Competing Duties: Duty of an Insured to Disclose Material Changes v. Duty of an Insurer to do Due Diligence

The duty to disclose a material change in risk in an automobile insurance policy was recently considered by Howden J. in the case DeKoning v. Vector Insurance, [2009] O.J. No. 3461 (S.C.J.).

The Court had to balance competing duties. An insured has a duty to disclose material changes to the policy. An insurer has a duty of due diligence to obtain publicly or readily available information.

An insured under an automobile liability policy failed to report her knowledge to her auto insurance company of the driving record of her dependent teenager who was listed on the policy as an occasional driver.

The insurer took the position that represented a breach of a statutory condition of the policy and permits the insurer to treat the policy as void ab initio and unenforceable.

In this instance, the guardian had added the 16 year old as an occasional driver to her policy by telephone through her broker. The insurer obtained the driving record of the teen showing that his record was clear. Nearly a year later, the son had his license suspended by reason of demerit point accumulation. He had several traffic convictions, including speeding. The guardian assisted the teen in ensuring that all fines were properly paid. The teen did not drive the insured motor vehicle until his suspension ended.

Neither the guardian nor the teen reported to the insurer the fact that his license had been suspended. They subsequently claimed that they did not know of a duty to do so.

The insurer never obtained a subsequent driving record which it could have done for a fee of $12.00.

A few months later, the son was driving with three passengers when a serious accident occurred resulting in one of his passengers suffering catastrophic injuries.

The catastrophically injured passenger obtained a judgment for over $18 million dollars. The insurer made itself a statutory third party throughout those proceedings and took the position that the policy was void ab initio. The limit for third party claims on the insurer was $1 million.

The mother and son brought an action against the broker and insurer, claiming that the policy of insurance is binding and enforceable and seeking a declaration that the insurer was obligated to provide them with a defence in the passenger action. They also claimed indemnity from the insurer for all damages and costs assessed against them in the passenger action.

The Court considered the duty of good faith on insureds to disclose material changes in risk to insurers. The Court noted that Statutory Condition #1 requires an insured to notify the insurer or agent (broker) of any change in the risk material to the contract. The Court reviewed case law which imposes an obligation on an insured to disclose material facts, and then noted that in this instance, only the insurer knew that a couple of traffic tickets and a license suspension were material. Further, the insurer was aware that the additional insured was a novice driver when it added him to coverage and the insurer did not take any additional steps to update its records with respect to his driving record.

The Court held that the guardian as the named insured did not fail in her duty to disclose a material change in the risk since it was not clear in the policy that the driving tickets and suspension were material changes.

The insurer had a duty of due diligence to obtain a further driving record. Therefore, the insurer had no ground in law to void the policy and was obligated to indemnify its insureds.