March 2013

Honesty is the best policy when it comes to insurance

By Marie-Ève Henrichon

Article 2408 of the Civil Code of Québec stipulates that, when acquiring insurance, the policyholder must disclose all the facts that are likely to influence the insurer's appraisal of risk. Failure to mention crucial information could result in the insurer's refusal to pay in the event of loss or damage, as was the case in Loranger v. Lloyd's.

In May 2008, Guy Loranger's barn was destroyed by fire. Mr. Loranger's insurer, Lloyd's Canada Insurance Company, refused to compensate him since he had failed to mention, when purchasing his insurance policy in 2006, that he had pleaded guilty to a charge of marijuana production two years earlier.

On November 23, 2012, Judge Marc St-Pierre rendered a decision in the matter, resolving the conflict between the parties (2012 QCCS 6266). The parties concurred that, had it been aware of the policyholder's criminal record, the insurer would never have agreed to insure the risk. The insurer invoked article 2409 of the Civil Code of Québec to further maintain that Mr. Loranger had not acted as a "normally provident insured" by failing to reveal his criminal record to the insurer. The matter in dispute was therefore whether the insured sought to conceal his criminal record, though there were no questions relating to the matter when Loranger purchased the policy.

The court first pointed out that the notion of concealment implies an act of will, and Judge St-Pierre concluded that, in this case, a regular citizen could not foresee creating a higher risk for an insurer as a result of a criminal past. Mr. Loranger had a new job and swore he no longer wished to engage in such activities. The "moral" risk that could be attached to Mr. Loranger, such as an eventual settling of accounts with former associates, was discounted given the period of time between the search and the purchase of the insurance policy. In terms of the "material" risk?the risk associated with a fire or from moisture resulting from marijuana production, for example?the policyholder no longer engaged in this type of activity, and the risk was therefore dismissed. Because there is no subjectively assessed risk related to the offense committed by Mr. Loranger, the court decided that there had been no concealment on his behalf.

The other arguments raised by the insured to refuse compensation were also dismissed.

This decision strikes us as rather surprising given that the policyholder's criminal past was contemporaneous to the acquisition of the policy. An appeal was filed.