Relief From Forfeiture Denied in Late Notice Case
The case of Searles v. Economical Insurance, 2022 ONSC 7217, involves a dispute between the applicant homeowners and their insurer, Economical, regarding a request for reimbursement of defence costs. The applicants provided notice of an action almost seven years after the commencement of the action.
History of the Litigation
The applicants sold their home in 2011, when the Economical home insurance policy was in force.
The applicants were then sued in 2013 by the purchasers of their home for damages arising from defective renovations to the home that the applicants performed or oversaw. The applicants retained a lawyer to defend the action. Affidavits of documents were exchanged and examinations for discovery were completed by 2015.
At a pre-trial conference in June 2020, the pre-trial judge suggested that insurance coverage might be available. In July 2020, the applicants put Economical on notice and requested coverage, almost seven years after the action was issued.
In August 2020, Economical denied coverage, alleging the applicants had breached the insurance policy’s notice and cooperation conditions.
In October 2021, the underlying action settled, without any admission of liability and without any involvement by the insurer.
Over the course of the underlying action, the applicants incurred $56,578.60 in legal fees and disbursements. Of this amount, $30,308.22 were post-tender defence costs incurred after they gave notice to Economical in July 2020 and $26,270.38 were pre-tender defence costs.
Positions of the Parties
The applicants sought a declaration that Economical was required to reimburse them for the entirety of their incurred legal costs.
Economical disputed this position, arguing that the seven-year delay in providing notice breached the insurance policy’s notice of accident and cooperation conditions. It acknowledged that but for the late notice, the action would have triggered a duty to defend the action.
In response, the applicants argued that this late notice constituted imperfect compliance and that relief from forfeiture should be granted.
Legal Principles
Under s. 129 of the Insurance Act the Court has the power to grant relief from forfeiture arising from “imperfect compliance with a … matter or thing required to be done or omitted by the insured with respect to the loss…”[1]
Furthermore, s. 98 of the Courts of Justice Act provides that a court may grant relief from forfeiture on such terms as are just.[2]
The Court also reiterated that “the purpose of relief from forfeiture is to prevent hardship despite a failure to comply with a condition where leniency in respect of strict compliance will not result in prejudice to the insurer”.[3]
In exercising its discretion, the decisions of Kozel v. Personal Insurance Co., 2014 ONCA 130 and Monk v. Farmers’ Mutual Insurance Company (Lindsay), 2019 ONCA 616hold that a court must consider three factors:
- the conduct of the insured,
- the gravity of the breach, and
- the disparity between the value of the property forfeited and the damage caused by the breach.[4]
The Court noted that not all three factors are required to be established and that, given the discretionary nature of the relief, all of the relevant circumstances should be weighed.[5]
Decision
Justice Roger found that the applicants breached the insurance policy provisions relating to notice and cooperation and that such policy breaches represent imperfect compliance.
His Honour also found that given the imperfect compliance, relief from forfeiture may be argued and sought for the legal costs incurred both before and after the applicants provided notice of the claim.
However, relief from forfeiture was not available to the applicants and the application was dismissed.
Analysis
Justice Roger found that the applicants breached the notice and cooperation conditions of the policy which required notice to be given “promptly”. His Honour noted that the ordinary meaning of “promptly” refers to something that is done without delay or immediately.[6]
His Honour considered the three factors set out in the jurisprudence for granting relief from forfeiture. He held that the first factor (conduct of the insured) weighed in favour of the applicants, but the second factor (gravity of the breach) and third factor (disparity between value forfeited and damage caused by the breach) weighed in favour of Economical.
Regarding the first factor of the conduct of the insured, Economical acknowledged that the applicants’ delay in reporting was inadvertent and that their conduct was reasonable.[7]
On the second factor, Justice Roger found that the applicants had failed to establish that the breach was not grave. His Honour concluded that due to the seven-year delay, Economical was deprived of its right to select counsel for all steps in the litigation and deprived of its opportunity to investigate the loss by conducting inspections of the property or retaining adjusters or experts, amongst other grounds.[8]
Turning to the third factor of the disparity between the value of the property forfeited and the damage caused by the breach, Justice Roger noted that while the applicants stood to forfeit a considerable amount, they failed to sufficiently prove that indemnity and legal costs were not aggravated by their late notice and that had Economical taken over the defence, Economical could have taken steps and positions that would have mitigated the indemnity and legal costs incurred.[9]
For the sake of completeness, Justice Roger addressed a sub-issue raised by Economical that the pre-tender defence costs would not be recoverable even if relief from forfeiture was granted, as per the decision in Lloyd’s Underwriters v. Blue Mountain Log Sales Ltd., 2016 BCCA 352.
However, Justice Roger disagreed and found the reasoning in the recent Ontario Superior Court decision in Loblaw Companies Limited v. Royal & Sun Alliance Insurance Company of Canada, 2022 ONSC 449, to be more compelling. In that case, the court determined that relief from forfeiture is applicable to pre-tender defence costs.[10]
Conclusion and Takeaways
At its broadest, this decision serves as a reminder for insureds to not delay in putting insurers on notice of claims and potential claims.
Especially in situations of a lengthy delay in providing notice, the court may find that the insurer has been prejudiced, such that relief from forfeiture is not available.
This decision also indicates that insureds may seek relief from forfeiture for both pre and post-tender defence costs.
[1] Insurance Act, R.S.O. 1990, c. I.8, at s129.
[2] Courts of Justice Act, R.S.O. 1990, c. C.43, at s98.
[3] Searles v. Economical Insurance, 2022 ONSC 7217, at para 32.
[4] Ibid, at para 33.
[5] Ibid, at paras 34-35.
[6] Ibid, at para 10.
[7] Ibid, at para 43.
[8] Ibid, at para 44.
[9] Ibid, at paras 45-47.
[10] Loblaw Companies Limited v. Royal & Sun Alliance Insurance Company of Canada, 2022 ONSC 449, at paras 119-125.