Both insurers and the insured have a duty to transact with one another in utmost good faith. This duty exists throughout the entirety of their relationship, but is most pronounced at the application stage (where the insurer is vulnerable) and the claims stage (where the insured is vulnerable).[1]
In Estate of Donald Farb v. Manulife, the Ontario Superior Court of Justice considered the insured’s duty of utmost good faith during a telephone application for travel insurance.
The facts
As is common in the travel insurance industry, Mr. Farb applied for travel insurance through a telephone interview with Manulife. During this phone interview, Mr. Farb provided false information regarding the amount of medication he was taking and whether he was being treated for a kidney disorder. Over the course of the interview, Manulife’s agent typed Mr. Farb’s answers into an insurance application form and, following the interview, delivered copes of the form to Mr. Farb so he could review and correct any misinformation. Mr. Farb did not correct the application form.
While travelling in Florida, Mr. Farb unexpectedly became ill and incurred over $130,000 in hospital expenses. Upon submitting a claim to Manulife, Manulife discovered the misinformation provided during Mr. Farb’s application and voided the policy for misrepresentation. Mr. Farb, via his estate, applied to the Ontario Superior Court of Justice to seek reimbursement of these hospital expenses from Manulife.
The case
The Estate argued that Manulife could not void an insurance policy based on an oral misrepresentation. According to the Estate, Statutory Condition 2, which is legislatively required to form part of accident or sickness insurance contracts in Ontario, suggests that only written misstatements contained in an insurance application could justify an insurer in voiding an insurance policy. Statutory Condition 2 reads as follows:
No statement made by the insured or person insured at the time of application for this contract shall be used in defence of a claim under or to avoid this contract unless it is contained in the application or any other written statements or answers furnished as evidence of insurability. [emphasis added][2]
The Estate’s position finds some support in the Insurance Act, which includes provisions that protect consumers from the harsh sanctions for misstatement by (a) requiring the insurer to provide the insured a copy of both the application and the policy;[3] (b) in the case of auto insurance, prohibiting the cancellation of coverage for alleged misstatements that are not within a “signed written application”;[4] or, in the case of accident and sickness insurance, prohibiting the cancellation of coverage for alleged misstatements that are not contained in “an application or any other written statements or answers”.[5]
In response, Manulife argued that an “application” within the meaning of Statutory Condition 2 need not be in writing; that a phone application would suffice. Justice Belobaba rejected this position because such an interpretation would undermine the safeguards in the Insurance Act that are intended to protect consumers. However, Justice Belobaba held that Manulife was entitled to void Mr. Farb’s policy in this case since Manulife had prepared a written application based on Mr. Farb’s phone interview and delivered copies of the same to Mr. Farb for review and correction prior to the policy taking effect.
Takeaway
The Court’s decision provides helpful guidance to the travel insurance industry, particularly since in-person insurance applications have become the exception. A “written application” within the meaning of Statutory Condition 2 includes a telephone application if the insurer types the insured’s information into an insurance application and sends a copy to the insured prior to the insurance policy coming into effect. The Court’s decision also provides a strong reminder to consumers of the scope of their duty of utmost good faith during the application process. If an insured provides false or incorrect information in an application for insurance, he or she may not be able to avoid the consequences of such a misstatement simply because the misstatement was made orally. Indeed, where there is evidence that the insured had ample opportunity to review the oral information provided during the application process, a failure to correct misinformation
[1] MDS Inc. v. Factory Mutual Insurance Company, 2020 ONSC 1924 at para 661 citing Denis Boivin, Insurance Law, 2nd edition (Irwin Law: 2015), at p. 42.
[2] Insurance Act, RSO 1990, c I.8, s 300 (Statutory Condition 2).
[3] Ibid, s 293(1)(b).
[4] Ibid, s 233(3).
[5] Ibid, s 300 (Statutory Condition 2).
