MEMO TO:
Alexsei Demo
RESEARCH ID:
#400033956df161
JURISDICTION:
Ontario, Canada
ANSWERED ON:
March 24, 2021

Issue:

How does the Insurance Act of Ontario scheme interact with waiver and estoppel with respect to rights under insurance contract — When insurer’s assumption and continuation of defence of action is assurance of coverage for purposes of estoppel — If so, what amounts to “detrimental reliance”.

Facts:

Steven Devecseri was insured by the respondent Royal & Sun Alliance Insurance Company of Canada (RSA) under a standard motor vehicle policy. Under this policy, Mr. Devecseri was prohibited from operating a motorcycle with any alcohol in his bloodstream. In 2006, Jeffrey Bradfield, Mr. Devecseri and another were riding their motorcycles. Mr. Devecseri drove onto the wrong side of the road and collided with an automobile. Mr. Devecseri was killed. Mr. Bradfield the automobile driver were injured. RSA engaged an adjuster to investigate the accident. The adjuster obtained the police report, which made no mention of alcohol. The adjuster noted that the coroner’s report would confirm whether alcohol had been a factor in the accident, but neither he nor RSA took steps to obtain the report. Mr. Bradfield commenced and later settled an action against Mr. Devecseri’s estate and his own insurer for uninsured and underinsured coverage. The other motorcyclist brought a personal injury action against Mr. Devecseri and Mr. Bradfield. RSA retained counsel to defend Mr. Devecseri’s estate in both actions. Three years after the accident, RSA became aware that Mr. Devecseri had consumed beer before the accident. It then took steps to obtain the coroner’s report, which confirmed that Mr. Devecseri’s blood alcohol level was above zero at the time of death. RSA then took the position that the matter was off-coverage and it stopped defending Mr. Devecseri’s estate. Mr. Bradfield commenced an action against RSA alleging that it was too late for RSA to take an off-coverage position. RSA had waived Mr. Devecseri’s policy breach, or was estopped for denying the coverage. The chambers judge granted the application, finding that RSA’s failure to take an off-coverage position after June 2006, and its defence of the claim amounted to a waiver by conduct of Mr. Devecseri’s breach of the insurance policy. The Court of Appeal allowed RSA’s appeal and dismissed Mr. Bradfield’s action.

Conclusion:

The obligation of an insured to comply with a requirement under a contract is excused to the extent that: (a) the insurer has given notice in writing that the insured's compliance with the requirement is excused in whole or in part, subject to the terms in the notice, or, (b) the insurer's conduct reasonably causes the insured to believe that the insured's compliance with the requirement is excused in whole or in part, and the insured acts on that belief to the insured's detriment (s.131(1)). Neither the insurer nor the insured shall be deemed to have waived any term or condition of a contract by any act relating to the appraisal of the amount of loss or to the delivery and completion or proof or to the investigation or adjustment of any claim under the contract (s.131(2)). (Insurance Act)

Waiver and promissory estoppel are closely related. The principle underlying both doctrines is that a party should not be allowed to resile from a choice when it would be unfair to the other party to do so. Both require "knowledge" of the policy breach. Waiver will be found where the party waiving had:

(1) full knowledge of the deficiency that might be relied upon; and,

(2) the unequivocal and conscious intention to relinquish the right to rely on the contract or obligation.

The creation of such a stringent test reflects the fact that no consideration moves from the party in whose favour a waiver operates. An overly broad interpretation of waiver would undermine the requirement of contractual consideration”. Knowledge can be inferred from conduct, but “that conduct must give evidence of an unequivocal intention to abandon rights known to the party waiving the right”. 

As for estoppel, the essential elements of estoppel are that:

(1) As in the case of waiver, the insurer must have knowledge of the facts that support a lack of coverage; and,

(2) Unlike waiver, there must be “a course of conduct by the insurer upon which the insured relied to its detriment.” (Bradfield v. Royal Sun Alliance Insurance)

Waiver arises one party to a contract with full knowledge that his obligation under the contract has not become operative by reason of the failure of the other party to comply with a condition of the contract, intentionally relinquishes his right to treat the contract or obligation as at an end but rather treats the contract or obligation as subsisting. It involves knowledge and consent, and the acts or conduct of the person alleged to have so elected, and thereby waived that right, must be viewed objectively and must be unequivocal. In considering the acts or the conduct of the person alleged to have made such an election the crucial time is after such party has knowledge of the failure of the other party to comply with the condition. However, the acts or conduct of that party either before, at the time, or following the happening of the event or circumstance giving rise to the right to treat the contract or obligation as at an end may be relevant in determining whether the party elected to waive compliance with the condition. (Economical Insurance Group v. Fleming)

The doctrine of waiver, as asserted against insurance companies to avoid the strict enforcement of conditions contained in their policies, is only another name for the doctrine of estoppel. It can only be invoked where the conduct of the companies has been such as to induce action in reliance upon it, and where it would operate as a fraud upon the assured if they were afterwards allowed to disavow their conduct and enforce the conditions. (Tarr v. Westchester Fire Insurance Company)

Waiver may be distinct from estoppel since it may be that prejudice need not be established for waiver to be effective, whereas it is a necessary ingredient of estoppel. For estoppel to apply, there must first be knowledge on the part of the insurer of the facts which indicated a lack of coverage; there must also be a course of conduct by the insurer upon which the insured relied to its detriment. Where it was not possible to point to actual prejudice, but where the insurer persisted in a defence through production and discovery into settlement negotiations, it was held that prejudice must be presumed. When a claim is presented to an insurer, the facts giving rise to the claim should be investigated. If there is no coverage then the insured should be told at once and the insurer should have nothing further to do with the claim if it wishes to maintain its off-coverage position. If coverage is questionable the insurer should advise the insured at once and in the absence of a non-waiver agreement or of an adequate reservation of rights letter defends the claim at its risk. (Rosenblood Estate v. Law Society of Upper Canada)

An insurer may elect to disregard a policy breach or it may waive reliance on an exclusion. Where a breach has been waived, the insurer cannot later resile from such waiver. Accordingly, there is a duty on the insurer to be clear about its position and not to leave an insured with a false belief that its interests are protected. If there is some doubt about coverage and the insurer requires time to investigate, the general practice is to obtain a non-waiver agreement or to reserve rights. Non-waiver agreements or reservation of rights letters are important tools to ensure an insured clearly understands she or he may be without coverage. An insurer that proceeds to defend an action, or even an insurer which unequivocally states that it will defend an action, may be taken to have waived reliance on the exclusion or it may be estopped from later denying coverage. If the facts as pleaded clearly give rise to an exclusion and the insurer ignores it and proceeds to defend the action, it may be deemed to have waived its right to rely on the exclusion. This principle is partially codified in s. 131 (1) (b) of the Insurance Act. That provision provides that the obligation of an insured to comply with a requirement under a policy of insurance is excused to the extent that the insurer’s conduct reasonably causes the insured to believe that compliance is excused in whole or in part and the insured acts on such belief to his or her detriment. An insured must not be prejudiced by a false sense of security. Quite apart from election or waiver, an insurer that provides a defence to the insured without a reservation of rights may be estopped from taking an off coverage position later in the litigation. It has also been held that where the litigation is at an advanced stage, prejudice to the insured is inferred, estoppel applies and, in that case, there is no need to decide if the actions of the insurer also constitute a waiver. (The Commonwell Mutual Assurance Group v. Campbell)

On the appeal, reported at The Commonwell Mutual Insurance Group v. Campbell, the Court held that whether to infer or find prejudice or detriment from the circumstances of a case is a factual determination. The Court also took into account, as evidence of prejudice, that the insured assumed his interests were being taken care of, that he did nothing to second-guess the decisions being made by the lawyer retained by the insurer, nor did he seek to have the other insurer defend him, although they may well have done. The Court rejected the assertion that the insured was obliged to identify missteps, finding instead that as a result of the insurer's conduct, the insured allowed the insurer to prosecute the defence of his case for close to a year without taking charge.

In Bradfield v. Royal Sun Alliance Insurance, an insurer appealed a decision that it was responsible to provide insurance coverage to its insured's estate. The insured was killed when driving on the wrong side of the road on a motorcycle. The motorcyclist had alcohol in his bloodstream, contrary to the conditions of his license. The insurer defended the claims against the state for some time until it learned that he had alcohol in his bloodstream at the time of the accident, at which point it took an off-coverage position. On the facts, the insurer did not actually know of the policy breach, although the information would have been available to it, had it sought to obtain it. In light of that, the Court of Appeal held that the insurer did not waive its right to refuse coverage for breach of the terms of the policy. In addition, the Court noted that there was no written waiver of the breach as required by s.131(1) of the Insurance Act to demonstrate a clear intention to waive the policy breach. Additionally, the Court held that the insurer was not estopped from asserting a breach of the policy both because it had no knowledge of the breach, and because there was no evidence of detrimental reliance.

In Logel Estate v. Wawanesa Mutual Insurance Company, an insurer appealed a decision of the Superior Court of Justice declaring that it had waived breach of a condition 4(1) in its policy. At the time of the accident, the insured had a significant level of alcohol in her bloodstream, contrary to the conditions of her license. The insurer argued that the breach of the condition meant that its liability under the policy was voided. The Court disagreed, holding that, looking over the insurer's conduct over a three-and-a-half-year period prior to its taking an off-coverage position, it was too late to take an off-coverage position. The Court held that in the context of the insurer electing to defend the action and taking many steps with respect to its defence over a three-year period, it seemed obvious that the insured would be prejudiced if the insurer were allowed to raise a coverage issue three years into the action. By that point, the action had proceeded through discoveries, production and settlement discussions, including dismissal of the action against two parties.

In Economical Insurance Group v. Fleming, the insured were sued for damages for negligence after they allowed a 12-year-old guest to drive an all-terrain vehicle at their cottage. After the insured was sued, the insurer wrote to the insured stating unequivocally that it would defend the action. The insured argued that the letter constituted a waiver. The insurer later realized there was an exclusion clause in the policy that it could have relied on, and attempted to resile from the first letter. Hoilett J. held that the facts of the case before the court strongly supported the contention that the insurer waived its rights and could not repudiate the position. Hoilett J. particularly took into account the chronology of the events, the length of time over which they evolved, and the unequivocal character of the initial letter to the insureds.

In Kozel v. The Personal Insurance Company, an insured sought a declaration that her insurer owed a duty to indemnify her and to defend her. The issues arose out of an accident occurring in Florida. At the time of the accident, the insured was driving on an expired license, in breach of statutory clause 4.1. After reporting the accident to the insurer, the insurer advised of a possible denial of coverage, and arranged for the insured to sign a non-waiver agreement. The insurer paid for the property damage, but reserved its right to claim a repayment of those sums. Wood J. held that s.131 of the Insurance Act was dispositive of the matter as no waiver was ever delivered to the insured, and, pursuant to s.131(2), the adjustment of the property damage claim could not be construed as a waiver of any term of the policy. As a result, estoppel could not occur. In addition, the Court found there was no detrimental reliance as the insured had preserved her right to defend the action. The Court held that the provisions of the Insurance Act effectively prevented the insured from claiming that the actions of the insurer estopped it from later denying coverage. On appeal, reported at Kozel v. The Personal Insurance Company, the Court of Appeal reversed the application judge's holding on due diligence, but granted relief from forfeiture to the insured under s.98 of the CJA. The Court of Appeal did not grapple with the question of estoppel.

Law:

Section 131(1) of the Insurance Act, RSO 1990, c I.8 concerns waiver and estoppel. It provides that the obligation of an insured to comply with a requirement under a contract is excused to the extent that: (a) the insurer has given notice in writing that the insured's compliance with the requirement is excused in whole or in part, subject to the terms in the notice, or, (b) the insurer's conduct reasonably causes the insured to believe that the insured's compliance with the requirement is excused in whole or in part, and the insured acts on that belief to the insured's detriment. Section 131(2) provides that neither the insurer nor the insured shall be deemed to have waived any term or condition of a contract by any act relating to the appraisal of the amount of loss or to the delivery and completion or proof or to the investigation or adjustment of any claim under the contract:

Waiver and estoppel

131 (1) The obligation of an insured to comply with a requirement under a contract is excused to the extent that,

(a) the insurer has given notice in writing that the insured’s compliance with the requirement is excused in whole or in part, subject to the terms specified in the notice, if any; or

(b) the insurer’s conduct reasonably causes the insured to believe that the insured’s compliance with the requirement is excused in whole or in part, and the insured acts on that belief to the insured’s detriment. 2012, c. 8, Sched. 23, s. 5.

Idem

(2) Neither the insurer nor the insured shall be deemed to have waived any term or condition of a contract by any act relating to the appraisal of the amount of loss or to the delivery and completion of proofs or to the investigation or adjustment of any claim under the contract. R.S.O. 1990, c. I.8, s. 131 (2).

In Bradfield v. Royal Sun Alliance Insurance, 2019 ONCA 800 (CanLII), an insurer appealed a decision that it was responsible to provide insurance coverage to its insured's estate. The insured was killed when driving on the wrong side of the road on a motorcycle. The driver of the car that hit the motorcycle was injured. The motorcyclist had alcohol in his bloodstream, contrary to the conditions of his license. The insurer defended the claims against the state for some time until it learned that he had alcohol in his bloodstream at the time of the accident, at which point it took an off-coverage position. The Court of Appeal considered whether the insurer waived its right to deny coverage, or whether it was estopped from doing so.

The Court held that waiver and promissory estoppel are closely related. The principle underlying both doctrines is that a party should not be allowed to resile from a choice when it would be unfair to the other party to do so. Both require "knowledge" of the policy breach. Waiver will be found where the party waiving had (1) full knowledge of the deficiency that might be relied upon; and (2) the unequivocal and conscious intention to relinquish the right to rely on the contract or obligation. The creation of such a stringent test reflects the fact that no consideration moves from the party in whose favour a waiver operates. An overly broad interpretation of waiver would undermine the requirement of contractual consideration”. Knowledge can be inferred from conduct, but “that conduct must give evidence of an unequivocal intention to abandon rights known to the party waiving the right”. On the facts, the insurer did not actually know of the policy breach, although the information would have been available to it, had it sought to obtain it. In light of that, the Court of Appeal held that the insurer did not waive its right to refuse coverage for breach of the terms of the policy. In addition, the Court noted that there was no written waiver of the breach as required by s.131(1) of the Insurance Act to demonstrate a clear intention to waive the policy breach:

Waiver by Conduct

[30] Waiver and promissory estoppel are closely related: Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., 1994 CanLII 100 (SCC), [1994] 2 S.C.R. 490, at para. 18.

[31] The principle underlying both doctrines is that a party should not be allowed to resile from a choice when it would be unfair to the other party to do so. Both require “knowledge” of the policy breach: Economical Insurance Group v. Fleming (2009), 2008 CanLII 112 (ON SC), 89 O.R. (3d) 68, at para. 31, aff’d 2009 ONCA 112, 69 C.C.L.I. (4th) 185, and Rosenblood Estate v. Law Society of Upper Canada (1989), 37 C.C.L.I. 142 (Ont. H.C.) at para. 53, aff’d 16 C.C.L.I. (2d) 226 (Ont. C.A.).

[32] Waiver will be found where:

“the party waiving had (1) full knowledge of the deficiency that might be relied upon; and (2) the unequivocal and conscious intention to relinquish the right to rely on the contract or obligation. The creation of such a stringent test reflects the fact that no consideration moves from the party in whose favour a waiver operates. An overly broad interpretation of waiver would undermine the requirement of contractual consideration”: Saskatchewan River Bungalows, at para. 20, and Economical Insurance Groupat para. 31.

[33] Knowledge can be inferred from conduct, but “that conduct must give evidence of an unequivocal intention to abandon rights known to the party waiving the right”: Canadian Federation of Students/Fédération canadienne des étudiant(e)s v. Cape Breton University Students’ Union, 2015 ONSC 4093, at para. 129.

[34] In Logel Estate v. Wawanesa Mutual Insurance Company, the insurer elected to defend the claim after receiving the accident report and the pathology report for a single car collision leading to a death: [2008] I.L.R. I-4744 (Ont. S.C.), aff'd 2009 ONCA 252, 70 C.C.L.I. (4th) 188. Those reports contained the evidence of the status of the insured’s licence and her physical condition. In Logel, the trial judge concluded at para. 21:

“that upon receipt they must have had knowledge of the facts including the status of Ms. Logel's licence and her physical condition, which gave rise to the exclusion of coverage. If they did not appreciate the significance of these facts they should have, before they elected to defend.” [Emphasis added.]

[35] In Logel, all facts necessary to establish knowledge were within the possession of the insurer. The insurer simply did not appreciate the significance of the facts before it elected to defend. In the face of this information, the court held that the insurer waived the breach by obtaining all the necessary information to enable it to be aware of a policy breach and deciding to defend the claim.

[36] In this case, RSA knew Devecseri had an M2 licence and it was a breach of the policy to consume any alcohol before driving.

[37] However, it is agreed that RSA had no actual knowledge that Devecseri breached the policy by consuming alcohol before driving until 2009.

[38] Second, unlike Logel, knowledge of a policy breach could not be imputed, as RSA did not have all of the material facts from which to determine there was a policy breach. This was not a case where RSA failed to appreciate the significance of information; it did not have information that Devecseri had been drinking and had thereby breached the terms of the policy.

[39] Third, there is no evidence to support Bradfield’s assertion that RSA knew of the policy breach but chose not to take possession of the information. No legal authority was proffered to support Bradfield’s assertion that an insurer must obtain the coroner’s report. It is also agreed that, although information as to the blood alcohol content was in the coroner’s report, there is no evidence that RSA knew that information was contained in the coroner’s report and knowing that, chose not to get the coroner’s report. On the contrary, had RSA obtained the report, it would not have expended monies conducting further investigation and defending the claim.

[40] Lastly, there was no written waiver of the breach on the part of RSA, as required by s. 131(1) of the Insurance Act, to demonstrate a clear intention to waive the policy breach.

[41] For these reasons, it was not correct to conclude that RSA waived its right to refuse coverage for breach of the terms of the insurance policy.

Concerning estoppel, the Court held that the essential elements of estoppel are that: 1. As in the case of waiver, the insurer must have knowledge of the facts that support a lack of coverage; and, 2. Unlike waiver, there must be “a course of conduct by the insurer upon which the insured relied to its detriment.” On the facts, the Court held that the insurer was not estopped from asserting a breach of the policy both because it had no knowledge of the breach, and because there was no evidence of detrimental reliance:

Estoppel

[42] The essential elements of estoppel are that:

1. As in the case of waiver, the insurer must have knowledge of the facts that support a lack of coverage; and

2. Unlike waiver, there must be “a course of conduct by the insurer upon which the insured relied to its detriment.” Rosenblood Estate, at p. 18.

[43] In Rosenblood Estate, a credit union claimed its solicitor was dishonest, resulting in losses to the credit union. The credit union sued the solicitor, who was insured by the Law Society. The Law Society retained counsel to defend the claim against the solicitor. Two years later, the Law Society advised the estate that it was denying coverage on the grounds that the loss was caused by dishonesty, which was excluded from coverage, and that the insured solicitor was in breach of the policy by failing to give timely notice of possible claims.

[44] The court in Rosenblood held that the insurer was estopped from denying coverage, as the insurer had all of the relevant facts necessary to decide whether to defend the fraud claim but nonetheless elected to defend the claim.

[45] The insurer in Rosenblood should have appreciated the significance of the information in its possession that constituted a policy violation. Despite this information, it elected to defend the claim. The insured relied to its detriment on the insurer’s agreement to defend the claim. As such, the insurer was estopped from relying on a policy breach and was required to defend the claim.

[46] In this case, the trial judge did not address the issue of estoppel, as he found that RSA had waived its right to rely on the policy breach.

[47] I find RSA is not estopped from asserting a breach of the policy, as, for the reasons set out above, RSA had no knowledge of the breach until 2009.

[48] Moreover, there was no evidence of detrimental reliance. The claim was issued in May 2008, the statement of defence was filed in March 2009, and the evidence as to alcohol consumption came to light in June 2009. Two weeks after discovering the evidence of alcohol consumption, RSA took an “off-coverage” position.

[49] RSA expended time, effort and money to investigate and defend the action until July 2009. There is no evidence that any of the steps taken by RSA to defend the case operated to prejudice the estate. On the contrary, the litigation administrator for the estate and Caton’s counsel agreed there was no difference in the defence of the action whether RSA added itself as a statutory third party or was a defendant in the action. Thus, even if Bradfield’s submission is that prejudice is presumed was correct, that presumption has been rebutted and I find no detrimental reliance in this case.

[50] For these reasons, I find RSA is not estopped from asserting a policy breach.

In Kozel v. The Personal Insurance Company, 2013 ONSC 2670 (CanLII), an insured sought a declaration that her insurer owed a duty to indemnify her and to defend a third-party action against the insured. The issues arose out of an accident occurring in Florida. At the time of the accident, the insured was inadvertently driving on an expired license, in breach of statutory clause 4.1. After reporting the accident to the insurer, the insurer advised of a possible denial of coverage, and arranged for the insured to sign a non-waiver agreement. The insurer paid for the property damage, but reserved its right to claim a repayment of those sums. 

One issue was whether the insurer was estopped from denying coverage as a result of its payment of the insured's property damage claim. She also argued that the non-waiver agreement was improper and she was not provided with independent legal advice. Wood J. held that s.131 of the Insurance Act was dispositive of the matter as no waiver was ever delivered to the insured, and, pursuant to s.131(2), the adjustment of the property damage claim could not be construed as a waiver of any term of the policy. As a result, estoppel could not occur. In addition, the Court found there was no detrimental reliance as the insured had preserved her right to defend the action. The Court held that the provisions of the Insurance Act effectively prevented the insured from claiming that the actions of the insurer estopped it from later denying coverage:

Is The Respondent Estopped From Denying Coverage As A Result Of Its Payment Of The Applicant’s Property Damage Claim?

[35] The applicant’s position on this issue is twofold. First she argues that the respondent having paid her property damage claim is estopped from denying coverage for personal liability. Second she argues that the non-waiver agreement obtained from her by the respondent was obtained improperly as she was not provided with independent legal advice before signing it. Given this circumstance she argues, the non-waiver agreement cannot operate to negate the estoppel created by the payment of the property damage claims.

[36] The respondent points to section 131(1) of The Insurance Act which provides:

No term or condition of a contract shall be deemed to be waived by the insurer in whole or in part unless the waiver is stated in writing and signed by a person authorized for that purpose by the insurer.

(2) Neither the insurer nor the insured shall be deemed to have waived any term or condition of a contract by any act relating to the appraisal of the amount of loss or the delivery and completion of proofs or to the investigation or adjustment of any claim under the contract. (my emphasis)

[37] The respondent argues that these statutory provisions alone are dispositive of the matter, as no waiver was ever delivered to the applicant, and the adjustment of the property damage claim is not to be construed as a waiver of any term of the policy under subsection 131(2). It follows that estoppel cannot occur.

[38] The respondent further argues that the doctrine of estoppel requires not only that one party say or do something indicative of a waiver of a term of a contract but that the second party rely upon that statement or action to his or her detriment. The respondent points out that that has not occurred in this case. The applicant was formally advised that coverage would be denied on October 17, 2012. Although the third party action had been commenced in May 2012 the applicant retained counsel and has preserved her right to defend that action. Therefore there has been no detrimental reliance by the applicant.

[39] I agree with the respondent’s position on the estoppel issue. The provisions of The Insurance Act effectively prevent the applicant from claiming that the actions of the company estop it from later denying coverage. Even if this were not the case, the fact that there has been no detrimental reliance by the applicant based on the respondent’s actions prevents the doctrine from applying.

[40] This finding renders the question of the non-waiver agreement moot. Since estoppel does not apply in this case, the signing of a non-waiver agreement by the applicant did not extinguish any right she might have had prior to its execution.

On appeal, reported at Kozel v. The Personal Insurance Company, 2014 ONCA 130 (CanLII), the Court of Appeal reversed the application judge's holding on due diligence, but granted relief from forfeiture to the insured under s.98 of the CJA. The Court of Appeal did not grapple with the question of estoppel:

[9] The application judge also rejected the respondent’s arguments that she was not in breach of her policy because she was authorized to drive at the time of the accident under Florida law, and that the insurance company was estopped from denying personal injury coverage because of its payment of the respondent’s property damage claim.

[...]

V. CONCLUSION

[72] For the reasons stated above, I would reverse the application judge’s holding on due diligence but grant the respondent relief against forfeiture under s. 98 of the CJA.

[73] In my view, the facts required to make out a due diligence defence are simply not present. At the same time, if this court were to allow the appeal, the insurance company would enjoy a large windfall at the expense of an individual who acted in good faith and whose breach caused no prejudice to the company. This result would be contrary to fundamental notions of equity. Accordingly, I would dismiss the appeal.

In Economical Insurance Group v. Fleming, 2008 CanLII 112 (ON SC), the insured were sued for damages for negligence after they allowed a 12-year-old guest to drive an all-terrain vehicle at their cottage. After the insured was sued, the insurer wrote to the insured stating unequivocally that it would defend the action. The insured argued that the letter constituted a waiver of any right to rely on the exclusion clause in issue. The insurer later realized there was an exclusion clause in the policy that it could have relied on, and attempted to resile from the first letter. The insurer brought an application for a declaration that it did not have a duty to defend or indemnify the insured in respect of the action. The insured brought a cross-application for the contrary relief.

Hoilett J. held that waiver arises one party to a contract with full knowledge that his obligation under the contract has not become operative by reason of the failure of the other party to comply with a condition of the contract, intentionally relinquishes his right to treat the contract or obligation as at an end but rather treats the contract or obligation as subsisting. It involves knowledge and consent and the acts or conduct of the person alleged to have so elected, and thereby waived that right, must be viewed objectively and must be unequivocal. In considering the acts or the conduct of the person alleged to have made such an election the crucial time is after such party has knowledge of the failure of the other party to comply with the condition. However, the acts or conduct of that party either before, at the time, or following the happening of the event or circumstance giving rise to the right to treat the contract or obligation as at an end may be relevant in determining whether the party elected to waive compliance with the condition. Hoilett J. held that the facts of the case before the court strongly supported the contention that the insurer waived its rights and could not repudiate the position. Hoilett J. particularly took into account the chronology of the events, the length of time over which they evolved, and the unequivocal character of the initial letter to the insureds:

[29] The responding party has advanced an alternative argument in the event it is unsuccessful in its primary contention. Briefly put, the respondent submits that the purport of correspondence from the applicant to the respondent amounts to a waiver of any right to rely on the exclusion clause in issue. The accident precipitating this cause of action occurred on July 25, 2005, and was soon after reported to Economical.

[30] Counsel for the respondents relies on Mitchell & Jewell Ltd. v. Canadian Pacific Express Co.1974 ALTASCAD 18 (CanLII), [1974] 3 W.W.R. 259, 44 D.L.R. (3d) 603 (Alta. S.C. (A.D.)) in support of his waiver argument. The relevant facts in Mitchell are sufficiently summarized in the headnote:

. . . . .

A contract of carriage provided that the carrier should not be liable "for any damage, partial loss or shortage unless written notice thereof is given at any office of the company within thirty days from delivery." Appellant carried a package containing diamond rings from Red Deer, Alberta, to Toronto. The package was delivered on 1st October and when opened was found to contain only empty ring boxes, the rings having been extracted during carriage. On 4th November the claimant sent a written claim to the carrier and the following day received a reply indicating that the carrier required a small downward adjustment of the amount claimed before paying the claim. Three days later the carrier's representative attended at claimant's premises and obtained further particulars of the claim. Appellant relied at trial on the contractual requirement of notice within 30 days of delivery.

[31] The Alberta Court of Appeal, in upholding a judgment in favour of the claimant, made the following observations at the paragraphs indicated below [30, 31 and 32]:

...the question of the application of the doctrine of estoppel did not arise as there was no evidence of the insured having acted to his detriment in reliance on any act or conduct on the part of the insurer.

Summarizing the law as set out in the cases above I am of the opinion that waiver as used in the present context arises where one party to a contract, [page80 ]with full knowledge that his obligation under the contract has not become operative by reason of the failure of the other party to comply with a condition of the contract, intentionally relinquishes his right to treat the contract or obligation as at an end but rather treats the contract or obligation as subsisting. It involves knowledge and consent and the acts or conduct of the person alleged to have so elected, and thereby waived that right, must be viewed objectively and must be unequivocal.

In considering the acts or the conduct of the person alleged to have made such an election the crucial time is after such party has knowledge of the failure of the other party to comply with the condition. However, the acts or conduct of that party either before, at the time, or following the happening of the event or circumstance giving rise to the right to treat the contract or obligation as at an end may be relevant in determining whether the party elected to waive compliance with the condition.

[32] The court at para. 40 went on to say that "That election once made and communicated to the claimant was irrevocable."

[33] Counsel for the applicant cited the decision of Croll J. in Bejinariu v. Primmum Insurance Co., [2004] O.J. No. 516, [2004] O.T.C. 109 (S.C.J.) in support of its argument that the doctrine of waiver should have no application in the present case. In that case, the insurers had filed a defence to the action. But, as summarized in the headnote, "Primmum had delivered a letter prior to filing the defence reserving the right to deny liability."

[34] I note, parenthetically, that Waddams in The Law of Contracts, 2nd ed. (Aurora, Ont.: Canada Law Book, 1980), cites, without critical comment, Mitchell & Jewell, supra, in his treatment of the subject of waiver. See generally Waddams at pp. 125-27 and 382-84.

[35] It is my conclusion, therefore, that the facts in the present case strongly support the respondents' contention that the applicant has waived its rights and may not now repudiate that position. The respondents' position is all the more compelling when one has regard to the chronology of events, the length of time over which they evolved and in particular the unequivocal character of the August 23, 2006 letter.

In Tarr v. Westchester Fire Insurance Company, 1953 CanLII 84 (ON CA), the Court of Appeal held that the doctrine of waiver, as asserted against insurance companies to avoid the strict enforcement of conditions contained in their policies, is only another name for the doctrine of estoppel. It can only be invoked where the conduct of the companies has been such as to induce action in reliance upon it, and where it would operate as a fraud upon the assured if they were afterwards allowed to disavow their conduct and enforce the conditions:

[46] The law was to estoppel in relation to contracts of insurance is discussed by Riddell J.A. in Teasdall v. Sun Life Assurance Co. of Canada, 1926 CanLII 422 (ON CA), 60 O.L.R. 201, [1927] 2 D.L.R. 502. That learned judge adopted the language of Mr. Justice Field in the case of Insurance Company v. Wolff (1877), 95 U.S. 326 at 333, in the Supreme Court of the United States, where it was said:

The doctrine of waiver, as asserted against insurance companies to avoid the strict enforcement of conditions contained in their policies, is only another name for the doctrine of estoppel. It can only be invoked where the conduct of the companies has been such as to induce action in reliance upon it, and where it would operate as a fraud upon the assured if they were afterwards allowed to disavow their conduct and enforce the conditions.

In Logel Estate v. Wawanesa Mutual Insurance Company, 2009 ONCA 252 (CanLII), an insurer appealed a decision of the Superior Court of Justice declaring that it had waived breach of statutory condition 4(1) in its insured's policy. The insured was killed in a single car accident. her passenger was seriously injured, and sued her estate. At the time of the accident, the insured had a significant level of alcohol in her bloodstream, contrary to the conditions of her license. The insurer argued that the breach of the condition meant that its liability under the policy was voided. The insurer acknowledged that it had full knowledge of the facts that would have given rise to waiver, but argued that only a 'conscious intention' to abandon its rights under the policy would suffice for a waiver. The  Court disagreed, holding that, looking over the insurer's conduct over a three-and-a-half-year period prior to its taking an off-coverage position, it was too late to take an off-coverage position. The Court held that in the context of the insurer electing to defend the action and taking many steps with respect to its defence over a three-year period, it seemed obvious that the insured would be prejudiced if the insurer were allowed to raise a coverage issue three years into the action. By that point, the action had proceeded through discoveries, production and settlement discussions, including dismissal of the action against two parties:

[1] The appellant, Wawanesa Mutual Insurance Company, appeals the decision of Lack J. of the Superior Court of Justice dated September 17, 2008 declaring that it had waived the breach of statutory condition 4(1) in the automobile insurance policy of its client Lori Logel.

[2] Ms. Logel was killed in a single car accident. Her passenger Bryan Gill was seriously injured. He sued the estate of Ms. Logel. Ms. Logel’s blood alcohol level at the time of the accident was 143 mg/100 ml. This contravened the terms of her G2 driver’s licence which required that her blood alcohol level be zero when she was operating a motor vehicle.

[3] Wawanesa’s position on the motion was that Ms. Logel’s breach of the statutory condition of her policy meant that its contractual liability for third party liability policy limits of $1,000,000 was voided, thus potentially limiting Gill to a maximum recovery of $200,000 under the Wawanesa policy.

[4] The motion judge held that Wawanesa’s interpretation of the terms of the policy was correct but that Wawanesa’s conduct from January 2002 to August 2005 constituted “a continuing election that amounted to a waiver by conduct of Ms. Logel’s breach.”

[5] The appellant contends that the motion judge erred by concluding that it had waived its rights under the policy. He accepts that the appellant had full knowledge of the facts that would give rise to waiver in these circumstances. He submits, however, that the trial judge erred in finding waiver based on her determination that the appellant “should have” appreciated the significance of these facts. The appellant argues that only a “conscious intention” to abandon its rights under the policy will suffice for waiver. In addition, the motion judge erred by presuming prejudice to the respondent flowing from the appellant’s delay in asserting its right.

[6] We disagree. Looking at the trial judge’s reasons as a whole, we are satisfied that she properly inferred an intention to abandon the right to rely on the policy breach from its conduct over a 3 ½ year period.

[7] The appellant filed its Statement of Defence in July 2002. In the following three years, the action proceeded through discoveries, production and settlement discussions, including the dismissal of the action against two parties. Not until August 2005 did the appellant raise the potential coverage issue. In these circumstances, the motion judge was entitled to apply what Holland J. said in the factually similar case Rosenblood Estate v. Law Society of Upper Canada1989 CanLII 4221 (ON SC), [1989] O.J. No. 420 (S.C.), aff’d. [1992] O.J. No. 3030 (C.A.), namely, that “[i]n the present case the insurer finally took an off coverage position but … much too late.” Moreover, in the context of the appellant electing to defend the action and taking many steps with respect to its defence over a three year period, it seems obvious, as it was to Holland J. and this court in Rosenblood Estate, that the respondent would be prejudiced if the appellant were allowed to raise a coverage issue three years into the action.

In Rosenblood Estate v. Law Society of Upper Canada, 1989 CarswellOnt 642 (aff'd Rosenblood Estate v. Law Society of Upper Canada, 1992 CarswellOnt 673) an insurer was sued by the estate of a deceased lawyer for damages for breach of contract after it failed to provide an indemnity for an alleged lawyer or omission made by the lawyer in his practice. The insurer took the position that the lawyer's conduct was dishonest, and not covered by the policy. The insured defended claims against the lawyer for a time before taking the off-coverage position. The Court considered the questions of election, waiver, and estoppel.

The Court held that election leads to waiver and may be distinct from estoppel since it may be that prejudice need not be established for waiver to be effective, whereas it is a necessary ingredient of estoppel. For estoppel to apply, there must first be knowledge on the part of the insurer of the facts which indicated a lack of coverage; there must also be a course of conduct by the insurer upon which the insured relied to its detriment. Potential coverage issues were brought to the insurer's attention very early on; the court found that the insurer had knowledge of the facts giving rise to exclusions of coverage and appreciated or should have appreciated the significance of those facts. The Court held that it was not possible to point to actual prejudice, but in the circumstances of the case, where the insurer persisted in the defence through production and discovery into settlement negotiations, prejudice must be presumed. The Court held that when a claim is presented to an insurer the facts giving rise to the claim should be investigated. If there is no coverage then the insured should be told at once and the insurer should have nothing further to do with the claim if it wishes to maintain its off-coverage position. If coverage is questionable the insurer should advise the insured at once and in the absence of a non-waiver agreement or of an adequate reservation of rights letter defends the claim at its risk. The Court held that the insurer finally took an off-coverage position much too late, and thus was estopped from doing so:

[51] Election leads to waiver and may be distinct from estoppel since it may be that prejudice need not be established for waiver to be effective whereas it is a necessary ingredient of estoppel. See Mitchell & Jewell Ltd. v. Cdn. Pacific Express Co., [1974] 3 W.W.R. 259, 44 D.L.R. (3d) 603 (Alta. C.A.), Anguish v. Maritime Life Assurance Co., 51 Alta. L.R. (2d) 376, [1987] 4 W.W.R. 261, 24 C.C.L.I. 194, 77 A.R. 189, [1987] I.L.R. 1-2226 (C.A.); additional reasons at 29 C.C.L.I. 190, [1988] I.L.R. 1-2340 (Alta. C.A.) , leave to appeal S.C.C. refused (1988), 61 Alta. L.R. (2d) lii (note), 90 N.R. 319 (note) (S.C.C.), and Western Can. Accident & Guaranty Insurance Co. v. Parrott, 61 S.C.R. 595, [1921] 2 W.W.R. 569, 59 D.L.R. 307. However, see the contrary view in Teasdall v. Sun Life Assurance Co. of Can. (1926), 60 O.L.R. 201, [1927] 2 O.L.R. 502 (C.A.).

[52] I do not find it necessary on the facts of this case to deal with the alleged distinction and will dispose of the matter based upon estoppel only.

[53] For estoppel to apply there must first be knowledge on the part of the insurer of the facts which indicated a lack of coverage: see Western Can. Accident & Guaranty Insurance Co., supra.

[54] There must also be a course of conduct by the insurer upon which the insured relied to its detriment.

[...]

[61] I conclude that the insurer through the Law Society and its solicitor had knowledge of facts giving rise to exclusions of coverage and appreciated or should have appreciated the significance of these facts.

[62] The Rosenblood estate must have relied on the Law Society and its solicitor to act in the best interests of the estate in defending the action. No notice was given to the estate of a problem concerning coverage until after examinations for discovery had been completed and until after settlement negotiations had commenced.

[63] If the estate had been advised of an off-coverage position earlier the defence could well have been conducted differently. Settlement negotiations could have been conducted earlier and interest claims accordingly reduced. A sworn rather than an unsworn affidavit on production could have been obtained together with production of all written material dealing with the criteria for collateral second mortgages. Production of the criteria could have provided a possible defence which might have been of use as a settlement tool. Examinations for discovery could well have been conducted with a different emphasis. It is not possible to point to actual prejudice but in the circumstances of this case where the insurer persisted in the defence through production and discovery into settlement negotiations prejudice must be presumed.

[64] When a claim is presented to an insurer the facts giving rise to the claim should be investigated. If there is no coverage then the insured should be told at once and the insurer should have nothing further to do with the claim if it wishes to maintain its off-coverage position. If coverage is questionable the insurer should advise the insured at once and in the absence of a non-waiver agreement or of an adequate reservation of rights letter defends the claim at its risk. In the present case the insurer finally took an off-coverage position but against Mr. Atlin's advice and much too late.

[65] I conclude on the facts outlined that American Home was estopped from taking an off-coverage position based on the two exclusions referred to.

In The Commonwell Mutual Assurance Group v. Campbell, 2018 ONSC 5899 (CanLII) (aff'd The Commonwell Mutual Insurance Group v. Campbell, 2019 ONCA 668 (CanLII)), MacLeod J. held that an insurer must defend a claim against its insured that is potentially within coverage and it must indemnify the insured up to the policy limits if liability is established providing the facts do not fall within an exclusion or demonstrate a policy breach. An insurer may elect to disregard a policy breach or it may waive reliance on an exclusion. Where a breach has been waived, the insurer cannot later resile from such waiver. Accordingly, there is a duty on the insurer to be clear about its position and not to leave an insured with a false belief that its interests are protected. Where a claim clearly falls outside the scope of an insurance policy or falls within an exclusion or exception, the insurer should deny coverage clearly and unequivocally. In cases where there is doubt about a duty to defend or where there may be a duty to defend but there may not be a duty to indemnify, the insurer must take steps to bring the possibility the claim will be denied to the attention of the insured. Non-waiver agreements or reservation of rights letters are important tools to ensure an insured clearly understands she or he may be without coverage. If there is some doubt about coverage and the insurer requires time to investigate, the general practice is to obtain a non-waiver agreement or to reserve rights. An insurer that proceeds to defend an action, or even an insurer which unequivocally states that it will defend an action, may be taken to have waived reliance on the exclusion or it may be estopped from later denying coverage. If the facts as pleaded clearly give rise to an exclusion and the insurer ignores it and proceeds to defend the action it may be deemed to have waived its right to rely on the exclusion. This principle is partially codified in s. 131 (1) (b) of the Insurance Act. That provision provides that the obligation of an insured to comply with a requirement under a policy of insurance is excused to the extent that the insurer’s conduct reasonably causes the insured to believe that compliance is excused in whole or in part and the insured acts on such belief to his or her detriment. An insured must not be prejudiced by a false sense of security. Quite apart from election or waiver, an insurer that provides a defence to the insured without a reservation of rights may be estopped from taking an off coverage position later in the litigation. It has also been held that where the litigation is at an advanced stage, prejudice to the insured is inferred, estoppel applies and in that case there is no need to decide if the actions of the insurer also constitute a waiver:

Waiver and Estoppel

[29] An insurer must defend a claim against its insured that is potentially within coverage and it must indemnify the insured up to the policy limits if liability is established providing the facts do not fall within an exclusion or demonstrate a policy breach. 

[30] It should be noted that an insurer may elect to disregard a policy breach or it may waive reliance on an exclusion. Where a breach has been waived, the insurer cannot later resile from such waiver. Accordingly, there is a duty on the insurer to be clear about its position and not to leave an insured with a false belief that its interests are protected.

[31] Where a claim clearly falls outside the scope of an insurance policy or falls within an exclusion or exception, the insurer should deny coverage clearly and unequivocally. In cases where there is doubt about a duty to defend or where there may be a duty to defend but there may not be a duty to indemnify, the insurer must take steps to bring the possibility the claim will be denied to the attention of the insured. Non-waiver agreements or reservation of rights letters are important tools to ensure an insured clearly understands she or he may be without coverage.

[32] If there is some doubt about coverage and the insurer requires time to investigate, the general practice is to obtain a non-waiver agreement or to reserve rights. This is precisely what Guarantee did before ultimately denying coverage. An insurer that proceeds to defend an action, or even an insurer which unequivocally states that it will defend an action, may be taken to have waived reliance on the exclusion or it may be estopped from later denying coverage.

[33] As long ago as 1921, the Supreme Court of Canada held that having elected to defend an insured rather than contesting coverage, the insurer could not avoid paying the judgment after it took the matter to trial and obtained an unfavourable result.[10] In the circumstances of that case, the insurer was found to have made an election not to rely on a condition in the policy.

[34] It is not necessary for there to be an adverse judgment. If the facts as pleaded clearly give rise to an exclusion and the insurer ignores it and proceeds to defend the action it may be deemed to have waived its right to rely on the exclusion.[11]

[35] This principle is partially codified in s. 131 (1) (b) of the Insurance Act. That provision provides that the obligation of an insured to comply with a requirement under a policy of insurance is excused to the extent that the insurer’s conduct reasonably causes the insured to believe that compliance is excused in whole or in part and the insured acts on such belief to his or her detriment.

[36] An insured must not be prejudiced by a false sense of security. Quite apart from election or waiver, an insurer that provides a defence to the insured without a reservation of rights may be estopped from taking an off coverage position later in the litigation. In Rosenblood Estate, it was held that by defending a claim without a reservation of rights, the insurer did so at its own risk. By defending the insured through production, discovery and the start of settlement negotiations, the insurer was estopped from denying coverage. [12]

[37] It has also been held that where the litigation is at an advanced stage, prejudice to the insured is inferred, estoppel applies and in that case there is no need to decide if the actions of the insurer also constitute a waiver.[13]

On the appeal, reported at The Commonwell Mutual Insurance Group v. Campbell, 2019 ONCA 668 (CanLII), the Court held that whether to infer or find prejudice or detriment from the circumstances of a case is a factual determination. The Court also took into account, as evidence of prejudice, that the insured assumed his interests were being taken care of, that he did nothing to second-guess the decisions being made by the lawyer retained by the insurer, nor did he seek to have the other insurer defend him, although they may well have done. The Court rejected the assertion that the insured was obliged to identify missteps, finding instead that as a result of the insurer's conduct, the insured allowed the insurer to prosecute the defence of his case for close to a year without taking charge:

[10] The alleged error of law is grounded in the application judge’s finding that by the time Commonwell denied coverage the litigation was “well advanced”, thus permitting him to draw an inference of prejudice. Commonwell contends that the litigation was not well enough advanced to trigger presumed prejudice. Implicit in Commonwell’s contention is that “well advanced” litigation is a formal legal status that can be identified by the stage of litigation, and that prejudice is presumed as a matter of law where litigation reaches this stage. The decision relied upon, Rosenblood Estate v. Law Society of Upper Canada (1989), 37 C.C.L.I. 142 (Ont. H.C.J.), aff'd. 16 C.C.L.I. (2d) 226 (Ont. C.A.), does not stand for these propositions, nor does any other authority brought to the court’s attention. When R.E. Holland J. found in Rosenblood that “where the insurer persisted in the defence through production and discovery into settlement negotiations prejudice must be presumed”, he was not purporting to draw a line as to when litigation is well advanced. Nor was he identifying a presumption of law. He was simply explaining why prejudice could be inferred in the case before him. Whether to infer or find prejudice or detriment from the circumstances of a case is a factual determination; the question before us is therefore, whether it was a palpable and overriding error for the application judge to do so in this case.

[11] Commonwell has not persuaded us that the application judge made a palpable and overriding error in finding detrimental reliance. Immediately upon being served with a statement of claim in April 2015, Mr. Campbell contacted his insurance broker and was put in touch with adjustors for Guarantee and Commonwell. Guarantee promptly issued a non-waiver agreement and a reservation of rights letter, and ultimately denied coverage. To the contrary, instead of taking similar prudent steps Commonwell appointed counsel for Mr. Campbell. An investigation of Mr. Campbell’s potential liability was then undertaken. A detailed statement of defence was prepared. Tactical decisions were made relating to who would be joined in the action, and crossclaims were issued. The tactical decision not to have a jury trial was made.

[12] The application judge also found that the action proceeded to the discovery stage, as things had progressed to the point where plaintiff’s counsel was seeking information from defence counsel, at least relating to coverage issues. We see no error in the application judge’s characterization that this was part of the discovery process. In any event, he was clear in the step he was describing.

[13] Ultimately, the lawyer Commonwell appointed for Mr. Campbell acted for him for 10 months before Commonwell gave Mr. Campbell any reason to believe his liability was not covered and he would not be defended. In these circumstances, the application judge was entitled to conclude that the litigation was well-advanced, and to infer that allowing Commonwell to now assert that there is no coverage and therefore no duty to defend Mr. Campbell would be detrimental to him.

[14] There was also supplementary direct evidence of prejudice. As Mr. Campbell attested, he assumed that his interests were being taken care of during this 10-month period. He did nothing to secure his own counsel to second-guess the decisions being made by the lawyer Commonwell retained. Nor did he seek to have Guarantee defend him, as they may well have done given their remaining potential for liability under the Insurance Act, R.S.O. 1990, c. I.8, s. 258.

[15] We do not accept that to prove prejudice Mr. Campbell is obliged to identify missteps that have occurred; this is an unrealistic and unnecessary burden to impose at this stage in the litigation. The immediate point is that as a result of Commonwell’s conduct, Mr. Campbell allowed Commonwell to prosecute the defence of his case for close to a year without taking charge of his own defence.

Authorities:
Insurance Act, RSO 1990, c I.8
Bradfield v. Royal Sun Alliance Insurance, 2019 ONCA 800 (CanLII)
Kozel v. The Personal Insurance Company, 2013 ONSC 2670 (CanLII)
Kozel v. The Personal Insurance Company, 2014 ONCA 130 (CanLII)
Economical Insurance Group v. Fleming, 2008 CanLII 112 (ON SC)
Tarr v. Westchester Fire Insurance Company, 1953 CanLII 84 (ON CA)
Logel Estate v. Wawanesa Mutual Insurance Company, 2009 ONCA 252 (CanLII)
Rosenblood Estate v. Law Society of Upper Canada, 1989 CarswellOnt 642
Rosenblood Estate v. Law Society of Upper Canada, 1992 CarswellOnt 673
Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co., [1994] 2 SCR 490, 1994 CanLII 100 (SCC)
The Commonwell Mutual Assurance Group v. Campbell, 2018 ONSC 5899 (CanLII)
The Commonwell Mutual Insurance Group v. Campbell, 2019 ONCA 668 (CanLII)
Teasdall v. Sun Life Ass'ce Co. of Can., 1926 CanLII 422 (ON CA)