At our weekly meeting, Michael Kryworuk discussed the Supreme Court of Canada’s decision in Trial Lawyers Association of British Columbia v. Royal & Sun Alliance Insurance Company of Canada, 2021 SCC 47. This decision addressed the issue of promissory estoppel in the context of insurance coverage disputes.
History of the Litigation
In May 2006, there was a motor vehicle accident involving parties Bradfield, Caton, and Devecseri. Devecseri died in the accident. Shortly thereafter, Bradfield and Caton each pursued claims against the estate of Devecseri. Devecseri’s insurer, Royal & Sun Alliance (“RSA”), proceeded to defend the estate in the two lawsuits.
Three years after the accident, and more than a year into litigation, RSA discovered that Devecseri had consumed alcohol immediately before the accident, putting him in breach of the terms of his license, and therefore of his insurance policy. RSA stopped defending Devecseri’s estate, and denied coverage.
When Caton’s action against Devecseri went to trial, judgement was awarded against Devecseri’s estate as well as the co-defendant, Bradfield. There was also a judgment in favour of Bradfield on his crossclaim against the estate of Devecseri.
Bradfield then sought a declaration allowing him to recover judgment against RSA on the basis that the insurance company had waived Devecseri’s breach of his policy, and/or was estopped from denying coverage to Devecseri’s estate.
The trial judge granted the declaration, finding that RSA had indeed waived its right to deny full coverage by failing to take an off-coverage position, and by providing a defence to Devecseri’s estate as the litigation progressed. Having found waiver by conduct, the trial judge did not consider the estoppel argument.
The Ontario Court of Appeal, however, allowed RSA’s appeal, finding that at the relevant time, Ontario’s Insurance Act precluded recognition of waiver by conduct, and that Bradfield had not satisfied the requirements to establish the equitable defence of promissory estoppel. The Court of Appeal held that RSA’s conduct could not amount to a promise or assurance which was intended to affect the parties’ legal relationship, as RSA had lacked knowledge of Devecseri’s policy breach when it provided him with a defence.
Bradfield then sought leave to appeal this decision to the Supreme Court of Canada, but after being granted leave, he settled with RSA and dropped his appeal. The Trial Lawyers Association of British Columbia “BC TLA” was permitted to be substituted as the appellant.
The Legal Test:
The constituent elements of the equitable defence of promissory estoppel were stated by Sopinka J at para 57 of Maracle v. Travellers Indemnity Co. of Canada,  2 S.C.R. 50. The defence requires that:
- the parties be in a legal relationship at the time of the promise or assurance;
- the promise or assurance be intended to affect that relationship and to be acted on; and
- the other party in fact relied on the promise or assurance to its detriment.
The majority decision written by Justices Moldaver and Brown (joined by CJ Wagner, and Justices Rowe, Cote and Kasirer) dismissed the appeal because the grounds for promissory estoppel were not made out. They held that RSA could not have intended to alter its legal relationship with its insured or Bradfield, because it lacked actual knowledge of the insured’s policy violation when it commenced its defence for Devecseri’s estate.
A concurring decision was written by Justice Karakatsanis, who would have also dismiss the appeal. However, she disagreed with the majority on their holding that it follows from the requirement for promissory estoppel that the promise be intended to vary the legal rights of the parties requires the promisor’s actual knowledge of the facts underlying the legal right.
In summary, the appeal was dismissed, and each party was ordered to bear their own costs.
The majority decision noted that in the insurance context, promissory estoppel arises most commonly where an insurer, having initially taken steps consistent with coverage, later denies coverage because of the insured’s breach of a policy condition, or the insured’s 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.
In the present case, Justices Moldaver and Brown held that RSA could not have intended by its actions in defending Devecseri’s estate to promise not to deny coverage due to Devecseri’s breach of the policy, because RSA did not know of Devecseri’s consumption of alcohol, which constituted the policy breach, at the time it provided the defence. Once RSA became aware of this breach, it was entitled to deny coverage.
The Majority held that this by itself was sufficient to dispose of the appeal. However, the majority decided to discuss what the court deemed “hurdles” that a third-party claimant must overcome in raising a successful estoppel argument against an insurer.
Following the Court’s previous ruling in Western Canada Accident and Guarantee Insurance Co. v. Parrott (1921), 61 S.Caton.R. 595, the Majority held that where an insurer is shown to have known of the facts demonstrating a breach, but failed to appreciate their legal significance (that there, in fact, was a breach), a trier of fact may impute such knowledge of the legal significance in this narrow instance.
For example, if RSA had known of the fact that Devecseri had consumed alcohol before the accident, but failed to realize this was a breach of his policy, the Court would infer that RSA knew of its right to deny coverage while intending to assure the Devecseri that it would not act on such a right.
However, the majority said this line of jurisprudence was of no assistance to the appellants, because RSA had no knowledge of the fact of the breach of the insured’s policy conditions until after the litigation had significantly progressed.
The BC TLA argued that RSA constructively knew of Devecseri’s breach, on the basis that RSA bore a duty to the insured, Devecseri, to “diligently” and “thoroughly” investigate the claim against its insured.
The Majority rejected this argument for two reasons. First, the Majority held that this would involve a “significant” and “unwise and unnecessary” modification of the obligation to investigate a claim that an insurer owes to the insured in the context of a liability claim.
In its previous jurisprudence, the Court, for public policy reasons, sought to temper the economic incentives of insurers to deny coverage, and to actively look for policy breaches to warrant denying coverage. As a result, the current state of the duty to the insured is to investigate each claim “fairly” and in a “balanced and reasonable manner”.
In the opinion of the Majority, raising the standard for investigation of a claim to the level suggested by the BC TLA would disadvantage insureds by providing insurers with greater license and economic incentive to look for reasons to deny coverage.
Second, the Majority held that there was no basis in law for a third-party claimant (such as Bradfield) to be able to ground an estoppel argument in an alleged breach of an insurers’ duty to the insured. The duty to investigate a claim fairly is a duty that is owed to the insured only.
The Court warned that were such a duty to be owed to third parties it would undermine “the duties of utmost good faith and fair dealing that govern the relationship between the parties to an insurance contract”.
Limits of Statutory Relationship:
The TLA argued that Bradfield as a third party claimant was in a legal relationship with RSA by virtue of language relating to third-party claims in s. 258 of the Insurance Act.
Section 258 of the Insurance Act states that:
“Any person who has a claim against an insured for which indemnity is provided by a contract evidenced by a motor vehicle liability policy, even if such person is not a party to the contract, may, upon recovering a judgment therefor in any province or territory of Canada against the insured, have the insurance money payable under the contract applied in or towards satisfaction of the person’s judgment and of any other judgments or claims against the insured covered by the contract and may, on the person’s own behalf and on behalf of all persons having such judgments or claims, maintain an action against the insurer to have the insurance money so applied.”
The Appellants argued that the statutory language in s. 258 allowed Bradfield to assert a right of coverage as against RSA, both on his own behalf and by standing the in shoes of Devecseri’s estate.
While the Majority agreed that the section did create a legal relationship between Devecseri and RSA, the majority pointed out that such legislation allows a third-party claimant to sue an insurer only upon recovering a judgement from the insured. In the present case, RSA abandoned its defence of Devecseri three years before Bradfield obtained its cross-claim judgment against him, at which point there was no legal relationship between RSA and Bradfield.
Furthermore, the Majority was skeptical of whether Bradfield, under the provisions of the Insurance Act, could assert an estoppel argument on behalf of Devecseri’s estate against RSA as the BC TLA proposed. However, without further submissions, the majority declined to definitively decide this issue.
Assurance Regarding Coverage:
The Appellants argued that RSA’s fulfillment of its various statutory obligations and its duty to defend constituted a “clear and unequivocal” or “unambiguous” assurance that it would refrain from denying coverage based on a later-revealed policy breach.
However, the Majority firmly rejected this position, finding that RSA’s duty to defend Devecseri and his estate was triggered not by RSA being satisfied Devecseri was not in breach, but simply by the receipt of the claim which if true would require the insurer to indemnify the insured for the claim.
At the initial stages of a dispute, an insurer may decline to defend the insured only where there is a known policy breach, the type of claim is expressly excluded, or where it is clear that the true nature of the facts fall outside the scope of the policy.
The Majority held that when an insurer responds to a claim by defending its insured, it is communicating to the insured and the third-party claimant only that the claim against its insured falls within the scope of coverage under the policy. “In no sense can such a limited communication, without more, be taken as a promise to indemnify the claimant if the insured is found at fault, irrespective of any later‑revealed or later‑occurring policy breaches.”
A final hurdle for the Appellants would lie in establishing detrimental reliance. The Majority affirmed that detrimental reliance by the promisee must be shown in order to establish promissory estoppel.
In this case, the Court did not need to determine whether detrimental reliance was made out. However, it cautioned that arguments to the effect that detrimental reliance can be based on presumed prejudice due to the advanced stage of the underlying litigation should distinguish between whether the claimant is a first-party or third-party claimant, vis-à-vis the insurer.
Justice Karakatsanis ultimately agreed with the majority that the appeal should be dismissed.
However, her point of disagreement with the Majority stemmed from their finding that the requirement for promissory estoppel of an intention to vary the legal rights of the parties necessarily requires the promisor to have actual knowledge of the facts underlying the legal right.
Furthermore, Karakatsanis J found the Majority’s distinctions between “imputed knowledge” and “constructive knowledge” unhelpful. 
Instead, Justice Karakatsanis posited that the intent of the promisor in promissory estoppel cases 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. This 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.
Despite this, Karakatsanis agreed with the majority that RSA’s conduct could not be interpreted as an unequivocal assurance they would continue to provide coverage even if the policy was breached. Nor did RSA’s continued coverage until it discovered the breach signify any intent to change legal relations between the parties.
Overall, this case provided valuable clarification regarding the applicability of the equitable defence of promissory estoppel in the insurance context, and particularly as it relates to third-party claimants to a policy.
The majority of the Court found that the determination of whether there was a promise or assurance by an insurer to affect or alter the legal relationship with its insured, will focus entirely on what actual facts and knowledge are within the possession of the insurer.
Furthermore, the Court has introduced a number of “hurdles” that may make the defence of promissory estoppel harder for third-party claimants to make out.
 Trial Lawyers Association of British Columbia v. Royal & Sun Alliance Insurance Company of Canada, 2021 SCC 47, at para 15.
 Ibid at paras 25-26.
 Ibid at paras 33-34.
 Ibid at para 35.
 Ibid at paras 46-47.
 Ibid at para 48.
 Ibid at para 72.
 Ibid at paras 68, 80