Trial Lawyers Association of British Columbia v. Royal & Sun Alliance Insurance Company of Canada, 2021 SCC 47 — Insurance — Motor vehicle insurance — Promissory estoppel

On appeal from a judgment of the Ontario Court of Appeal (2019 ONCA 800) setting aside a decision of Sosna J. (2018 ONSC 4477).

D died in a motorcycle accident. His insurer, Royal & Sun Alliance (“RSA”), proceeded to defend his estate in two lawsuits started by B and another claimant, both injured in the accident. Three years after the accident, and over a year into litigation, RSA learned that D had consumed alcohol immediately prior to the accident, putting him in breach of his insurance policy. RSA promptly ceased defending D’s estate and denied coverage. Nearly three years later, the other claimant’s action proceeded to trial, resulting in a judgment against D’s estate and against B, and a judgment for B on his cross‑claim against D’s estate. B sought a declaration of entitlement to recover judgment against RSA on the basis that RSA waived D’s breach or was estopped from denying coverage to D’s estate. The trial judge granted the declaration and found that RSA had waived its right to deny full coverage by failing to take an off‑coverage position and by providing a defence to D’s estate as the litigation progressed. Having found waiver by conduct, the trial judge did not consider the estoppel argument. The Court of Appeal allowed RSA’s appeal, holding that, at that time, Ontario’s Insurance Act precluded recognition of waiver by conduct and with respect to estoppel, that RSA’s conduct could not amount to a promise or assurance which was intended to affect the parties’ legal relationship, as RSA lacked knowledge of D’s policy breach when it provided him with a defence. B sought to appeal the decision, but after being granted leave, he reached a settlement agreement with RSA and discontinued his appeal. Trial Lawyers Association of British Columbia asked and was permitted to be substituted as the appellant.

Held (7-0): The appeal should be dismissed.

Per Wagner C.J. and Moldaver, Côté, Brown, Rowe and Kasirer JJ.:

Waiver by conduct was precluded by statute at the relevant time. With respect to promissory estoppel, RSA could not have intended to alter its legal relationship with B because it lacked knowledge of the facts which demonstrated D’s policy breach.

Promissory estoppel requires that (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. In the insurance context, estoppel arises most commonly where an insurer, having initially taken steps consistent with coverage, then denies coverage because of the insured’s breach of a policy term or its ineligibility for insurance in the first place. To prevent the insurer from denying coverage, the insured will attempt to show that the insurer is estopped from changing its coverage position based on its prior words or conduct.

To ground promissory estoppel, the requirement that a promise or assurance be intended to affect the parties’ legal relationship signifies that the promisor must know of the facts that are said to give rise to that legal relationship, and of the alteration thereto. The significance of intention depends entirely on what the promisor knows. A promisor cannot intend to alter a relationship by promising to refrain from acting on information that it does not have. Constructive knowledge arising from a breach of a duty to investigate is not enough, and to hold otherwise would be to unwisely and unnecessarily undermine the existing duty on insurers owed to insureds to investigate liability claims fairly, in a balanced and reasonable manner. However, where an insurer is shown to be in possession of the facts demonstrating a breach, an inference may be drawn that the insurer, by its conduct, intended to alter its legal relationship with the insured — notwithstanding the fact that the insurer did not realize the legal significance of the facts or otherwise failed to appreciate the terms of its policy with the insured.

The proposed duty to investigate thoroughly and diligently is rejected. It is at odds with the duty owed to the insured to investigate fairly, in a balanced and reasonable manner. There is no basis in law for a third-party claimant to be able to ground an estoppel argument in any alleged breaches of an insurer’s duty to its insured. The duty to investigate fairly, in a balanced and reasonable manner, is owed only to the insured, not third parties. Were such a duty owed to third parties, it would sit uneasily, and indeed would undermine the duties of utmost good faith and fair dealing that govern the relationship between the parties to insurance contracts. The obligations between the insurer and the insured are reciprocal; while the insurer has a 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. To allow third‑party claimants to piggy‑back onto the relationship between insurer and insured would effectively mean that a contract of liability insurance provides greater protection to, and imposes fewer (indeed, no) obligations upon, third parties than it provides to and imposes upon the first‑party insured.

In the instant case, RSA, the promisor, could not intend to alter a relationship by promising to refrain from acting on information that it did not have. If RSA is to be taken, by having furnished a defence, as having intended to affect a relationship with B by extending coverage notwithstanding D’s breach, it must be shown to have known of the facts which demonstrate that breach. However, RSA lacked knowledge, at the time it provided a defence to D’s estate, of D having breached the policy by consuming alcohol. This is fatal to the argument that RSA is estopped from denying coverage. As for imputed knowledge, had RSA known of the fact that demonstrated D’s breach (that he had consumed alcohol prior to the accident) but failed to appreciate its legal significance (that this was a breach), knowledge of that legal significance could have been imputed to RSA. But when RSA defended D’s estate, it did not know of the fact of his consumption of alcohol prior to the accident. Knowledge of the facts demonstrating D’s breach cannot be imputed to RSA, and RSA therefore cannot be taken to have intended to assure D’s estate, or B, or anyone else, that it would not be relying upon that breach to deny coverage. While RSA was under a duty to D to investigate the claim against him fairly, in a balanced and reasonable manner, RSA was under no additional duty to B or other third‑party claimants to investigate policy breaches at all, much less on a different and more rigorous standard than that owed to its insured.

Per Karakatsanis J.:

There is agreement that the appeal should be dismissed and with much of the majority’s legal analysis. However, there is disagreement that the element of promissory estoppel that requires an intention to vary legal rights requires the promisor’s actual knowledge of the facts underlying the legal right.

The jurisprudence has long established that the intent of the promisor in promissory estoppel must be interpreted objectively, based upon their words or conduct: a promise is intended to be binding when it would be reasonable for the promisee to interpret it as such. The objective approach considers whether, viewed objectively in light of the full context and including all the facts that the promisor knew or reasonably can be taken to have known, the promisor intended to alter legal rights. There are important doctrinal reasons to focus on the reasonable interpretation of the promisor’s conduct, and not on their subjective intent or actual knowledge. Promissory estoppel responds to inequity and reliance. Inequity is found where the promisor acted in such a way that the promisee reasonably interpreted the words or conduct as a promise and the promisee changed their position as a result. The person who relies on the promisor’s words or conduct should be able to rely on the entire context, including what the promisor could reasonably be assumed to know.

A promisor cannot resist promissory estoppel by claiming that they only had knowledge of the facts but not their legal rights. The jurisprudence imputes knowledge of legal rights precisely because it would be inequitable for the promisor to resile where their conduct can reasonably be interpreted as an intention to change legal relations.

Given that the analysis does not focus on the subjective intent of the promisor, there is no absolute requirement that the promisor have knowledge of their legal rights or the underlying facts giving rise to those rights in every case. Instead, knowledge is relevant because it is part of the context informing the objective interpretation of the promisor’s words or conduct. Because the intention of the words or conduct must be assessed objectively, both what the promisor knew and what they reasonably ought to have known are relevant.

In the instant case, there is agreement with the majority that RSA’s conduct cannot be interpreted as an unequivocal assurance that RSA would continue to provide coverage even if the policy was void. RSA’s continued coverage did not signify any intent to change legal relations. B cannot succeed in establishing promissory estoppel because RSA did not make a promise or assurance that can be reasonably interpreted as intending to alter legal relations.

Reasons for judgment: Moldaver and Brown JJ. (Wagner C.J. and Côté, Rowe and Kasirer JJ. concurring)

Concurring Reasons: Karakatsanis J.

Neutral Citation: 2021 SCC 47

Docket Number: 38949