Chapter 5 - Regulation of Insurance Contracts

Question 1

Parties to the Contract

Answer 1

Name of the insurer and insured must be shown

Question 2

Policy Period

Answer 2

Start and end time of the insurance policy must be stated on the declarations page

Question 3

Insurance Interest of others

Answer 3

Must show who the loss payable is and which parties are involved

Question 4

Type of Insurance and Amount of Coverage

Answer 4

The policy must identify the specific insurance coverages and the sum of insurance applying to each item to be insured. This includes the insurance rate and premium charged

Question 5

Rate and premium charged

Answer 5

The insurance rate is the cost of insurance per unit of exposure

The cost of insurance per unit of exposure

eg. $1 per $1000 of insurance coverage

insurance premium is what the insured pays for the policy. It is calculated by multiplying the rate by the number of exposure units.

Question 6

Subject matter of insurance

Answer 6

a description of the object of insurance must be provided. The policy must clearly identify the items insured and their locations

Question 7

Removal Coverage

Answer 7

The insured property has to be at the identified location in the business policy

Question 8

Removal clause exceptions

Answer 8

property that has to be moved to prevent further damage can be insured under specific conditions if included as a clause

Three conditions apply to the removal clause:

1) Before the insurer is required to pay for a loss to property at an unnamed location, it must be shown that the property was at that location because it was in danger of further loss or damage from a peril insured by the policy. For example, any property saved during a major fire on the insured’s premises would be insured while at an unnamed location.
2) The amount of insurance available for any loss to the property while at the unnamed location will be reduced by the amount paid for the loss at the named location. For example.

○Amount of insurance at named location: $100,000.

○Amount of fire loss to property at named location: $85,000.

○Amount of insurance remaining to pay losses to property while removed to an unnamed location: $15,000.

3)The insurer’s obligation to extend insurance coverages to property at an unnamed location ends after seven days or upon expiry date of the policy, whichever is sooner.

Question 9

Limitation of liability clauses

Answer 9

a clause that allows the amount paid out to be less than the actual amount of indemnity but it must have the wording of the clause included “This policy contains a clause(s) that may limit the amount payable”

If not printed or stamped, they would not be binding upon the insured

Question 10

Right of subrogation

Answer 10

Subrogation gives an insurer the legal right to substitute itself for the insured to recover funds it has paid to settle a policyholder’s claim from the party responsible or causing the loss

Eg. Paul accidentally burns his house down which also catches his neighbor’s house. Paul’s insurance company pays for his house’s repair. His neighbor would receive payments for repair by his insurance company and his insurance company can then go sue Paul for amounts paid out for negligence

Question 11

Waiver of term or condition

Answer 11

Any changes to an existing policy must be in writing if they are to be binding on the insurance company

Question 12

Effect of delivery of policy

Answer 12

As long as the promise has been made to pay, if the policy has been delivered, claims will be honored and the policy will be in effect

Question 13

Fire Peril

Answer 13

Must be met:

1. basic coverages
2. standard exclusions
3. statutory conditions

Question 14

basic coverages

Answer 14

fire
lightning
explosion of natural, coal, or manufactured gas

Question 15

friendly fire

Answer 15

Fire where they are supposed to be (fireplaces, fire pits, etc)

Question 16

Hostile fires

Answer 16

fires that escape or originates outside of such receptacle; eg. fire spark escaping from a fireplace is a hostile fire or a forest fire

Question 17

Standard exlcusions

Answer 17

things that would not be covered. it can be broadened if necessary

Question 18

Application of heat exlcusion

Answer 18

when heat is being directly applied to property, a loss can be expected which would then not be insured. EG. clothes and a hot iron

Question 19

lightning damage to electrical devices or appliances exclusion

Answer 19

power surges from lightning that destroys electrical appliances

Question 20

Electrical currents other than lightning exlcusion

Answer 20

Artificial currents that destroys appliances

Question 21

contamination by radioactive material exclusion

Answer 21

perils insured under the policy causes radioactive materials to escape; not insured

Question 22

war exclusion

Answer 22

riot
insurrection
civil commotion
rebellion
revolution 
invasion
war
civil war
hostilities 
act of foreign enemy
military power

Question 23

statutory conditions - General

Answer 23

automobile
accident
sickness
fire

Statutory Conditions are a set of policy conditions imposed by provincial legislation outlining the duties and responsibilities of both the insured and the insurer under contracts of automobile insurance, accident and sickness insurance, and fire insurance. Statutory Conditions must be printed on every policy under their own clearly labelled heading.

Because Statutory Conditions are imposed by provincial legislation, insurers are prohibited from making any changes to them. If there is a dispute about coverage following a claim, any variation to, omission of, or addition to any Statutory Condition will not be binding on the insured, even if the insured agreed to such changes.

Question 24

Regulation of Property Insurance Policies

Answer 24

Many decades ago, governments across Canada realized that insurance consumers are at a disadvantage when entering into an insurance contract. For one thing, they lacked the pure ability to provide informed consent; furthermore, they didn’t have consistent access to legal counsel. The public needed to be better protected.

In Canada, both federal and provincial governments now have defined roles in regulating, supervising, and monitoring insurance companies via statute laws. Meanwhile, the provincial governments of each province regulate insurance policies.

All provinces have adopted essentially the same standards for property insurance policies, which have been incorporated into the Insurance Act of each province. However, automobile insurance is treated differently by each province.

Question 25

Regulation of Automobile Insurance Policies

Answer 25

Each provincial government has the power to create public or private automobile insurance schemes,

However, in Ontario, automobile insurance is sold by private insurers. Ontario’s Compulsory Automobile Insurance Act regulates automobile insurance in our province through policy wordings for owned private passenger vehicles, garages, and drivers. These wordings spell out the rights and obligations of the policyholder and the insurer related to policy coverage, terms, and conditions. You will learn much more this topic in Chapter 9: Automobile Insurance.

Question 26

The Insurance Act

Answer 26

Ontario’s Insurance Act contains the legal rules governing the operation of the insurance industry as well as rules applying specifically to insurance contracts, including:

Contents of an insurance contract.

• Removal coverage.
• Limitation of liability clauses.
• Right of subrogation.
• Waiver of term or condition.
• Effect of delivery of policy.
• Policies insuring fire peril:

○Basic coverages.

○Standard exclusions.

○Statutory Conditions.

Question 27

Contents of an Insurance Contract

Answer 27

The declaration, also known as the “coverage summary,” is the portion of an insurance policy containing a summary of the compulsory information.

1) Parties to the contract.
2) Policy period.
3) Insurable interest of others (if any).
4) Type of insurance and amount of coverage.
5) Rate and premium charged.
6) Subject matter of insurance.

Question 28

Pro-rating recovery

Answer 28

Where the net amount recovered whether by action or on settlement is, after deduction of the costs of the recovery, not sufficient to provide complete indemnity for the loss or damage suffered, the amount remaining shall be divided between the insurer and the insured in the proportion in which the loss or damage has been borne by them.

Question 29

Misrepresentation

Answer 29

The law requires insurance applicants to provide the insurer with an accurate description of the property to be insured. Misrepresentation occurs when there is a false description or a misrepresentation of a material fact.

Question 30

Misrepresentation Through False Description

Answer 30

A false description of the property to the prejudice of the insurer might be accidental or deliberate. When a decision to provide insurance is based on incorrect information, the insurer may unwittingly be placing itself in a disadvantaged position.

For example, fire-resistive buildings are less at risk of a total fire loss than wood-frame buildings used for the same occupancy. As a result, insurers charge a lower rate for brick or masonry buildings. If an applicant describes their wood-frame building as a “one-storey masonry structure,” they are falsely describing the property to the prejudice of the insurer and are guilty of misrepresentation.

Even “honest mistakes” regarding the description of the property being insured can constitute misrepresentation when the position of the insurer is prejudiced. This is because, in past cases, the law has held that it is reasonable to expect a building owner to know the construction details of the building they own or occupy.

Question 31

Misrepresentation of a Material Fact

Answer 31

A material fact is a fact which, if the insurer knew about it, would cause it to either decline the risk altogether or charge a higher premium for accepting the risk. Some facts contained in an insured’s application are more important to the insurer than others. The law requires that all representations regarding material facts be true.

Material facts can include:

• Information about previous claims.
• Details about previous cancellations or refusals of insurance.
• Details concerning the existence of fire suppressions and intrusion detection systems, including monitoring contracts for these systems.

Question 32

FRAUDULENT OMISSION OF A MATERIAL FACT

Answer 32

Misrepresentation can also occur when applicants for insurance fraudulently, knowingly, or deliberately and with the intent to deceive, omit to disclose a material fact. An applicant for insurance may deliberately fail to disclose certain information to the insurer to secure a lower premium or to obtain insurance.

Question 33

Property of Others

Answer 33

Generally, the insurer will not be obligated to pay for loss or damage to property of others. However, under the terms of this condition, payment will be made to cover the insured’s insurable interest in such property if stated in the contract.

Businesses like upholsterers and dry cleaners often want their insurance policy to extend coverage to customers’ property, since these businesses may be held responsible for theft or damage to their customers’ property. If so, the business owner’s interest in such property must be stated in the insurance contract.

Question 34

Change of Interest

Answer 34

Normally, only the parties to a contract are entitled to benefit from it. While this same rule generally applies to insurance contracts, Statutory Condition 3: Change of Interest permits the following exceptions:

• An authorized assignment under the Bankruptcy and Insolvency Act.
• A change of title by succession.
• A change of title by operation of law: When a policyholder has been certified as mentally unfit to handle their own affairs, the court may order all their rights of ownership and control of property be transferred to others.
• A change of title by death: When title to property willed to others is transferred to the new owners, they will have the same rights under an existing contract of insurance as the previous insured.

Question 35

Material Change

Answer 35

“Any change material to the risk and within the control and knowledge of the insured avoids the contract as to the part affected thereby, unless the change is promptly notified in writing to the insurer or its local agent, and the insurer when so notified may return the unearned portion, if any, of the premium paid and cancel the contract, or may notify the insured in writing that, if he desires the contract to continue in force, he must, within fifteen days of the receipt of the notice, pay to the insurer an additional premium, and in default of such payment the contract is no longer in force and the insurer shall return the unearned portion, if any, of the premium paid.”

Question 36

Non-material Changes

Answer 36

Changes in the occupancy or processes used on the insured’s premises may occur during the policy period. Some changes are minor and are not material to the risk — in other words, they do not increase the chance of loss occurring. Examples of non-material changes include:

• Installing new carpeting to replace the old carpeting in the insured’s dwelling.
• Replacing an older gas furnace with a new, high-efficiency gas furnace.
• Paving the gravel parking lot in front of a retail premises.
• A residential tenant moving out of a rented dwelling and a new tenant moving in.

Question 37

Material Changes

Answer 37

A material change is any change within the control and knowledge of the insured that:

• Arises after the policy has been issued, and
• Increases the chance of loss.

Since a material change increases the chance of a loss occurring, the insurance company must be advised. This allows the insurer to re-assess the risk and the exposure to loss. Examples of material changes include:

• Adding a wood or pellet stove to a dwelling.
• Converting a policyholder’s private garage to a repair garage.
• Renovating a basement in a private home into an income-earning apartment or short-term rental accommodation.
• Cancelling a burglar alarm monitoring contract when the policy was written by the insurance company with the understanding the premises would be monitored at all times.

Question 38

Effect on Policy Coverages

Answer 38

The insurer must be notified of any changes that would result in an increase in the potential for loss. When a material change is reported to the insurer, it may:

• Retain the risk and advise the insured, in writing, of the additional premium required.
• Return the unearned premium and cancel the policy.

If the insured has not paid the additional premium within 15 days of receipt of notice, the insurer is entitled to cancel the policy and return the unearned portion, if any, of the initial premium.

If the insured does not report the material change, the insurer is entitled to void the contract “as to the part affected.” In other words, losses directly attributed to an unreported material change will not be paid.

Question 39

Termination

Answer 39

Every contract must provide a basis for termination. When an insurance contract is terminated, there are a few general conditions that apply:

• The refund provided to an insured must be in the form of money, postal or express company money order, or cheque payable at par.
• When the insurer terminates the policy, the 15 days’ written notice required to be provided to the insured commences on the day following the receipt of the registered letter at the post office to which it is addressed.
• When registered mail is received at the post office, the signature of a responsible person is required before the letter will be released by the post office. When addressees who receive regular carrier service are not available to sign for the letter, or when the addressee’s mail is left in a community mailbox, the post office will leave a card indicating where the registered letter can be picked up and signed for. As the insured is unlikely to know of the existence of such letter for at least a day after it has been received at the post office, it makes sense that the period of notice be considered to start on the day following the receipt of the registered letter at the post office. If the registered letter is not claimed within the 15 days provided for above, notice is considered to have been properly given and the contract is legally terminated.

While most insurance contracts terminate upon their natural expiry date, they can also be terminated by either the insurer or the insured during the policy period. We’ll now turn to the specific details involved in these situations.

Question 40

Termination by Insurer

Answer 40

The insurer is not required to give a reason for cancellation of a property policy.

The insured is required to give a notice period prior to termination of the policy.

This notice provides the insured a fair opportunity to replace insurance coverages when the contract is cancelled by the insurer during the policy period

When cancelling an existing policy, insurers typically provide 15 days’ notice of termination by registered letter.

However, there may be circumstances where an insurance company determines there is an urgent need to terminate a policy — for example, if there was a serious misrepresentation of a material fact revealed upon inspection of the insured’s premises. In such a case, Statutory Condition 5: Termination permits an insurer to cancel a policy with five days’ written notice of termination, but it must be personally delivered.

Question 41

REFUNDS - Termination by insurer

Answer 41

The rules regarding refunds are clearly stated in Statutory Condition 5: Termination. When the policy is terminated by the insurer, refunds are on a pro rata basis. As illustrated below, the insurer first calculates the daily cost of insurance. It then issues a refund equivalent to the daily dollar amount, multiplied by the number of days remaining on the policy.

However, even in these situations, most policies are subject to a minimum retained premium. In these cases, the minimum premium is deducted from the refund.

Let’s look at an example of a pro rata refund calculation.

Total annual policy premium: 3650 ($10/day)
Minimum Retained Premium: $500 (non-refundable)
Pro Rata Refund = 200 days remaining on the policy x $10 (daily cost) - $500 non-refundable minimum retained premium = 1500

Question 42

Termination by Insured

Answer 42

The policy can be terminated by the insured at any time prior to the policy expiry date upon request. No reason is required to be given

. The insurer will generally require such requests be in writing and signed by the policyholder. The consent of any loss payee(s) must accompany the request.

Question 43

Refunds - Termination by Insured

Answer 43

The amount of the refund due to the insured is calculated on a short rate basis. This amount will be significantly less than the amount refunded when the policy is cancelled by the insurer.

When cancelling a policy on a short rate basis, the insurer is allowed to deduct certain administrative costs that would not have been incurred had the policy been allowed to remain in force for the contracted period. Insurers use formulas contained in a short rate cancellation table to calculate the policy refund.

Question 44

Requirements after Loss

Answer 44

Statutory Condition 6: Requirements After Loss reads as follows:

(1) Upon the occurrence of any loss of or damage to the insured property, the insured shall, if the loss or damage is covered by the contract, in addition to observing the requirements of conditions (9), (10), (11);
a. Forthwith give notice thereof in writing to the insurer;
b. Deliver as soon as practicable to the insurer a proof of loss verified by a statutory declaration;
i. Giving a complete inventory of the destroyed and damaged property and showing in detail quantities, costs, actual cash value and particulars of amount of loss claimed,
ii. Stating when and how the loss occurred, and if caused by fire or explosion due to ignition, how the fire or explosion originated, so far as the insured knows or believes,
iii. Stating that the loss did not occur through any wilful act or neglect or the procurement, means or connivance of the insured,
iv. Showing the amount of other insurances and the names of other insurers,
v. Showing the interest of the insured and all others in the property with particulars of all liens, encumbrances and other charges upon the property,
vi. Showing any changes in title, use, occupation, location, possession or exposures of the property since the issue of the contract,
vii. Showing the place where the property insured was at the time of loss
c. if required, give a complete inventory of undamaged property and showing in detail quantities, cost, actual cash value;
d. if required and if practicable, produce books of account, warehouse receipts and stock lists, and furnish invoices and other vouchers verified by statutory declaration and furnish a copy of the written portion of any other contract
(2) The evidence furnished under clauses (c) and (d) of subparagraph (1) of this condition shall not be considered proofs of loss within the meaning of conditions 12 and 13.

This Statutory Condition requires the insured to provide proper documentation for all claims made under the policy.

Question 45

Fraud

Answer 45

Fraud is a deliberate attempt to deceive, with a view to securing some profit. By the terms of Statutory Condition 7: Fraud, the insurer is not responsible for the payment of fraudulent insurance claims.

An honest mistake in a proof of loss does not constitute fraud. If the insurer suspects it is being asked to pay a fraudulent claim, it must prove that the insured is deliberately attempting to deceive it to profit from a loss situation. When the insurer can prove fraud, it is entitled to deny the entire claim, and not just that part which was fraudulent.

Question 46

Who May Give Notice and Proof

Answer 46

When the insured is away or otherwise unable to provide notice and proof of loss, the insurance company is entitled to know the reason. If the insurer finds the reason acceptable, under Statutory Condition 8: Who May Give Notice and Proof, an agent of the insured (for example, their lawyer, a friend, or a relative) is permitted to fulfil these functions on the insured’s behalf. Acceptable reasons include extended hospitalization of the insured or a prolonged absence from the country.

Question 47

When an Insured Refuses to Make a Claim

Answer 47

A policyholder who has deliberately caused a loss may refuse to make a claim if they become aware that submitting a proof of loss in this circumstance constitutes fraud and may result in criminal charges. Despite such a refusal, a mortgagee or other party with an insurable interest is generally entitled to collect in such instances and is permitted to file notice and proof of loss.

Question 48

Salvage

Answer 48

Salvage is property remaining after a loss that still has some value. The Statutory Condition 9: Salvage is designed to avoid the economic waste that can occur when there is loss to property that might have been saved through a reasonable effort on the part of the insured.

The law requires insureds to take all reasonable steps to reduce or prevent loss or damage, including removal of property if required. If insureds make no effort to salvage insured property from loss when it is clear that a reasonable opportunity exists, the insurer has the right to deny insurance coverage on that property which could have been saved.

Question 49

Entry, Control, and Abandonment

Answer 49

It would be impossible for the insurer to determine the amount of any loss if its representatives were prevented from gaining access to the loss site.

Question 50

Appraisal

Answer 50

Most claims are settled with little or no disagreement. There are, however, times when the insured and the insurer cannot agree on the value of property involved in the loss. Statutory Condition 11: Appraisal allows either party to ask that disputes involving valuation be settled by appraisal, the details of which are provided in the Insurance Act.

It is important that insureds understand the appraisal process has nothing whatsoever to do with whether insurance coverage is provided under the policy. Once the appraisal process is underway, it seeks only to establish the value of insured property, and nothing else.

Question 51

When Loss Is Payable

Answer 51

“The loss is payable within sixty days after completion of the proof of loss, unless the contract provides for a shorter period.”

Question 52

Replacement

Answer 52

“The insurer, instead of making payment, may repair, rebuild, or replace the property damaged or lost, giving written notice of its intention do to so within thirty days after receipt of the proofs of loss.

In that event the insurer shall commence to so repair, rebuild or replace the property within forty-five days after receipt of the proofs of loss, and shall thereafter proceed with all due diligence to the completion thereof.”

Question 53

Action

Answer 53

In other words, if an insured is unsatisfied with an offer to settle a claim, they may, under the fire Statutory Conditions, sue the insurer within one year of the loss or damage.

In law, a claim can be “discovered” in one of two ways:

• The day that the insured became aware of the event. In this case, there is a presumption the policyholder discovered the loss or damage on the day it actually occurred.
• When a reasonable person ought to have known, in cases when there has been a delay in discovering the claim. In these cases, the cause of the delay will be considered (was the delay reasonable?).

Question 54

Notice

Answer 54

Statutory Condition 15: Notice reads as follows:

“Any written notice to the insurer may be delivered at, or sent by registered mail to, the chief agency or head office of the insurer in the Province. Written notice may be given to the insured named in the contract by letter personally delivered to the insured or by registered mail addressed to the insured at the insured’s latest post office address as notified to the insurer. In this condition, the expression “registered” means registered in or outside Canada.”

This condition establishes the rules regarding all written communications between the insurer and the insured during the policy period.

Question 55

Notice by Insured to Insurer

Answer 55

While most insureds will deal with their brokers for policy changes, they may decide to communicate directly with the insurer. All letters must be sent by registered mail or delivered to the chief agency or head office of the insurer in the province.