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August 9, 2016 - view full issue
Weeding out when a Homeowner Insured may be Entitled to Coverage
By Raman Johal
The recent case of Bahniwal v. The Mutual Fire Insurance Company of British Columbia, 2016 BCSC 422 demonstrates that a homeowner can have insurance coverage for property that houses a marijuana grow operation as long as they are not aware of the operation. We have written about Coverage for Marijuana Grow Operations before but the focus of this article concerns knowledge on the part of the insured homeowner and its impact on coverage.
Ms. Bahniwal and her husband owned property near Oliver BC where a number of structures were located, including a house and a storage facility with an attached living suite. The insureds did not live in the house or attached suite. Their tenant lived in the house and rented the attached suite. Following a fire on the property, the insurer determined that a marijuana grow operation was likely located in the attached suite and the insurer elected to void the insurance policy based on breaches of statutory conditions 1 and 4 of the policy.
Insurance policies are contracts of utmost good faith, meaning that both an insured and an insurer have a duty to act with the utmost good faith throughout the application process leading to the formation of a policy for insurance. An insured is required to disclose all material facts to the insurer upon making its application and at each renewal so that the insurer can accurately judge the risk being undertaken and fix the premium accordingly or chose to not take on the risk. If an insured fails in its duty to disclose, then the insurer will have the right to void the policy.
British Columbia's Insurance Act requires that a misrepresentation or non-disclosure (omission) in an application be material as a necessary precondition to avoiding the policy. The relevant provisions are found in statutory conditions 1 and 4 of the Act which is incorporated into all homeowner policies.
- If any person applying for insurance falsely describes the property to the prejudice of the insurer, or misrepresents or fraudulently omits to communicate any circumstance which is material to be made known to the insurer in order to enable it to judge of the risk to be undertaken, the contract is void as to any property in relation to which the misrepresentation or omission is material.
- Any change material to the risk and within the control and knowledge of the insured avoids the contract as to the part affected by the change, unless the change is promptly notified in writing to the insurer or its local agent; ...
These sections codify the common law rule that whether or not a misrepresentation or non-disclosure is material is always a question of fact. In other words, a court will not lay down general rules with respect to what types of facts are going to be found to be material. However, it is accepted that the insured must disclose special facts which render the risk of loss unusually greater. In each case, the court will look to all the facts, the parties and the policies in order to determine whether any particular representation or omission was material.
The burden of proving that the insured has breached its duty to disclose is placed upon the insurer. In order to satisfy this onus, the insurer must establish that:
- there has been a misrepresentation or an instance of non-disclosure;
- the misrepresentation or non-disclosure was material; and
- the insurer was induced to enter into the contract in reliance upon the misrepresentation or non-disclosure.
In Bahniwal, it was agreed by the parties that if a marijuana grow operation existed on the insured's rental property and the Bahniwals had knowledge of it, then a failure to disclose it while applying for or renewing insurance would constitute the failure to disclose a material fact.
In addition, the test for whether a fact is material or not is whether the fact would have influenced a "reasonable insurer" to decline the risk or to stipulate for a higher premium. The test places the burden of proof on the insurer to show that its own practice in considering that a misrepresentation is material to the risk is in line with the practice of a number of other insurers. Thus, an insurer should lead evidence to demonstrate that the fact in question is taken into account in the course of its own underwriting procedures as well as the underwriting procedures of other insurers.
The Vice President of Underwriting for the Bahniwals' insurer gave evidence that if the existence of a marijuana grow operation came to the knowledge of the insurer after a policy had been extended, the insurer would have voided the policy.
The critical issue was whether the insureds were aware of the marijuana grow operation on their rental property. Mr. Justice Joyce held that the Bahniwals did not have knowledge of the operation on their property based on the following factors:
- The Bahniwals were credible when they testified that they never smelled marijuana on the property and never saw anything out of the ordinary, despite attending the suite and going inside on two occasions;
- Despite the hydro account for the property being in the name of Mr. Bahniwal, it was accepted that he simply passed the bill off to the tenant without looking at it closely as the tenant was responsible for payment and always paid on time; and
- Despite being paid in cash by the tenant, Mr. Bahniwal offered a reasonable explanation for why he did not question this arrangement – because it benefited him to have cash to pay seasonal workers.
Despite denying the Bahniwals' property loss claim, the insurer was not required to pay punitive damages because the insurer exercised its right to investigate the fire and to come to the conclusion that there was a misrepresentation on the part of the insured. For a discussion on the need for insurers to conduct fair and effective investigations, see our article, Where There's Smoke, There May Not Be Fire.
The impact of this decision is that it protects homeowners from loss if their property is being used for activities that could jeopardize their insurance coverage as long as the homeowners can prove they were unaware of that activity. Owners of rental properties must merely show that they exercised "reasonable" care in monitoring the activities on their property. As a result, insurers may wish to undertake a more rigorous assessment of the practices of owners of rental properties to determine whether they have met the reasonableness test.