When determining whether a claim has been made under an insurance policy, substance trumps form. Such was the ruling in a recent Nova Scotia Court of Appeal case, Hants Realty Ltd v Travelers Guarantee Co. of Canada, 2014 NSCA 69.

The issue before the Court was whether a complaint filed with the Nova Scotia Real Estate Commission (the “Commission”) constituted a “claim” as defined in Hants Realty Ltd.’s professional errors and omissions policy.

The facts of the case were straightforward. An agent of Hants Realty Ltd. acted in the sale of a property in 2005. The purchaser experienced issues with getting running water to the property and filed a complaint with the Commission. The complaint stated, in part:

The realtor...did not disclose to me any info stating that I would run out of water.  

I am now thousands of dollars in the hole trying to get water.

I think the realtor should cover the cost that I’m going to have to pay to get water here.

Hants Realty Ltd. received a copy of the complaint but did not report it to its (then) professional liability insurer. Several years later, the purchaser commenced legal action against Hants Realty Ltd. alleging that $50,000 had been spent trying to get water to the property, which was now essentially valueless.

Hants Realty Ltd.’s insurer at the time the action was commenced took the position that it had no duty to defend. The insurer’s view was that the 2005 complaint to the Commission constituted a “claim” and that the policy specifically limited coverage to “claims” that were first made during the policy period.

The policy defined “claim” as a “written demand for damages or non monetary relief...against an Insured for a Wrongful Act committed by the Insured.”

What Constitutes a “Claim”?

The Court of Appeal agreed that the 2005 complaint to the Commission constituted a “claim”. In reaching this conclusion, the Court cited several leading cases on the meaning of “claim”, which stand for the proposition that substance rather than form is determinative when considering the definition of “claim,” that regard must be given to the reality of what the third party was communicating1, and that a claim is simply a communication of a third party’s intention to hold the insured responsible for damages.

With these common law principles informing its analysis, the Court then turned to the definition of “claim” in the policy and found that the 2005 complaint satisfied each element. While the complaint was informal and somewhat unspecific, it was in writing, it identified a wrongful act committed by the insured, and it demanded damages.

The insured argued that a complaint filed with a regulatory body with no jurisdiction to award damages was incapable of satisfying the common law and definitional requirement for a "claim” to demand “damages”. The Court disagreed holding that the substance of the claim did, in fact, contemplate damages.

Both insureds and insurers should note that when considering the definition of “claim,” the applicable test is an objective one. According to the Court of Appeal, Hants Realty Ltd. ought reasonably to have known that the phrase “...I think the realtor should cover the cost that I’m going to have to pay to get water here” was an indication of the Pattens’ intention to hold the agent (and thereby Hants Realty Ltd.) liable. It did not matter that the insured’s did not conceive of the complaint as a written demand for damages; the subjective beliefs of Hants Realty Ltd. or its agent regarding the complaint were not relevant.    

Take-aways

  • Substance trumps form. Unless prescribed in the policy, a claim need not be detailed or formal. A simple communication of a third party’s intention to hold the insured responsible for damages may constitute a claim.  
  • De-emphasis on formality in combination with an objective standard makes for a relatively low threshold for establishing a claim at common law.