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The Life Insured’s Duty to Disclose and the Consequences of Material Misrepresentation and Non-Disclosure

5 01 2003

1. Introduction

Insurance contracts are said to be contracts uberrimae fidei, meaning that each party owes a duty to the other of the utmost good faith. This is unlike most other contractual relationships. The requirement for the duty of good faith is perhaps most pronounced in the case of life and disability policies in which the insured has unique knowledge about his or her own physical condition.
The English case Carter v. Boehm describes the common law duty of good faith. In that case, Lord Mansfield made the following statement regarding the insured’s duty of representation:
… Insurance is a contract upon speculation.

The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the underwriter trusts to his representation, and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into a belief that the circumstance does not exist, and to induce him to estimate the risque, as if it did not exist.
The keeping back such circumstance is a fraud, and therefore the policy is void. Although the suppression should happen through mistake, without any fraudulent intention; yet still the underwriter is deceived, and the policy is void; because the risque run is really different from the risqué understood and intended to be run, at the time of the agreement.

2. Statutory Provisions Governing the Duty to Disclose

In the case of life insurance policies, the traditional common law duty to disclose as outlined above has been modified by insurance legislation in all Canadian provinces. In British Columbia, life insurance policies are governed by Part III of the Insurance Act. In particular, sections 41-45 set out the statutory obligations owed by the insured and insurer during the policy application process, and the consequences of not meeting these duties. All other common-law provinces have similar provisions in their respective insurance legislation.

The B.C. Act provides as follows:

Duty to disclose

41 (1) An applicant for insurance and a person whose life is to be insured must each disclose to the insurer in the application, on a medical examination, if any, and in any written statements or answers furnished as evidence of insurability, every fact in his or her knowledge that is material to the insurance and is not so disclosed by the other.
(2) Subject to section 42, a failure to disclose, or a misrepresentation of, such a fact renders the contract voidable by the insurer.

Exceptions

42 (1) This section does not apply to a misstatement of age or to disability insurance.
(2) Subject to subsection (3), if a contract has been in effect for 2 years during the lifetime of the person whose life is insured, a failure to disclose, or a misrepresentation of, a fact required to be disclosed by section 41 does not, in the absence of fraud, render the contract voidable.
(3) In the case of a contract of group insurance, a failure to disclose, or a misrepresentation of, such a fact in respect of a person whose life is insured under the contract does not render the contract voidable, but if evidence of insurability is specifically requested by the insurer, the insurance in respect of that person is voidable by the insurer unless it has been in effect for 2 years during the lifetime of that person, in which event it is not, in the absence of fraud, voidable.

Nondisclosure by insurer

43 If an insurer fails to disclose or misrepresents a fact material to the insurance, the contract is voidable by the insured, but in the absence of fraud the contract is not by reason of such failure or misrepresentation voidable after the contract has been in effect for 2 years.

Exceptions

44 (1) This section does not apply to a contract of group insurance or of creditor’s group insurance.
(2) Subject to subsection (3), if the age of a person whose life is insured is misstated to the insurer, the insurance money provided by the contract must be increased or decreased to the amount that would have been provided for the same premium at the correct age.
(3) If a contract limits the insurable age, and the correct age of the person whose life is insured at the date of the application exceeds the age so limited, the contract is, during the lifetime of that person but not later than 5 years from the date the contract takes effect, voidable by the insurer within 60 days after it discovers the error.

Misstatement of age in group insurance

45 In the case of a contract of group insurance or of creditor’s group insurance, a misstatement to the insurer of the age of a person whose life is insured does not of itself render the contract voidable, and the provisions, if any, of the contract with respect to age or misstatement of age apply.

3. The Requirement that a Fact be Material

a) The test for Materiality

The question of materiality is purely a matter of fact. The common law test for materiality was set out in Ontario Metal Products Co. v. Mutual Life Insurance Co. of New York, a decision of the Judicial Committee of the Privy Council:
…it is a question of fact in each case whether if the matters concealed or misrepresented had been truly disclosed, they would, on a fair consideration of the evidence, have influenced a reasonable insurer to decline the risk or to have stipulated for a higher premium.

Whether or not a fact is material is to be assessed objectively from the point of view of a reasonable or prudent insurer. It is significant to note that the test for materiality is that of a reasonable insurer, not that of a reasonable person which is often seen in negligence law. Because the emphasis is on the opinion of a reasonable insurer, it should not be surprising that opinions and beliefs of the insured are not relevant criteria to determine materiality.
As noted in one leading text, the test for materiality does contain a subjective element in the sense that if the insurer in question does not believe a fact is material, then it is not. In other words, if the insurer had been advised of the misrepresented or non-disclosed fact, but would have chosen to issue the policy without having charged a different premium, then the insurer cannot take the position that the fact was material and is a basis upon which to deny coverage.
It is not necessary for the misrepresented or non-disclosed fact to be material in relation to the insured’s cause of death. The fact must only be material in the sense that had the information been disclosed to the insurer, the insurer would have acted differently by charging a higher premium or declining the risk.
The insured’s statutory obligation to disclose material facts does have limits. As provided in s. 41 of the B.C. Insurance Act, the insured is only required to disclose, “…every fact in his or her knowledge that is material to the insurance…” The insured therefore has no obligation to disclose facts that he or she does not know about. For example, if after applying for life insurance an insured discovers that he or she has cancer, but that at the time of applying for coverage there were no symptoms of ill health, the insured would not have had a duty to disclose that which he or she did not know about. Whether an insured actually knew of a fact is to be assessed objectively, from the standpoint of a reasonable person possessed with the knowledge of the insured’s circumstances.

If a life insured dies within the first two years of a life insurance policy being issued, any failure to disclose a known material fact can serve as the basis upon which the insurer can avoid coverage. Mere innocent forgetfulness on the part of the insured is not a defence to having failed to disclose a material fact. This was seen in Cameron v. Coopérants Mutual Life Insurance Society.
In that case, Mrs. Cameron had a malignant melanoma removed from her chest in 1984. In 1985, she applied for group life insurance from North American Life and in the application form, she disclosed the fact of the melanoma. The insurer declined to issue a policy. In December 1987, Mrs. Cameron and her husband applied for a mortgage, and at that time, she also applied for group life insurance. Mrs. Cameron signed the application form, and in so doing, she agreed to the terms of a declaration which stated “I declare that, in the past five (5) years, I have never been denied life or health insurance by any insurance company.” Eighteen months later, Mrs. Cameron died. The Nova Scotia Court of Appeal held that even though Mrs. Cameron’s failure to disclose the prior denial may have been due to forgetfulness, there was still a misrepresentation and thus she did not meet the eligibility requirement.
In reaching this conclusion, the Nova Scotia Court of Appeal cited with approval the following passage from a leading text:
The misrepresentation of the known fact may have been due to negligence on the part of the insured or life insured, where he meant to disclose it, but did not actually do so. It may have been due to forgetfulness on his part, where the material fact genuinely escaped his memory. It may have been due to mistake on his part, where he believed that he had disclosed it to the insurer on a previous occasion, or where he believed that the insurer was already in possession of the fact of its own knowledge. It may have been due to misjudgement on his part, where he felt that the fact was not really significant and he did not therefore consider it important to relate it to the insurer.
Regardless of the good faith of the insured or life insured, all such misrepresentations, however innocently made and regardless of the genuine lack of appreciation of materiality, will entitle the insurer to avoid the contract as long as the misrepresentation is of a fact known to the insured or life insured which would be regarded by a reasonable insurer as material to the risk.

b) How to Prove Materiality

The insurer bears the onus of establishing that a fact is material. The onus is not discharged simply by showing that the insured’s incorrect information was provided in answer to a question on the insurer’s application form. Rather, as a general rule the insurer will be expected to introduce expert evidence at trial regarding the standards and practices of other insurers in the industry. For example, an insurer could call as an expert witness an underwriter from another life insurance company to testify at trial that had the insured fully disclosed the information in question, the expert’s insurance company would have declined the risk or charged a higher premium.

Although expert evidence from another life insurance company’s underwriter likely represents the strongest evidence of materiality, it is still open to an insurer to rely upon evidence of its own employees. To prove materiality, all that the insurer must do is establish a prima facie case that, acting reasonably, it would have declined the risk or charged a higher premium. If the insured does not present any evidence to rebut the insurer’s evidence, it is open to the court to accept the testimony of the insurer’s own employees and find that the fact in question is material. This was the situation in the Supreme Court of Canada case Henwood v. Prudential Insurance Co. of America, in which Mr. Justice Ritchie wrote:
Although the evidence of expert witnesses as to whether or not other insurance companies consider a question to be “material”, is admissible and may be relevant in such a case as this, I do not think that when no evidence whatsoever has been adduced to suggest that the (insurer’s) practice is anything but reasonable, it is seized with the burden of proving the practice of other insurers.

4. Fraud

When an insured dies more than two years after the life insurance policy was issued, it becomes much more difficult for the insurer to avoid coverage. As provided in section 42 of the B.C. Insurance Act, after two years, a material misrepresentation or material non-disclosure of a known fact will only affect coverage if the insured acted fraudulently.

The traditional test for fraud comes from the English House of Lords case Derry v. Peek. A representation will be deemed fraudulent if it is:
1) made knowingly without belief in its truth; or,
2) made recklessly without care as to whether it is true or false.
A life insurer faces a heavy burden in trying to prove that the insured fraudulently mis-represented or fraudulently failed to disclose a material fact. Before a court will find that the insured acted fraudulently, the insurer will almost certainly need to lead evidence of the insured’s actual knowledge and intention. This can be difficult where the insured has died. However, if the insurer succeeds in proving fraud, the insurer is entitled to keep the full premium.

5. The Role of Questions on Life Insurance Policy Applications

Although the insured has a duty to disclose material information in his or her knowledge, the life insurer has a powerful tool at its disposal to elicit information from the insured. This tool is the policy application form.

Life insurance application forms typically include a series of questions designed to obtain information about the insured’s medical history and lifestyle. These questions can lead to unintended consequences from the standpoint of the insurer. Questions can have the effect of limiting the scope of information which the insured is obligated to disclose, and in some cases, depending upon the insured’s answer, can impose an obligation on the insurer to make further enquiries.
The following cases illustrate the significance of the need to have clearly worded questions on life insurance policy application forms:

a) Taylor v. National Life Assurance Co. of Canada16

On February 14, 1986, in an effort to help lose weight, Robert Taylor underwent a gastroplasty operation, a major operation which altered the shape of his stomach. On September 21, 1986, he was admitted to hospital suffering from abdominal pain. He was diagnosed as having adhesions resulting in a partial small bowel obstruction. He had his stomach pumped, and was released from hospital two days later.

On April 11, 1987, Mr. Taylor again was admitted to hospital complaining of severe abdominal pain. The doctor’s diagnosis was subacute obstruction related to the gastroplasty operation. He was again treated and released from hospital a few days later.
On July 16, 1987, Mr. Taylor again went to the hospital complaining of abdominal pain. The doctor diagnosed a subacute internal obstruction, probably due to adhesions from the surgery. The doctor discussed the option of further surgery, but Mr. Taylor opted for further medical treatment.
On August 26, 1987, in the course of applying for a mortgage, Mr. Taylor also applied for group life insurance. Under the heading “Evidence of Insurability”, Mr. Taylor responded to two of the questions as follows:
Question 2: During the past 5 years have you had, consulted a physician for or been treated for heart trouble, tuberculosis, cancer, tumour, diabetes, nervous/mental disorder, ulcers, kidney trouble, and normal blood pressure, back disorder, multiple sclerosis, Crohn’s disease, colitis, pancreatitis, or any other chronic or mental condition?
Answer: No
Question 3: Have you any condition for which a hospital confinement has been advised or is contemplated?
Answer: No
Mr. Taylor died roughly three months after he had applied for the insurance. The insurer denied the claim on the basis that he gave incorrect answers to the above two questions.
With respect to question 2, the insurer argued that Mr. Taylor’s adhesions arising from his surgery constituted a chronic condition which Mr. Taylor failed to disclose. The B.C. Court of Appeal concluded that Mr. Taylor was not treated for adhesions, but rather for subacute bowel obstruction which was not a chronic condition in the proper medical sense.
With respect to question 3, the insurer argued that because surgery had been suggested to Mr. Taylor by the doctor in July, his answer was wrong. The court interpreted question 3 narrowly, and concluded that it was asking whether hospital confinement has been advised or is contemplated at present, not at some point in the past. In that context, Mr. Taylor’s response to question 3 was truthful because he had declined the offer for surgery and was not contemplating further hospital treatment at the time he completed the policy application.
Some of the lessons that can be derived from the Taylor case are:
• The meaning of the word “chronic” in question 2 is likely well known in the medical community, but likely less well known to lay people. Mr. Taylor was not expected to have known whether any medical problem he had was “chronic”.
• The five year time frame used in question 2 likely has the effect of rendering immaterial any facts more than five years old. In other words, by specifying the time frame with which the insured is to concern him or herself, the question suggests to the insured that anything occurring outside of that time frame is not of interest to the insurer, and therefore need not be disclosed.
• With respect to question 3, if the insurer’s intention was to enquire about past medical conditions, the question could have been made more clear by putting the question into the past and present tense, such as: “Have you ever had or do you now have any condition for which a hospital confinement has been advised or is contemplated?” Alternatively, multiple questions could have been asked, such as, “Have you ever been hospitalized?” and “Have you been advised to, or do you contemplate being hospitalized in the future for any condition which you have?”

b) Katrichak v. National Life Assurance Co. of Canada

In 1981, Paul Katrickak underwent several medical examinations. His doctors finally concluded that he had experienced a viral myocarditis and endarteritis, but that he had fully recovered. Less than five years later in 1986, Mr. Katrichak applied for group life insurance. He died in December 1987 from what was in fact chronic heart trouble.

The application form included the same questions as found in the Taylor case. The relevant portion of question 2, to which Mr. Katrichak answered “no”, was:
(2) During the past 5 years have you had, consulted a physician for or been treated for heart trouble… or any other chronic physical or mental condition?
Based on the medical evidence presented, the court concluded that Mr. Katrichak’s viral myocarditis was not chronic and therefore his answer was not untrue.
Katrichak illustrates the following:
• The use of the word “chronic” limited the scope of information which the insured was required to provide.

c) Stewart v. The Canadian Life Assurance Co.

Donald Stewart was diagnosed with ulcerative colitis at age 13. He lived symptom-free for several years. In 1992, Mr. Stewart had several visits to his doctor in which he complained of abdominal pain. He underwent a series of tests and a colonoscopy was performed on December 30, 1992. Mr Stewart was ultimately given a diagnosis of ulcerative colitis. He was prescribed medication, and his condition generally improved. Mr. Stewart did not see his doctor again until 1994. On July 11, 1994 he saw his doctor and expressed concern over his ongoing symptoms. The prescription was renewed.

On July 28, 1994, Mr. Stewart applied for group life insurance. The application included the following questions, to which Mr. Stewart answered “No”:
Have you ever received any treatment for, consulted a physician for or been diagnosed by a physician as having:
3. Diabetes, kidney or liver disease or any other disease of the stomach, intestines, rectum, bladder, prostate, or reproductive organ, or of the nervous system; or asthma, emphysema, or other respiratory disease?
On March 26, 1995, Mr. Stewart had a heart attack and died. The insurer denied coverage on the basis of Mr. Stewart’s answer to question 3.
The court held that Mr. Stewart’s condition was a material fact, and that it had not been disclosed. However, this fact was not within Mr. Stewart’s knowledge because he believed he had a disease of the bowel or colon, not a disease of the intestine. The court held that it was not part of general knowledge that the colon or bowel is part of the intestines. Accordingly, the court found that there was coverage under the policy.
The lessons from the Stewart case include:
• The statutory duty imposed upon an insured is to disclose “every fact in his or her knowledge.” If the insured, acting as a reasonable person, does not know something, he or she will not be obligated to disclose it.
• The use of one medical term, such as “intestine”, in the absence of others (ie., colon or bowel) can restrict the insured’s obligation to disclose.

d) Houtt Estate v. First Canadian Insurance Corp.

On April 7, 1993, Ronald Hoult, who had a history of occasional bronchial problems and chest colds, went to his doctor complaining of a cold, chest congestion and discomfort. On a May 19 visit to his doctor, he complained of nasal congestion and a cough. On a May 28 visit, Mr. Hoult complained of some difficulty breathing and shortness of breath. The doctor diagnosed a mild case of bronchitis.

On June 12, 1993, Mr. Hoult while in the course of purchasing a new car, bought a group life policy that insured his car loan. He signed a document which included the following declaration:
I am presently in good health, have read the information given above and apply for the insurance stated.
The insurance policy also included a term stating that the insurer had no liability for a death resulting from pre-existing illness. The term “pre-existing illness” was defined as:
…illness, disease or physical condition for which medical diagnosis, advice consultation, service or treatment was acquired or recommended on or within a six (6) month period immediately preceding the Effective Date of Insurance…
Two days after applying for the policy, Mr. Hoult again saw his doctor. His cough had worsened and he was now producing white phlegm. The doctor ordered a chest x-ray which showed clouding in the right lung, possibly indicating pneumonia. At that time, Mr. Hoult’s doctor also considered for the first time that cancer might be a remote possibility. On June 29, 1993 Mr. Hoult was diagnosed with lung cancer. Two months later, he died of lung cancer.
The insurer denied the claim on two grounds. First, it argued that Mr. Hoult had a pre-existing illness. The court concluded that the phrase “pre-existing illness” was ambiguous. It could be interpreted broadly to mean pre-existing symptoms of subsequently diagnosed serious conditions, or it could be interpreted narrowly to mean only pre-existing diagnosed conditions. The court opted for the narrow interpretation which favoured the insured. In this case, at the time of applying for the policy, the court found that Mr. Hoult had only sought treatment for and had only been diagnosed with a cough and mild bronchitis. Mr. Hoult did not die from a cough or bronchitis, and thus the exclusion did not apply.
The second argument made by the insurer was that Mr. Hoult’s declaration that he was “presently in good health” was a material non-disclosure. The court adopted the following definition of “in good health”:
Referring specifically to the term ‘good health’ when used in a policy of life insurance, it has been declared that it means freedom from any grave, important, or serious disease, or any ailment that seriously affects the general soundness or healthfulness of the human system. In brief, it means a reasonably good state of health, but does not mean perfect health.
The court found that in light of this definition of “in good health”, Mr. Hoult’s response that he was in good health was true. The court went on to conclude that even if the diagnosis of cough and mild bronchitis had been disclosed to the insurer, it would not have declined the risk, and thus the non-disclosure was not material.
Hoult offers the following lessons:
• It does not appear to be disputed that Mr. Hoult’s symptoms in the months leading up to his June 12th life insurance application were, in hindsight, related to his lung cancer. The critical point was that neither Mr. Hoult nor his doctor knew of the lung cancer at the time of the application.
• Had the insurer wished to avoid coverage, a more detailed medical questionnaire should have been used, rather than simply asking if the applicant was in good health.
• Broad phrases such as “in good health” and “pre-existing illness” are capable of many different interpretations, and courts will tend to adopt interpretations most favourable to the insured.

e) Johannessen v. First Canadian Insurance Corp.

Johannessen is a case involving a claim for coverage on a disability insurance policy, but the policy language, and the “in good health” declaration on the application form were the same as in Hoult.

In 1991, Gerhard Johannessen was diagnosed as having low grade prostate cancer. He did not require active treatment, but his condition was monitored by his doctor. On April 8, 1994, he had a regular check-up, at which he complained of low back pain, and had tests done related to his prostate cancer. The court described the low back problem as being disabling.
In August 1994, while in the process of buying a vehicle, Mr. Johannessen applied for the insurance policy and in so doing declared, “I am presently in good health.” In 1995, he started to receive radiation therapy for his cancer. He quit working and made a claim on his disability policy.
The court agreed with the insurer that Mr. Johannessen was not in good health at the time he signed the application form. This was a material misrepresentation and therefore, the insurer was able to void the policy and return the premium.
Johannessen offers the following lesson:
• Each case of misrepresentation or non-disclosure will always turn on its own facts. Unlike in Hoult where the insured did not know he had cancer at the time of the application, in this case, Mr. Johannessen did know he had cancer.

f) Hallman v. Canada Life Assurance Co.

Joan Hallman suffered from epilepsy. She took medication to control her seizures which occurred only infrequently. In April of 1991, Mrs. Hallman and her husband applied for a mortgage, at which time they also applied for mortgage life insurance. Mrs. Hallman answered a question on the application form as follows:
Question: Have you within the past 36 months received any treatment for, consulted a physician for or been diagnosed by a physician as having:… Diabetes, kidney or liver disease or any other disease of the stomach, intestines, rectum, bladder, prostate, or reproductive organ, or of the nervous system; or asthma, emphysema or other respiratory disease?
Answer: No (by way of checking a box)

In December 1992, Mrs. Hallman was diagnosed as having lung cancer and she died one month later. The insurer denied the claim on the basis that epilepsy is a disease of the nervous system and thus her answer to the above question was a material misrepresentation.
The court agreed that the fact that Mrs. Hallman had epilepsy was a material fact in the sense that had it been disclosed, the insurer would have declined to accept the risk. However, the real question was whether there had been a misrepresentation. The court concluded that the phrase “disease of the nervous system” is ambiguous and therefore the answer was not a misrepresentation. While a medical person or an educated lay person may understand that epilepsy is a disease of the nervous system, this was not necessarily Mrs. Hallman’s understanding.
Hallman offers the following lessons:
• The ambiguity in this case would have been avoided if the word “epilepsy” had been included in the question. As noted by the court, “Epilepsy is a well known disease. It would have been very easy to simply list it in the questionnaire.”
• The case again illustrates that where a medical term is used, the court will interpret it narrowly, and any ambiguity will be resolved in favour of the insured.

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