Of Frozen Pipes, Windfalls and Draconian Consequences

Written by David Thompson and Roger Chown for OIAA WP Magazine

It is very common for homeowner’s policies to exclude water claims arising when pipes freeze during the heating season if the insured was away from the premises for more than four consecutive days, unless the insured had arranged for a competent person to enter the dwelling on a daily basis to ensure that heating was being maintained.  However, there are surprisingly few cases that squarely deal with this simple fact pattern.  After one of the coldest Canadian winters in decades, it seems appropriate to consider this topic.

A 2013 Quebec Court of Appeal decision called into question the reasonableness of excluding coverage based on failure of the insured to fulfil the policy requirement of having someone check on their house daily to ensure adequate heating.  In Perley Shohet c. Traders General Insurance Company, the insured homeowner was away from her home from December 22, 2011 to January 5, 2012.   During this period a water pipe burst, causing $19,000 damage to the home.  The insured’s son had checked in on the home twice during this period, but only entered the home on one of the visits.  Traders denied coverage for the loss based on the policy exclusion requiring the insured to arrange for someone to enter the home daily to ensure adequate heating.

The Quebec Court of Appeal considered whether this exclusion was voided by Article 1437 of the Quebec Civil Code, which states that

[a]n abusive clause in a consumer contract or contract of adhesion is null, or the obligation arising from it may be reduced.

An abusive clause is a clause which is excessively and unreasonably detrimental to the consumer or the adhering party and is therefore not in good faith; in particular, a clause which so departs from the fundamental obligations arising from the rules normally governing the contract that it changes the nature of the contract is an abusive clause.

The court found that it was “abusive” to exclude coverage based on a failure to fulfil a requirement for a daily visit, without demonstrating the necessity of that requirement.   The time period in question was during a winter thaw.   The insurer had not presented any evidence to show that a daily visit was necessary during the period of the thaw.  The exclusion was void on this basis.

Could this reasoning be replicated in Ontario?  Section 151 of the Ontario Insurance Act is the closest we get to s. 1437 of the Quebec Civil Code.   Section 151 states that any “exclusion, stipulation, condition or warranty is not binding on the insured, if it is held to be unjust or unreasonable.”

In the 1993 British Columbia lower court decision Rickards v. BCAA Insurance Co., the defendant insurer sought to dismiss the plaintiff homeowner’s action due to the homeowner’s failure to comply with the exclusion requirement to have someone perform a daily check on his home if he was away for more than 4 consecutive days.  Water pipes froze and burst during the month of December, causing extensive water damage.  The plaintiff relied on s. 223 of the BC Insurance Act, the equivalent of s. 151 of the Ontario Insurance Act, arguing that this exclusion was unjust and unreasonable within the meaning of that section. The court found that the exclusion requirement applied and was not unjust or unreasonable, based on there being a “direct causal connection” between the policy breach and the loss.   The pipe froze in the winter, which was the risk anticipated by the policy provision.  The homeowner’s claim was dismissed.

In its 2005 decision Marche v. Halifax Insurance Co., the Supreme Court of Canada interpreted s. 171 of the Nova Scotia Insurance Act, which is identical to s. 151 in Ontario.  The insurer denied a fire loss claim due to an earlier period of unreported vacancy that was unrelated to the loss, because the property was not vacant at the time of the loss.  The insurer nonetheless argued that the earlier vacancy constituted a material change in risk that voided the policy.  The trial judge found that s. 171 relieved the insured of any policy breach because the insured had rectified the vacancy prior to the loss.  The main issue as argued at the Supreme Court was whether s. 171 applied to statutory conditions (it does), but the court also considered and found no reason to interfere with the trial judge’s finding that s. 171 applied.   The Supreme Court did not lay down any specific test for determining whether s. 171 applied, but pointed out that it is not essential that a statutory breach be causally related to the loss.  The court recognized the conflict that exists between the “draconian consequence of policy cancellation where the change material to the risk has been corrected” and the loss of insurer’s right to cancel the contract due to a material change in risk, and found in favour of the insured.

In the 2010 Ontario Superior Court decision Pietrangelo v. Gore Mutual Life Insurance Co., Justice Ducharme opined that the test for s. 151 is not whether it is unfair to the insured, but whether it has a rational, defensible basis for its existence.

We could find no reported decisions in which section 151 was used to challenge the daily check requirement in Ontario.   Based on the available case law, it seems likely that the exclusion would be upheld if the failure to perform the daily check is what indeed led to the loss.

If the daily check was not performed but it is not proven that this failure caused the loss, then the outcome becomes less clear.  There is an argument to be made that the insurer has a right to assess which circumstances it wants to underwrite, by including conditions and exclusions related to risk, although not necessarily related to the cause of any specific loss.   That said, in Marche, while the Supreme Court recognized this right, the consequences seemed “draconian” to the court and the court found in favour of the insured.

If the insured is not successful in obtaining relief under s. 151, the court may still grant relief from forfeiture under s. 98 of the Courts of Justice Act.  Section 98 reads:

98.  A court may grant relief against penalties and forfeitures, on such terms as to compensation or otherwise as are considered just.

This provision is potentially available if the insured’s policy breach is not substantial and does not prejudice the insurer.   In Kozel v. The Personal Insurance Company, the Ontario Court of Appeal has recently stated that this provision should be interpreted broadly, giving courts a “wide scope to provide relief where the result would be otherwise inequitable or unjust.”  When exercising its discretion to grant relief from forfeiture, the court is to consider:

1.     The conduct of the applicant;

2.     The gravity of the breach; and

3.     The disparity between the value of the property forfeited and the damage caused by the breach.

In insurance cases, the disparity referred to in the third factor involves a comparison of the loss of the coverage and the extent of the damage caused by the insured’s breach.   In Kozel, the breach was the insured’s failure to renew her license.  Writing for the court, Justice Laforme opined that the damage, a $1,000,000 claim threatening the insured’s personal assets, outweighed any damage caused by the insured’s policy breach.  Justice Laforme said that if the coverage denial were upheld, “the insurance company would enjoy a large windfall at the expense of an individual who acted in good faith and whose breach caused no prejudice to the company.”  Justice Laforme determined that the insured’s failure to renew her licence was unrelated to her ability to drive safely.   This suggests that a major determinant of whether a policy breach is “grave” is whether that policy breach was causally connected to the loss.

Even if the policy breach caused the loss, it is not difficult to imagine situations in which the insured’s conduct seems reasonable and the consequences of the exclusion “draconian.”  For instance, if the insured arranged for someone competent to visit every other day, would that be reasonable?  What if warm weather had been forecast as in Perley Shohet?  What if the furnace was brand new but failed inexplicably?  What if the insured was only expected to be away for five days?  In all these situations, it may now be open to a judge to grant relief from forfeiture under the Courts of Justice Act.

The courts are clearly anxious to avoid “windfalls” to insurers and “draconian” results to insureds.  The results of the cases described above seem fair; however, it leaves those of us who assess these claims with considerable uncertainty as there is no easy way to measure what is “draconian” and what is a “windfall.”  As a result, considerable uncertainty remains in assessing these fact patterns.