In the recent decision of Trial Lawyers Association of British Columbia v Royal & Sun Alliance Insurance Company of Canada, the Supreme Court of Canada considered the application of the doctrine of promissory estoppel in the context of a personal injury claim. Specifically, the Court considered whether an insurer was estopped from denying coverage by its conduct before it had actual knowledge of material facts constituting the insured’s breach of the policy. The Court concluded that promissory estoppel did not apply in the circumstances. The Court also provided some interesting comments upon the insurer’s duty to investigate as it relates to third parties.
In May 2006, Steven Devecseri (the “Deceased”), Jeremy Bradfield and number of other people were riding their motorcycles in Ontario. The Deceased rode into oncoming traffic and died as a result of a collision with a car driven by Jeremy Caton (the “Collision”). Both Caton and Bradfield were injured in the Collision and brought claims against the Deceased’s estate.
The Deceased held an insurance policy with Royal & Sun Alliance (“RSA”), who assumed defence of the claims brought against the Deceased’s estate. Some time after assuming the defence, RSA learned the Deceased had consumed alcohol prior to the Collision, putting the Deceased in breach of his insurance policy with RSA.
As a result, RSA took an off-coverage position, which affected the claimants’ entitlement to damages. Bradfield was only entitled to collect the $200,000 statutory minimum coverage, whereas $1 million would have been recoverable under the Deceased’s insurance policy.
Bradfield settled his action against the Deceased’s estate, which obligated his insurer, State Farm, to pay him $750,000 in under-insured coverage pursuant to a family protection endorsement. State Farm brought a claim against RSA in an attempt to recover the money it paid to Bradfield.
Bradfield argued that RSA had waived the Deceased’s breach, voluntarily relinquishing their right to deny coverage on the basis that they ought to have known, or had constructive knowledge of the Deceased’s breach. Alternatively, Bradfield argued that promissory estoppel applied as RSA provided assurances to Bradfield through the defence of the claims against the Deceased’s estate. The trial judge held that RSA’s conduct amounted to waiver since they failed to take an off-coverage position sooner and defended the claims brought against the Deceased’s estate for a significant period of time. The trial judge did not consider the issue of promissory estoppel since Bradfield was successful in arguing waiver.
Court of Appeal Decision
The Court of Appeal found that RSA’s conduct did not amount to waiver since the legislation in force at the time, namely, section 131(1) of Ontario’s Insurance Act, expunged recognition of waiver by conduct and provided that waiver could only be given in writing. The Court of Appeal also rejected the promissory estoppel argument because RSA did not have actual knowledge of the breach at the time it began defending the claims brought against the Deceased’s estate.
The Supreme Court of Canada’s Decision
The sole issue before the Supreme Court of Canada was whether “RSA [was] estopped from denying coverage because it responded to the claims against [the Deceased’s] estate long after it could have discovered evidence of [the Deceased’s] policy breach?”
The Court reiterated the test for establishing promissory estoppel, which requires that:
- The parties be in a legal relationship at the time of the promise or assurances;
- The promise or assurances be intended to affect that relationship and be acted on; and
- The other party in fact relied on the promise or assurances.
Although Bradfield’s claim was settled after the Court of Appeal’s decision, the Trial Lawyer’s Association of British Columbia (“TLABC”) was granted leave to replace him as appellant for the purposes of the appeal to the Supreme Court of Canada. TLABC argued that promissory estoppel ought to apply since RSA’s actions were assurances that Bradfield relied upon.
The Court rejected this argument. Since RSA lacked actual knowledge of the Deceased’s alcohol consumption and was ignorant to this fact until three years after the Collision, RSA could not be held to the assurances that it provided to Bradfield for the purposes of establishing promissory estoppel. Intention could not be established since RSA’s assurances at the time they initially defended the claims were not informed by actual knowledge of the Deceased’s policy breach.
TLABC also urged the Supreme Court of Canada to find that constructive knowledge could satisfy the test for promissory estoppel, since RSA had or ought to have had constructive knowledge of the Deceased’s policy breach. Specifically, RSA would have determined the existence of this breach sooner if they had conducted an adequate investigation. If the relevant facts are known, an inference may be drawn that a party had the intention to alter its legal relationship with the opposing party. Possessing knowledge of the legal significance of the facts is not required to determine that a party intended to alter its legal relationship.
The Court also rejected this argument and determined that RSA discharged their duty to carry out a fair and reasonable investigation after the Collision. The Court also stated that allowing constructive knowledge to satisfy the test for promissory estoppel in the insurance context would give insurance companies, who already have a significant economic interest in denying claims, the incentive to engage in potentially relentless searches for policy breaches. This would conflict with an insured’s right to a fair and reasonable investigation upon a claim being made.
The Court further elaborated on an insurer’s duty to investigate as it relates to third parties. TLABC attempted to ground their estoppel argument on the basis that RSA’s failure to conduct a thorough investigation was detrimental to Bradfield. The Court rejected this position, reasoning that TLABC could not bring an argument for promissory estoppel on this basis since RSA’s duty to investigate was a duty owed only to the Deceased. The Court also stated: “[t]his is because the obligations between the insurer and the insured are reciprocal; while the insurer has the aforementioned duty to investigate fairly, in a balanced and reasonable manner, the insured is also under a reciprocal duty to disclose facts material to the claim.” As a third party, Bradfield was not a part of this reciprocal duty. Had the Deceased been alive, he would have been obligated to fully co-operate in the investigation.
An insurer is not expected to know every single detail of a claim brought by an insured. While diligent investigations can help to warrant informed decisions at the outset, there are potential recourses to safeguard an insurer’s lack of knowledge once a claim progresses and protect the insurer’s right to subsequently deny coverage. Further, the insurer does not owe any duties to third parties in the course of investigating a claim.