Republished with permission from the Insurance Brokers Association of Alberta’s magazine The Alberta Broker (February/March 2022)
What happens when an insurer initially defends an insured in relation to an accident but learns more than a year into the litigation that its insured had consumed alcohol just prior to the accident, in breach of his policy of insurance? Is the insurer estopped from denying coverage once they learn of the breach because they had previously defended their insured?
The Supreme Court of Canada has recently rendered a helpful decision on the issue of waiver and estoppel in Trial Lawyers Association of British Columbia v Royal & Sun Alliance Insurance Company of Canada, 2021 SCC 47 (“Trial Lawyers”).
In Trial Lawyers, Mr. Steve Devecseri (“Devecseri”) died in a motorcycle accident in 2006. His insurer was Royal & Sun Alliance Insurance Company of Canada (“RSA”). RSA investigated the accident and were unaware that alcohol played a role in the collision. RSA did not obtain a copy of the coroner’s report as part of its investigation.
RSA defended Devecseri’s Estate against two lawsuits started by Mr. Caton (“Caton”) and Mr. Bradfield (“Bradfield”) who were injured in the accident. Several years after the accident and over one year into the litigation, RSA learned that Devecseri had consumed alcohol immediately prior to the accident, which put him in breach of his insurance policy. RSA ceased defending Devecseri’s Estate and denied coverage. This reduced the $1 million policy limit available to pay to Bradfield and Caton to the statutory minimum coverage of $200,000. Several additional years later, the third parties obtained judgments at trial against Devecseri’s Estate.
Bradfield sought to enforce his judgment against Devecseri’s Estate. He rejected RSA’s position that the Estate was confined to the statutory minimum limits of $200,000 on two grounds: (1) waiver by conduct on the part of RSA, or (2) promissory estoppel.
The trial judge agreed that RSA had waived its right to deny coverage. The Ontario Court of Appeal (“ONCA”) rejected both grounds. The ONCA held that “RSA’s conduct could not amount to a promise or assurance which was intended to affect the parties’ legal relationship and be acted on because RSA lacked knowledge of Mr. Devecseri’s policy breach when it provided him with a defence.” This was despite the fact that the coroner’s report, which was available not long after the accident, would have provided RSA with evidence of the breach.
Bradfield appealed to the Supreme Court of Canada (“SCC”), advancing both waiver by conduct and promissory estoppel arguments. However, s. 131(1) of the Insurance Act, as it read at the relevant time, required that waiver must be given in writing. As RSA did not waive any rights in writing, the appellant conceded that waiver by conduct was not actionable on these facts. As such, the sole issue that proceeded before the SCC was whether RSA was estopped from denying coverage because it defended the claims against Devecseri’s Estate before it was aware of the policy breach.
Promissory estoppel is an equitable defence whose elements were stated by the SCC in Maracle v Travellers Indemnity Co. of Canada,  2 S.C.R. 50 (“Maracle”) as follows:
“The principles of promissory estoppel are well settled. The party relying on the doctrine must establish that the party has, by words or conduct, made a promise or assurance which was intended to affect their legal relationship and to be acted on. Furthermore, the [promise] must establish that, in relation on the [promise], he acted on it or in some way changed his position. [Emphasis added]”
The SCC held that the promissory estoppel argument against RSA failed, because RSA gave no promise or assurance intended to affect its legal relationship with Bradfield. RSA lacked knowledge of the policy breach when it defended Devecseri’s Estate. RSA was under no duty to Bradfield or other third party claimants to investigate policy breaches on a different or more rigorous standard than that which it owed its insured.
The SCC also noted the following key issues that Bradfield had to contend with in raising a successful estoppel argument against RSA:
As noted above, to support promissory estoppel, a promise or assurance must be intended to affect the parties’ legal relationship. This signals that the promisor must know of the facts which give rise to the legal relationship and the alteration of those facts. Prior SCC cases speak of intention, not knowledge. But the significance of intention depends on what the promisor knows. A promisor, such as RSA, cannot intend to alter a relationship by refraining from acting on information it does not have. As RSA lacked knowledge of Devecseri’s breach, this is dispositive of the appeal.
(i) Imputed Knowledge
Promissory estoppel requires that RSA knew about the breach in order to be bound by any promise to cover notwithstanding the breach. Had RSA known that Devecseri had consumed alcohol prior to the accident but failed to appreciate its legal significance, namely that Devecseri was in breach of his insurance policy, knowledge of that legal significance could have been imputed to RSA.
(ii) Constructive Knowledge
The appellant argued that RSA constructively knew of Devecseri’s breach and therefore knew that which it ought to have known. This was based on RSA’s alleged breach of a duty to diligently investigate the claims against their insured.
The SCC held that an insurer owes a duty to its insured, not to a third party such as Bradfield, to investigate a claim fairly and in a balanced and reasonable manner and without being overzealous in its search for policy breaches. Had Devecseri survived, he would have owed a duty to RSA to disclose any information which he had which might have voided his coverage. If after receipt of this information, RSA still proceeded to provide Devecseri with a defence, Devecseri could have relied on this to prevent RSA from later changing its coverage position.
The SCC held that detrimental reliance by the promisee must be shown to assert promissory estoppel, along with evidence of prejudice, inequity, unfairness, or injustice before a court will hold a promisor to its promise or assurance.
The SCC dismissed the appeal without costs to either party.
Waiver by conduct is precluded by the Insurance Act in British Columbia as it read at the time unless the insurer specifically provides the waiver in writing.
An insurer can deny coverage, despite having defended claims against its insured, when it does not know of its insured’s policy breach.
 Trial Lawyers Association of British Columbia v Royal & Sun Alliance Insurance Company of Canada, 2021 SCC 47 at para 15 (“Trial Lawyers”)
 Ibid., at para 18.
 Ibid, at paras 21-22.
 Ibid, at para 24.
 Ibid., at paras 32-39.