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The Warranty: What You Need to Know

Publication date: September 1, 2020

An actual case may originate with a disciplinary decision, a complaint received by the Syndic’s Office of the ChAD, or a question that a professional or a consumer has asked. Its purpose is to help you reflect on best practices as they relate to your ethical obligations. 

The Story

In 2007, a couple took out a comprehensive homeowner’s policy on an inn they had purchased to run as a bed and breakfast. Three years later, the insurer dispatched a preventionist to inspect the property. The preventionist’s report included two requirements concerning an old wood stove: that it be sealed shut and that a sign prohibiting its use be posted. Once the insurer considered it complete, the preventive intervention file was closed. The preventionist wrote the following note in the file: “received note from the insured saying that the combustion chamber cannot be opened since it is screwed shut. The insured undertakes to post a sign prohibiting its use. File considered complete. Follow-up finished.  

 In 2014, a violent fire broke out at the inn, destroying the building and its contents. The insurer refused to indemnify the couple, since it believed the fire was the result of intentional negligence. Furthermore, the insurer considered that though it was not the cause of the fire, the insureds’ breach of the warranty to secure the wood stove aggravated the risk, which thus suspended coverage. For its part, the couple maintained that it did not breach the warranty to make the corrections the preventionist had required, as evidenced by the lack of a signature on the insurer’s document.   

The Court ruled in favour of the insurer.[1] Let’s see why.

The Scope of the Warranty

This story brings up two questions: first, does the warranty apply if the insured did not give their consent in writing, and second, can coverage be suspended if breaching the warranty was not the cause of the loss?

First, it should be remembered that a warranty may be required prior to the conclusion of the contract, during the contract, or at policy renewal time, in particular following a site inspection. For instance, the insured may have to carry out remedial work on the property—installing a staircase railing, replacing an old roof, or removing a heating oil tank—or implement measures within a specific deadline to protect the property. An insurer could require a car dealership to install surveillance cameras outside the building, or require a company to keep its sprinklers in good working order.   

The warranty can take different forms, including:

  • a document to be read, signed and returned to the insurer;
  • a rider added to the insurance contract;
  • a paragraph within the insurance contract itself.

The warranty is an integral part of the contract; thus, failing to comply with the warranty within a specific deadline could change the coverage or even lead to cancellation of the contract. Here is what article 2412 of the Civil Code of Québec stipulates in this respect: “A breach of warranty aggravating the risk suspends the coverage. The suspension ceases as soon as the insurer has acquiesced or the insured has remedied the breach.”[2]

Failing to comply with a warranty may also result in the insurer not renewing the contract. You must therefore inform any new insurer of this refusal, which may make it difficult to have the risk accepted, or lead to the insured having to pay a higher premium.
Chantale Boucher
Director of Client Relations, ChAD

No Signature Required

So, in answer to the first question this story raises, a signature is only necessary when there is a reduction in coverage during the term of the contract. Article 2405 of the Civil Code of Québec provides that “[…] any rider stipulating a reduction of the insurer’s liability or an increase in the insured’s obligations, other than an increased premium, has no effect unless the policyholder consents to the change in writing.”  It should be noted, however, that it is good practice to obtain a signature.  

Warranty and Cause of Loss

As to whether there must be a connection between the cause of the loss and the warranty in order for the warranty to apply, the answer is no. Indeed, as soon as it is observed that a breach of the warranty aggravating the risk has occurred, the insurance coverage is suspended, as the judge noted in her decision: “If, on the date of the loss, the insured has not respected the warranty to make changes required by the insurer, the latter is not required to honour the insurance contract.”[3]

It should be further noted that it is the insured’s responsibility to respect a warranty. It is up to the insured to mention any issue that is likely to aggravate the risk, such as being unable to respect a warranty.

To help you answer your insured’s questions, the ChAD has written an article [in French only] dealing with the consequences of a warranty. Feel free to recommend it to your insureds.

Keep Abreast of Case Law

In her decision, the judge also dealt with the concept of intentional negligence. To learn more about this topic and about 2019’s most notable legal decisions, register for the Revue annuelle de la jurisprudence 2019 en droit des assurances [2019 Annual Case Law Review of Insurance Law, a new course available in French only on ÉduChAD. This Forfait Folio course, given by Jonathan Lacoste-Jobin and Bernard Larocque, partners at Lavery, de Billy Lawyers, examines recent court decisions on various topics including phishing fraud, subrogation and condominium insurance, exclusions for unlawful acts, and credit insurance.

 

 

[1] Miller c. Promutuel Boréal, société mutuelle d’assurances générales, 2019 QCCS 1288. 

[2] Article 2412 of the Civil Code of Québec.

[3] Miller c. Promutuel Boréal, société mutuelle d’assurances générales, 2019 QCCS 1288.