Insurance on Property - 1.8

While investigating a claim under a fire insurance policy, the insurer discovers that the insured misrepresented a material circumstance of the risk when applying for the policy. As a result, the premium is only 50% of what is should have been.

Assume that the insurer is located in a common law province and that only the matter of the misrepresentation remains to determine the insurer's response to the claim.

Must the insurer pay the claim? Discuss the insurer's options. What policy conditions determine these options?

How does your answer change if the insurer is located in Quebec?

Answer:

The insurer may avoid the policy so that the insurer will not pay the claim. Since the insured misrepresented a material circumstance of the risk, and an inadequate permium of 50% has been charged for the risk.

However, the policy can be voided only if the insurer can prove the misrepresentation was metarial to the acceptance of or the 50% permium charged for the risk. If the insurer does not prove it, the insurer will still need to pay the claim and actually in 100% of the amount, but at the same time, correct the representation of the risk and amend the premium to 2 times of the current value.

The policy condition which determines these options is the Misrepresentation, Statutory Condition 1.

If the insurer is located in Quebec, these options will be determined by Misrepresentations or Concealment in Statements of the General Conditions.

Under this General Condition, the insurer may nullify the policy even if the loss is not connected to the misrepresentation, so that it will not pay the claim. Similar to other common law provinces, the insurer need to prove the bad faith on the insured. Or it need to establish the fact that it would not accept the risk if it had discovered the misrepresentation.

If the insurer cannot prove the bad faith nor the non-acceptance of risk, it must pay the portion of the loss that the premium collected bears to the premium it should have collected, in this case, it must pay 50% of the claim.

Unlike the Statutory Conditions, the General Condition does not govern how the insurer should alter the policy or charge the insured on additional premium.