Fraud
A finding of fraud is very important as it will allow the insurer to defeat the incontestability period of two years. It is again irrelevant with respect to group disability policies.
Case law dealing with the defence of fraud in disability applications are few.
The British Columbia Supreme Court considered such a defence 1 in a claim made on a life insurance policy which is instructive of general principles. The insured had failed to reveal to the insurer her history of alcoholism, treatment for this disease and acute labyrinthitis.
The court noted that the insurer must prove the alcoholism was a material consideration to the risk, the test for which was stated as whether such an issue would be considered as material to the risk, viewed objectively.
Finch, J. reviewed the judicial history of the word “fraud” in insurance cases and noted at one time it could be interpreted in a broad sweeping fashion to include one made innocently and lacking a fraudulent intent.
This definition, the court noted, has given way to the requirement to prove actual fraud. The test to be applied was hence determined to be the actual intent to defraud, made knowingly to be false.
Typically an allegation of fraud in a civil case requires a higher standard. The Court spoke to this issue:
Fraud, as defined for these purposes, must be proven by the defendant insurer on the balance of probabilities, the ordinary civil standard of proof:….However, the seriousness of the conduct alleged is a circumstance to be considered in determining whether the matter has been sufficiently proven. 2
In this case, the court found a misrepresentation was made, but that there was no fraudulent intent:
On the facts as I have found them, fraud has not been proven in this case. There has been misrepresentation and non-disclosure of material facts. But I am not satisfied that the insured did this knowingly, or recklessly, so as to fix her with a fraudulent intent. It is just as likely, in my view, that the insured relied on Dr. Little for the completion of the original application, and was lulled by her reliance on him into an innocent belief that all relevant medical history had been fully and accurately disclosed.
The decision was upheld on appeal.
The Ontario Court of Appeal considered this question in its June 2001 decision. 3The trial judge, whose decision was reversed on appeal, found that there had been misrepresentations as to income and medical status, but had failed to make a finding of fraud and hence applied the incontestability clause to allow for the plaintiff’s action to succeed.
The misrepresentations with respect to the income of the plaintiff were the most telling. At the relevant date of the initial application and also subsequent reinstatement applications following lapses to the policy, Gregory had claimed an earned income of $100,000 and $90,000, which contrasted remarkably to the true sum of, at the most zero, and in considering his business losses, a negative number. The reality was that there was no earned insurable income.
Sharpe J.A. defined the test of civil fraud as that set out in Derry v Peek, which found that there must be a false representation which has been made:
- Knowingly; or
- Without belief in its truth; or
- Recklessly, careless whether it be true or false.
Essentially, to show a defence to the assertion, there must be proven “an honest belief in its truth”.4The court added that the motive of the guilty person is of no consequence in the application of the test. The innocent party need not prove an intention to cheat or injure.
The Court of Appeal agreed that the insurer had made out the test of the third branch and hence denied the applicability of the incontestability clause and dismissed the claim.
The Court also considered the obligation of the insured when applying for reinstatement of the policy and whether on these occasions, there was an affirmative duty on the insured to then disclose his earned insurable income was nil, particularly in this context in which the insurer did not request a written application.
The Court concluded that it would be inconsistent with “basic common law insurance principles” to allow an insured to withhold material facts which clearly relate to his insurability.
Sharpe J.A. did, however, add that generally speaking, the insurer’s failure to ask a pointed question may lead to the conclusion that such a subject matter is not considered by it to be relevant. Normally the failure of the insurer to request a written application for reinstatement would lead to the issue of the significance of undisclosed facts to be read in the interest of the insured. In this instance, however, the issue was fundamental to the application and decided against the plaintiff. 5
This defence was considered in the February 2012 decision of the Nova Scotia Supreme Court. 6
Fraud was required to be proven by the insurer as the Nova Scotia legislation allowed a misrepresentation to void a policy only for the two year period following its issuance. The policy was issued in May of 1993. The claim followed in October of 2000.
The insurer proved that the insured answered questions on the application falsely by not disclosing past medical issues, including chest pains, heart problems, headaches and migraines, epilepsy and seizures, anxiety, stress and back problems.
The Insurance Act required the insured to disclose “every fact within his knowledge that is material to the insurance”. This is typical of insurance legislation in all provinces in Canada.
As to the issue of what is a material fact, the court repeated the test as above. The court noted that this issue is a question of fact and one on which the burden rests on the insurer. It would be incontrovertible that the medical history of the insured, on these facts, must certainly meet this test.
The Court continued to review the test for fraud, which needless to say, is conduct which is something more than an innocent or negligent misrepresentation and applied the same test as set out above.
The insurer succeeded in the defence.