The policyholder’s life insurance positive reporting obligation

This article appeared in the Winter 2023 issue of the Montréal Association of Insurance Women (MAIW) newsletter.

The authors comment on the decision in Croteau (succession De Roy) v. TD Compagnie d’assurance-vie, and the recent Superior Court decision in Kabeya v. Compagnie d’assurance-vie RBC, both of which addressed the principles of misrepresentation analysis in life insurance.

1. Croteau (succession De Roy) v. TD Compagnie d’assurance-vie¹

On October 21, 2020, the Superior Court ruled in favour of the defendant, TD-Compagnie d’assurance-vie (the “Insurer”), declared the life insurance policy of Mr. Stéphane Roy (the “Insured”) null and void ab initio and refused to pay the insurance benefit to the liquidator and former spouse of the Insured, the plaintiff, Ms. Nancy Croteau [the “Plaintiff”), on the grounds that the Insured had made false declarations at the time the policy was taken out.

A. The facts

In July 2012, the Insured and the Plaintiff entered into a loan agreement with the Toronto-Dominion Bank (the “Bank”) following the purchase of a condominium. They were then offered the opportunity to purchase a Mortgage Critical Illness and Life Insurance policy.

The Insured filled out the insurance application as well as a more detailed questionnaire in which he specified that he was in the military, had high cholesterol, suffered from anxiety and depression related to post-traumatic stress disorder and indicated the prescribed medication. The Insurer then mailed a supplemental questionnaire to the Insured. However, since the Insured had moved, he never received the letter, and it was the Insurer’s understanding that the process had been abandoned.

Around the beginning of 2016, the Insured took out a new mortgage with the Bank and again completed a life insurance application covering the mortgage balance. He answered “yes” to one of the questions, and this led to a full investigation by the Insurer. A representative of the Insurer contacted the Insured and conducted a tele-interview to submit an additional medical questionnaire to him. The Insured disclosed that he suffered from osteoarthritis in his knee and anxiety and had been diagnosed with post-traumatic stress disorder; however, he did not mention his treatment for depression, his intestinal problems or the abnormal results he had received. He also said “no” with respect to receiving disability benefits.

As a result of this investigation process, the Insurer approved the mortgage life insurance, and the premium amount was set.

At the same time, the Insured completed three (3) credit applications with the Bank that reflected the fact that the Insured was receiving disability benefits.

On November 16, 2017, the Insured died accidentally. His will named the Plaintiff as universal legatee and liquidator, and she claimed the indemnity under the insurance policy. However, the Insurer refused the claim on the grounds that the Insured did not fully disclose the risks at the time of purchasing the policy and that he was not insurable.

B. The decision

The evidence showed that the Insured did not disclose the fact that he was suffering from major depression² or that he was receiving a disability pension³. Although his depression was reported in 2012, the Court noted that these were two (2) separate files and that it was not up to the Insurer to search its previous files to find information that the Insured should have disclosed⁴.

With respect to the disability pension, the fact that the Insured took out three (3) loans with the Bank between April 2016 and January 2017 and indicated that he was receiving a disability pension⁵ did not relieve him of his obligation to disclose this to the Insurer. Indeed, the Court specified that a distinction needed to be made between the “Bank” and the “Insurer” even though one might be the agent of the other. In this sense, the Insurer, not the Bank⁶, was solely responsible for analyzing the medical information and risk.

Furthermore, the Insured failed to disclose both his intestinal problems for which he had consulted multiple times in recent years⁷ and the abnormal test results⁸.

As to the materiality of the inaccurate information, the evidence submitted by the Insurer was categorical that the information was relevant and would have caused a reasonable insurer to decline covering the risk⁹.

In light of the misrepresentations and their materiality, the Court concluded that the insurance policy was void ab initio and that the premiums paid should be refunded¹⁰. 

2. Kabeya v. Compagnie d’assurance-vie RBC¹¹

On March 28, 2022, the Superior Court ruled in favour of the defendant, Compagnie d’assurance-vie RBC (the “Insurer”), which had refused to pay Mr. Lebon Kabeya (the “Plaintiff”) the term life insurance benefit under the policy purchased by his son, Fiston Kabeya (the “Insured”), due to misrepresentations about his citizenship status.

A. The facts

The Insured was a citizen of the Democratic Republic of the Congo. On or about November 6, 2015, he arrived in Canada as a refugee claimant.

On December 4, 2015, the Insured opened a Newcomer Bank Account with RBC Bank (the “Bank”) and his Citizenship/Immigration Canada card certifying his status as a refugee claimant was registered in his file.

On July 5, 2016, the Insured completed a simplified application for term life insurance with the Insurer in the presence of two (2) insurance advisers. The Insured answered “yes” to the question “Are you a Canadian citizen?”. The Insured also answered “no” to the questions regarding stay or residence outside of Canada within the last twelve (12) months. The Insured named the Plaintiff as the beneficiary of his policy. This policy was issued the same day and the terms were accepted on August 30, 2016.

On May 18, 2017, the Insured died of natural causes at the age of 27.

During the claim process initiated by the Plaintiff, the Insurer was informed that the Insured was not a Canadian resident, but rather a foreign worker residing in Canada under a temporary work permit. The Insurer notified the Plaintiff that his claim had been denied and terminated the insurance policy because of the Insured’s misrepresentation and refunded to the Insured’s estate the insurance premiums that had been paid.

On August 3, 2018, the Plaintiff commenced an action against the Insurer and sought payment of the $150,000 benefit he believed was due under the term life insurance policy purchased by his son. The Plaintiff argued that it was the insurance advisers who made an error when completing the questionnaire and that if the Insurer had used a fuller hard copy of the questionnaire rather than a simplified one, it would have obtained the necessary information to assess the risk. He also claimed that the Insurer could easily have checked to find out whether the Insured was a citizen. 

For its part, the Insurer pleaded that the advisers had acted in accordance with applicable standards and completed the application based on the information disclosed by the Insured. Thus, if it had known the true status of the Insured at the time the policy was taken out, the risk would have been declined.

 B. The decision 

In his reasoning, the judge considered that the question put to the Insured was in no way ambiguous¹². Moreover, the Insured was an educated man, and it was therefore unlikely that he did not understand the question being asked¹³. Thus, even if the Insured could have thought that the Insurer had access to his records since his bank account was with the Bank and the Bank was likely aware of his status as an asylum seeker, this did not constitute an excuse to falsely answer the questions asked¹⁴.

With respect to the use of an electronic questionnaire for a simplified application, the evidence showed that this is a common practice in the insurance industry in a situation such as the one in this case¹⁵.

In addition, the preponderance of expert evidence was that disclosure of the Insured’s status as a temporary worker at the time he took out the policy would have led to the immediate denial of his insurance application. A policyholder who is neither a Canadian citizen nor a permanent resident would have been directly refused. This policy was consistent with that of the industry.

The judge found that the Insured incorrectly answered the citizenship question and the questions on stay and residence outside of Canada within the last twelve (12) months¹⁶. By answering these questions in the negative, the Insured misled the Insurer and therefore did not produce the red flag that would have triggered an investigation procedure¹⁷. The Insurer had no reason to conduct additional checks and review the Insured’s records¹⁸. An Insurer must be able to rely on the good faith and diligence of an Insured if the answers do not raise valid grounds for additional verification¹⁹.

Regardless of intent, the Insured made a misrepresentation to the Insurer²⁰ concerning his citizenship status, and this information had the potential to materially influence the insurer’s decision as to whether it should accept the risk²¹. In sum, the Court found that the Insurer was justified in requesting the nullity ab initio of the insurance policy pursuant to Article 2410 C.C.Q., in refunding the premiums paid to the Insured’s estate and in rejecting the Plaintiff’s claim²².

Authors’ comments

These two (2) decisions remind us of the principles set out in case law and the law to the effect that a policyholder must fulfil in good faith and in an honest and truthful manner his or her obligation to disclose risks to an insurer. The insurer is entitled to rely on the statements made by the insured and does not have to undertake any investigation to ensure their veracity when the answers provided do not justify such a step. In this sense, imposing an obligation to investigate on an insurer would have run counter to the fundamental principle that good faith governs the parties to an insurance contract.

In addition, the Croteau decision confirms the teachings of the Court of Appeal in Falduto v. Compagnie d’assurance vie Federated du Canada²³ to the effect that an answer appearing in a previous application cannot excuse a subsequent misrepresentation when two different applications are involved. The same logic must apply when information has been disclosed to a banking institution that is closely related to the insurance company. Indeed, as stated by the Honourable Daniel Dumais, J.S.C., it is essential to distinguish between the “bank” and the “insurer” even if one may act as an agent of the other, because the processing and analysis of medical information are the responsibility of the Insurer and not the Bank²⁴.

In sum, it appears that recent case law fully recognizes the positive reporting obligation of the insured and/or the policyholder when taking out an insurance policy.

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¹ 2020 QCSC 3539.
² Ibid., at paras. 50 and 51.
³ Ibid., at para. 55.
⁴ Ibid., at paras. 52–54.
⁵ Ibid., at para. 56.
⁶ Ibid., at para. 57.
⁷ Ibid., at para. 58–91.
⁸ Ibid., at para. 62 et seq.
⁹ Ibid., at para. 87.
¹⁰ Ibid., at paras. 95 and 96.
¹¹ 2022 QCSC 1035.
¹² Ibid., at para. 79.
¹³ Ibid., at para. 80.
¹⁴ Ibid., at para. 82.
¹⁵ Ibid., at paras. 89 and 90.
¹⁶ Ibid., at paras. 97 and 98.
¹⁷ Ibid., at para. 99.
¹⁸ Ibid., at para. 93.
¹⁹ Ibid., at par. 22.
²⁰ Ibid., at para. 101.
²¹ Ibid., at paras. 107 and 108.
²² Ibid., at para. 109.
²³ 2008 QCCA 438 (Application for leave to appeal to the Supreme Court dismissed).
²⁴ Ibid., at para. 57.