In Searles v. Economical Insurance, Justice Pierre Roger heard an application for a declaration that Economical is required to reimburse them for their legal costs and for the amounts they paid to settle their action. The principal issue was whether relief from forfeiture should be granted to the applicants. Relief from forfeiture is an equitable remedy that is sometimes rooted in statute as well. The court has the power to excuse a party from the application of forfeiture which would otherwise operate against that party as a result of their failure to perform a covenant or a condition in a contract (such as breaching an insurance policy), or when a mistake has been made. In the insurance context, relief from forfeiture is set out in s.129 of the Insurance Act.
The applicants had a home insurance policy (the Policy) with Economical in effect at the time in question. They sold their home in 2011 and were sued by the purchasers over defective renovations. The action started in 2013 and instead of advising Economical of the existence of the claim against them, the applicants decided to defend their action personally. They did not provide notice of the action to Economical until 2020 – seven years after the action had started.
Economical took an off-coverage position on the basis that the delay breached the Policy. Economical also told the applicants that they would have been entitled to a defence and may have been entitled to indemnity if prompt notice of the action had been provided. The applicants ended up settling their action in 2021 for a full and final settlement in the amount of $47,500.00. They also incurred approximately $100,000.00 in legal costs in defending the claim brought against them. The applicants contend that they learned that their policy of insurance with Economical might have included coverage for this claim in 2020.
Justice Roger analyzed the Policy’s provisions concerning Economical’s right and duty to defend an action alleging a claim that comes within the coverage:
Coverage in the policy is also subject to the following limitation:
Notice of Accident or Occurrence: When an accident or occurrence takes place, you must promptly give us notice (in writing if required). The notice must include:
1. your name and policy number;
2. the time, place, and circumstances of the accident;
3. the names and addresses of witnesses and potential claimants.
Cooperation: You are required to:
1. help us obtain witnesses, information and evidence about the accident and cooperate with us in any legal action if we ask you;
2. Immediately send us everything received in writing concerning the claim including legal documents.
Unauthorized Settlements – Coverage E: You shall not, except at your cost, voluntarily make any payment, assume any obligations or incur expenses, other than first aid expenses necessary at the time of the accident.
Justice Roger considered the fact that such provisions were intended to be just protections for the insurer and not to be breached with impunity. He also analyzed the definition of “promptly” and, by reference to case law concerning a similar situation that considered whether the breach of such a condition was successfully alleged (Monk v. Farmers’ Mutual Insurance Company (Lindsay), 2019 ONCA 616), determined that the applicants had failed to give not only prompt notice but to cooperate, as was required under the Policy.
A breach was thus established, allowing Justice Roger to consider whether relief from forfeiture ought to be granted. Justice Roger made a number of other determinations that Insurers ought to take note of:
1. Relief from Forfeiture is applicable to pre-tender defence costs (i.e., costs incurred by an insured prior to them tendering the claim to their insurer) even where there is a breach of said policy since the entire point of Relief from Forfeiture is to protect against imperfect compliance with a statute or contract;
2. Taken from case law, in exercising a court’s discretion to allow Relief from Forfeiture they consider three factors, with the onus on the insured to prove it should be granted:
a. The conduct of the insured (whether it was reasonable, etc)
b. The gravity of the breach (the impact on the insurer’s contractual rights and any resultant prejudice, etc,) and;
c. The disparity between the value of the property forfeited and the damage caused by the breach.
While the applicants proved their conduct was reasonable, they failed to prove that the breach was not grave. Relevant considerations included that Economical was deprived of its right to select counsel for all steps in the litigation and investigate the loss. Furthermore, the home in question was sold off to a third party complicating a future inspection and already likely repaired in the seven years making any future inspection unhelpful and a co-defendant real estate agent had been released. With the third factor, the applicants could not provide evidence that the legal costs and indemnity were not aggravated by the late notice. Essentially, though they could show what the action had cost them, they could not show that this amount was not significantly greater than what it would have cost Economical to step in had compliance been made to the policy requirements.
In summary, in the event of a potentially insurable loss, insureds should seek to advise their insurer as soon as possible lest they risk being found in breach of policy. Relief from forfeiture might be available to an insured for losses arising from a breach of an insurance contract but the insured will have to be able to justify the basis for the breach and demonstrate that the insurer is not unduly prejudiced by the granting of relief from forfeiture. While having insurance is wise, making sure that availing oneself of it in the way intended by the policy is the smartest way to ensure coverage will be granted.