The B.C. Court of Appeal has released the decision of Schellenberg v. Wawanesa Mutual Insurance Company, 2020 BCCA 22, which comments on an insured’s duty to inform its insurer of a material change in risk in the context of a licensed marijuana grow operation.
The case concerns property damage caused by a fire. The property was insured pursuant to a homeowner’s policy (the “Policy”). The underwriter for the Policy voided the Policy based on the homeowners’ failure to notify it of the existence of a licensed marijuana grow operation, which the underwriter considered to be a material change in risk to the Policy.
Section 29 of the Insurance Act, R.S.B.C. 2012, c. 1 (the “Act”), deems every insurance contract to contain a provision requiring the insured to promptly give notice to the insurer or its agent of a change that is material to the risk and within the control and knowledge of the insured, failure of which may cause the contract or parts thereof to become void.
At trial, the judge was “entirely satisfied” that the presence of the grow operation was a material change in risk. The trial judge noted that the above-noted provision from the Act likely requires objective knowledge of materiality though she expressed concern about requiring an insurer to prove subjective knowledge. Ultimately, the trial judge failed to answer the actual knowledge required by an insured regarding the materiality of the change as she found that the insureds in the case knew that the changes in question were material to their insurance.
On appeal, the Court noted that a change material to the risk is one that if disclosed, would have caused a reasonable insurer to decline the risk or stipulate a higher premium. It supported the finding that the grow operation was material to the risk, and that there was a sound basis in relation to the insureds’ subjective knowledge that the existence of the grow operation was a material risk to the insurer and ought to have been disclosed. The Court upheld the trial decision and the insureds were denied coverage for their loss.
Schellenberg demonstrates that legality of the material change is irrelevant as is the connection between the loss and the undisclosed risk; no causal connection between the breach and the cause of loss is required. However, while it is clear that the insured is required to know about the existence of the material change in risk (i.e., the existence of a grow-op), it remains less clear if an insured is required to know whether that change represents a material risk.