It is an understatement to say that insurance is part of our lives. Life insurance, disability insurance, home insurance, automobile insurance and third-party insurance—they are all part of a major economic activity that gives peace of mind to policy holders, who, in return, pay a premium on a monthly, annual or other basis. Insurance is therefore a private contract that binds both the insurer and the policy holder. In this article, we will provide an overview of the main rules that apply to insurance.

Risk

As an uncertain event in the future, a risk is the rationale for insurance. Death, disability, water damage, theft and accidents are all examples of risks that an insurer can agree to cover. Insurance is therefore an aleatory contract: Neither party knows in advance whether the insured risk will occur or not. Most of the time, it does not occur, and the insurer will pocket the premium without having to pay anything in return. However, sometimes the risk can materialize just once in a lifetime and be worth many times the premium paid during the coverage period. The insurer must therefore carefully assess the risk during the formation of the contract and when setting the premium that the policy holder will pay. To do so, the insurer must be able to rely on the policy holder’s declarations: It is inconceivable that the insurer would be required to investigate all the information and details related to a given risk. That would be an odd way to establish a contractual relationship.

The Policy Holder’s Duty of Disclosure

Since the insurer must be able to rely on the policy holder’s disclosures, the law requires the policy holder to disclose, “all the facts known to him which are likely to materially influence an insurer in the setting of the premium, the appraisal of the risk or the decision to cover it[1]”. In practice, the insurer often tells the policy holder what they want to know by asking questions about the matter in an interview or questionnaire. However, the policy holder’s legal duty does not stop there: He or she must go beyond the questions asked because the contract is said to be made in the “utmost good faith”. Policy holders must use their judgment and act as a normally prudent, diligent policy holder who is concerned about the well-being of others. They should put themselves in the insurer’s shoes for a few moments and ask themselves: “If I were the insurer, would I like to know such and such?” The outdated feature of a building, involvement in an activity with significant risks and behavioural antecedents are examples of facts that will interest the insurer when entering into a contract. When in doubt, the policy holder should disclose as much information as possible; otherwise, an omission could be held against him or her later and have significant consequences.

In the case of damage insurance (e.g., home insurance), the policy holder has a duty to disclose if there is an increase in risk, not only at the time of entering into the contract but also at any time thereafter. For example, a policy holder who will now use part of their home for their professional activities must inform their insurer about it. The same goes for someone who decides to use an artisanal smokehouse adjoining his or her residence and thereby increases the risk of fire.

Consequences of the Failure to Disclose

In practice, failure to disclose is often not discovered until many years after entering into a contract. The luckiest policy holders will notice this before an event occurs, for example during a visit from an inspector appointed by the insurer or a meeting with an insurance agent or broker. When the insured risk materializes, the insurer must in principle pay the insurance benefit agreed upon in the contract. However, if they notice that certain circumstances unknown to them were present when the risk materialized, the insurer could refuse to pay the full amount, arguing that if they had known, they would have required higher premiums. This is referred to as a proportional reduction of the insurance benefit in relation to the premium collected. Thus, if the insurer establishes that, in the circumstances, the premium paid would have been double, then they can pay only half of the agreed benefit.

If the insurer shows that they would never have insured the risk if the fact that was unknown to them had been disclosed, or if they prove that the policy holder was in bad faith, then the insurer can claim that the insurance contract is invalid, which means a total lack of coverage. The insurer must then offer to reimburse all the premiums collected during the term of the contract, but for the policy holder, this is often just a consolation prize.

In the case of personal insurance (e.g., life insurance, disability insurance), with some exceptions and provided that the contract has been in force for at least two years, the contract can only be invalid when the policy holder commits fraud, which implies an intention to deceive the insurer and claim insurance benefits. It is also all or nothing: Proportional reduction is not a potential option for personal insurance.

In insurance law, many disputes are related to the policy holder’s duty to disclose. However, the following other aspects deserve attention.

Rights and Duties Following an Event

When the insured risk materializes, the policy holder must report it to his or her insurer without delay. This is a fundamental duty, and failure to fulfill it could result in the partial or total loss of the policy holder’s entitlement to the indemnity payment if the insurer is adversely affected. This will be the case when it prevents the insurer from investigating or intervening to prevent further damages.

Why is the insurer so determined to investigate? An investigation could reveal breaches of the duty to disclose or that a policy exclusion applies, and the insurer will therefore not have to pay. Furthermore, the insurer is never responsible for a fault of the policy holder. Third parties may also be liable for the event, and the insurer could take action against them.

The policy holder has the duty to cooperate with this investigation, again in a manner worthy of the utmost good faith. The policy holder must therefore “inform the insurer as soon as possible of all the circumstances surrounding the loss, including its probable cause, the nature and extent of the damage, the location of the insured property, the rights of third persons, and any concurrent insurance; he shall also provide the insurer with vouchers and attest under oath to the truth of the information[2]”. Any misrepresentation could result in the policy holder losing his or her full or partial entitlement to the insurance benefit.

The insurer, unless it can establish a valid reason for a denial, must pay the agreed amount to the policy holder within sixty days of receipt of the insurance claim or, if they made a request, of relevant information and supporting documents.

Disputes

If the insurer denies a claim, the policy holder should contact a lawyer right away to learn about his or her legal options. Similarly, if specific incidents occur during the contract, it is not a bad idea to consult a lawyer and gain a clearer picture before the risk materializes. 

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^[1] Article 2408 of the Civil Code of Québec

^[2] Article 2471 of the Civil Code of Québec