, except as provided in subsection (12), the insurer may,
(a) with respect to the coverage in excess of those limits; and
(b) as against a claimant,
avail itself of any defence that it is entitled to set up against the insured, despite subsection (4).
According to the Court’s interpretation, it is permissible for insurance companies to “assert any defences against the claimant as it could raise against the insured” (Trial Lawyers, 38). Therefore, the third party claimant cannot expect more of the RSA than the insured could expect of the RSA.
Welcome Advancement or Worrisome Set Back?
Depending on one’s situation within the insurance context, this case is either a welcome advancement, or a worrisome set back in the insurance scheme. From the Court’s perspective, this decision is laudable in that it does not provide insurers with incentives to deny coverage to individuals since the Court held that RSA conducted their investigation in a fair and reasonable manner (Trial Lawyers, para 22). Had the Court held that RSA was estopped given it breached its investigative duty prior to discovery, one might expect that insurers would be more aggressive in their approach to investigating claims. In the event that insurance investigators had to be more aggressive in their approach to investigating breaches, they might have been more likely to have tunnel vision when looking for breaches so that they would not have to defend insured persons.
For insured persons who become involved in insurance litigation, this decision is worrisome for the way in which it affords no certainty to litigants. Once the insurer becomes involved in litigation, the insured will no longer have the assurance that their insurer will see defence of the matter through from start to finish. On top of a pending tort claim, it would only add more stress and confusion for a litigant to be denied coverage by their insurance provider.
Regardless of what side of the debate one finds themselves on, this decision is important for how it highlights the many inequities within the insurance litigation scheme. For example, the fact that the RSA was “confused” about whether it was the responsibility of the insurance adjuster to pursue the coroner’s report does not instill confidence about the equal and consistent applicability of the insurance scheme. It seems almost absurd that insurers do not follow policies as strict as those that they expect the insured to follow. We can only hope that going forward, powerful insurance companies will take fair and reasonable positions with regard to policies that so many Canadians rely on.