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Insurance contracts, like any other type of contract, require informed consent by all signatories. This concept is especially relevant considering that an insurance contract is an example of uberrimae fidei, i.e. an agreement requiring the utmost and the most absolute good faith when one party is disclosing facts that could influence the other party?s decision. In other words, policyholders are held to a high degree of honesty when providing their insurers with information.

Insurance contracts are essentially characterized by the risks they cover and by what risks the insurer is willing to tolerate for a given premium. The Civil Code of Québec (CCQ) recognizes two specific instances in which the actual declaration of risk is fundamental: the initial declaration of risk before the contract is drawn up¹ and any increase in the risk level during the term of the contract.²

The declaration of risk is essential to the insurer when it comes to accurately determining the extent of the risk and the premium will be charged if the insurer agrees to cover the prospective client. As a general rule, the policyholder?s utmost good faith should be in evidence during the initial declaration stage given that this declaration paves the way for the prospective contractual relationship and its various terms and conditions.

Due to the positive disclosure requirement, policyholders are responsible for informing the insurer about any relevant factors that might change its risk assessment. Therefore, it stands to reason that the Civil Code sets out consequences in the event that this requirement is not fulfilled by the policyholder. Policyholders who make false statements could see their insurance contracts nullified ab initio.³ In other words, the contract would be deemed to have never existed because the basis on which it rests, i.e. the initial declaration of risk, was flawed. It should also be noted that nullification will only be relative: the insurer may elect not to raise the issue at all. And the Court, after having heard the evidence, might not automatically rule that the contract is null and void.

It is also interesting to note that the Civil Code provides a window of opportunity in which the insurer may apply for a ruling that the contract entered into with a policyholder who failed to make full disclosure during the initial declaration of risk is null and void ab initio. The insurer has two years after the effective date of the contract to request nullification ab initio based on false statements or an unwillingness to fully disclose risk.⁴ Set against that backdrop, the insurer?s burden of proof amounts to demonstrating that the policyholder made false statements or concealed relevant facts.

Insurance fraud

Once the two-year window of opportunity has closed, the insurer faces an additional burden of proof: it must also demonstrate that the policyholder committed fraud.⁵

Fraud is distinguished from false declarations or concealment. Among other things, it results from the misrepresentation of a fact in the knowledge that, if the truth were disclosed, the insurer would not issue the policy under the negotiated conditions. Therefore, the policyholder must have intentionally deceived the insurer in order to obtain an advantage that would not have otherwise been obtained.

Insurers, therefore, have a heavy burden of proof if the two-year threshold has been crossed. This is because fraud cannot be presumed; it must be established with certainty. It should be noted that if the insurance contract has been in effect for less than two years, insurers do not have to prove fraud in order to have it declared null and void by the Court.⁶

Burden of proof

On top of that heavy burden of proof, we must also consider the actions of a ?reasonable insurer? in the same circumstances. Whether or not the two-year window of opportunity is still open, the insurer must (1) demonstrate that it would not have entered into the contract based on its own underwriting criteria; and (2) that a reasonable insurer in the same circumstances (i.e. dealing with false declarations, concealment or fraud) would have also declined to issue coverage.⁷

To recap, before the expiry of the two-year window of opportunity, insurers requesting a contract?s nullification ab initio must prove that:

• The policyholder made false declarations or concealed information when making the initial declaration of risk.
• The insurer would not have entered into the contract based on its own underwriting criteria if it had been apprised of the concealed information.
• A reasonable insurer in the same circumstances would have also declined to take on the risk.

In contrast, after the expiry of the two-year window of opportunity, insurers requesting the contract?s nullification ab initio must prove that:

• The policyholder made false declarations or concealed information when making the initial declaration of risk and intended to deceive.
• The insurer would not have entered into the contract based on its own underwriting criteria if it had been apprised of the concealed information.
• A reasonable insurer in the same circumstances would have also declined to take on the risk.

A topical debate

Recently, Justice Isabelle Germain of Quebec?s Superior Court ruled on a case involving insurance fraud in the matter of Paul-Hus v. Sun Life Canada, compagnie d?assurance-vie.⁸ This ruling illustrates that policyholders must answer the insurer?s questions honestly, failing which the consequences may be severe.

In this case, Paul-Hus claimed insurance benefits for serious illness, as set out in the insurance policy taken out by his company (of which he was the sole shareholder and director). Sun Life considered the contract null and void due to Paul-Hus?s false declarations while filling out the questionnaire he was required to complete when taking out the policy. Essentially, he did not answer three questions correctly and, if he had, the insurer would not have issued the serious illness policy.

Among other things, Sun Life had asked Paul-Hus whether he felt weakness in his arm and whether a doctor had ever recommended any tests or if he was awaiting any test results. The company also asked him if he had ever experienced severe headaches. Paul-Hus answered ?no? to all those questions.

The evidence, however, demonstrated the opposite. The insurance policy was issued on March 17, 2015, while the evidence indicated that Paul-Hus had consulted his neurologist on February 24, 2015 due to weakness in his left hand, which had been noted at least two years previously in his medical records. At that time, his attending neurologist had prescribed a battery of tests to identify the cause.

In light of the facts of the case, Justice Germain reiterated the principles governing  declarations of risk in the insurance sector and agreed that the penalty for false declarations is nullification of the contract. This decision is an interesting one because Sun Life successfully discharged the heavy burden of demonstrating Paul-Hus?s fraudulent dealings by introducing as evidence his medical records, along with recordings of his telephone interview with a Sun Life representative. Although Paul-Hus claimed not to have noticed or suspected any symptoms of disease prior to taking out the policy, his medical records revealed the opposite. In the Court?s view, it was clear that Paul-Hus was under neurological investigation due to weakness in his left arm at the time he was completing the questionnaire. Although he claimed not to know that this information could have had an impact on the insurer?s decision, Justice Germain did not find this claim credible and concluded that Paul-Hus had been dishonest. For Justice Germain, the evidence presented demonstrated that Paul-Hus had intentionally deceived Sun Life.

In addition, Paul-Hus claimed that he had been diagnosed with amyotrophic lateral sclerosis (ALS, also known as Lou Gehrig?s disease), which was in no way supported by the evidence. Under cross-examination, Paul-Hus admitted that he had never received any such diagnosis.

In the Court?s opinion, the policyholder knowingly misled the insurer and falsified his risk assessment in order to obtain coverage. Given that Paul-Hus was not insurable for serious illness coverage in the eyes of a reasonable insurer, the Court concluded that the contract should be nullified ab initio and terminated.

This decision reminds us of how important it is for policyholders to answer insurer?s questionnaires honestly when making their initial declaration of risk.

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1. CCQ, sec. 2408 and 2409.
2. CCQ, sec. 2466 and following.
3. We should point out that if the false statement deals exclusively with the policyholder?s age, the contract cannot be declared null and void (sec. 2410 CCQ) unless the policyholder?s actual age is outside the insurable range established by the insurer (CCQ, sec. 2411).
4. CCQ, sec. 2424.
5. CCQ, sec. 2424, par. 1.
6. Giguère v. Mutuelle vie des fonctionnaires du Québec, 1995 CanLII 4658 (QC CA).
7. CGU compagnie d?assurance du Canada v. Paul, 2005 QCCA 315, par. 2.
8. 2023 QCCS 3890. We should note that, while this article was being written, this decision was appealed.

 

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