The Requirement to Update Your Insurer of Material Changes in Risk
Insureds have an ongoing obligation to disclose material changes to risk as they are discovered. The duty to disclose has been codified in insurance legislation in all Canadian provinces. In British Columbia, section 29 of the Insurance Act sets out a standard set of statutory conditions which are incorporated into insurance contracts. Statutory condition 4 provides that an insured must promptly give notice in writing to their insurer of a change that is material to the risk and within their knowledge and control.
Post-Contractual Duty to Disclose
The law imposes a duty on the insured to act in utmost good faith. Good faith takes the form of mandatory disclosure, while bad faith takes the form of omissions and misrepresentations. Mandatory disclosure is the exception rather than the rule in commercial transactions as parties are expected to protect their own interests during contractual negotiations by making inquiries and deciding whether to share sensitive information. However, insurance is unique in that much of the information used by the insurer to assess risk is within the personal knowledge of the insured. The law in this area was recently confirmed in Seetaram v. Allstate Insurance Company of Canada, 2019 ONSC 683.
Following disclosure, the insurer may adjust the premium or extent of coverage, or terminate the contract with adequate notice depending on the circumstances. If an insurer is not promptly notified of a material change, the contract can be rendered void. This reflects the insured’s ongoing obligation to act in good faith in apprising the insurer of new risks that were not contemplated when the policy was initially placed.
The duty to disclose only applies to material facts. The scope of disclosure covers facts within the knowledge of the insured that are unknown and inaccessible to the insurer and material to the risk. For example, in Bahniwal v. The Mutual Fire Insurance Company of British Columbia, 2016 BCSC 422, the Court found that the owners did not know the tenants had a marijuana grow operation and loss after a fire under a home insurance policy was covered. In Coronation Insurance Co. v. Taku Air Transport Ltd.,  3 SCR 622, the Court found that a small commercial aircraft company did not have to disclose previous accidents because they were a former client and airplane accidents were recorded in a central public database. This limit to the scope of disclosure prevents an insurer from too easily claiming a failure to disclose after a risk has materialized.
A fact is material if it would, on fair consideration of the evidence, have influenced a reasonable insurer to decline the risk or stipulate a higher premium had it been disclosed at the relevant time (Mutual Life Insurance Co. v. Ontario Metal Products Co.,  AC 344 (PC)). These facts can relate to the gravity of the risk (for example, a used car dealership starts selling luxury instead of economy cars) or to the probability that the risk will materialize (for example, the same dealership moves to a neighbourhood known for high theft rates). Determination of materiality is a question of fact, with the burden of proof on the insurer alleging the breach.
The following are examples of material risks under different types of insurance policies:
- renting your home, having a vacant home, doing major renovations to your home or operating a business in your home (home insurance);
- changing the use of your vehicle from personal to business use or having additional new drivers use your vehicle (vehicle insurance);
- suffering from disease (life insurance);
- changing your occupation (accident and sickness insurance); and
- changing the nature of your business, geographical location of the premises, property type, use of premises, fire or security protection or detection (commercial general liability insurance).
Although the concept of materiality is well-established, the courts have seldomly addressed whether an insurer is under a duty to explain to the policy holder what constitutes a material change in risk. Seetaram confirmed that an insurer is under no such duty. Rather, the duty is on the insured to disclose all material facts, even in the absence of inquiries from the insurer.
Key Consideration for Insureds
The failure to disclose material facts when applying for insurance or to promptly notify the insurer of a material change in risk is a surprisingly common mistake made by insureds. There can be devastating consequences, leaving an insured with no coverage despite having taken out a policy of insurance.
The insurance industry cannot function without mandatory disclosure. It is in place to prevent abuses and ensure participants act in good faith. Although some information is accessible through common knowledge and information databases shared between insurers, most of the facts used by insurers to assess risk and process claims remain within the exclusive knowledge of the policy holder.
Insureds should be alert to their duty to disclose at the different stages of the insurance contract. As a general rule of thumb, policy holders should be honest and thorough when applying for insurance and report to their insurer any changes in the facts or circumstances that may affect their policy in any way.
This article is intended to provide general information on the subject matter. For specialist advice about your specific circumstances, please contact one of our experienced lawyers in SHK’s Insurance group.