Litigation Matters

Mr. Thomson was insured for $1.3 million under a renewable term life insurance policy, and his estranged wife was the owner and sole beneficiary. Before the term policy was set to expire, the policyowner elected to exercise her option to convert the policy, without evidence of insurability, to a universal life insurance policy with a reduced premium for a lower death benefit of $400,000. The conversion clause confirmed the immediate termination of the term policy upon application for conversion, even before the new policy came into force. The conversion clause also prohibited reinstatement of the term policy.

The new universal policy had a 10-day “free-look” period, which is mandatory in Alberta, with a refund of the initial premium if the policyowner decided to cancel the new policy within that period. Mr. Thomson passed away during the 10-day cancellation period. Ms. Thomson informed ivari that she wanted to cancel the new universal policy and reinstate the old term policy. ivari informed Ms. Thomson that the term policy could not be reinstated under the terms of the conversion clause because the life insured had died, so she no longer had the option to cancel the new policy. As a result, ivari admitted its liability with regard to the new policy and paid the $400,000 death benefit to the court, as Ms. Thompson was asking for the term policy to be reinstated and for the amount of $1.3 million to be paid to her.

At trial, the argument prevailed that the option to cancel the policy within 10 days continued to apply despite the insured’s death during that period. Consequently, since the new policy had been cancelled within the 10-day period, it had never taken effect, and the term policy had not terminated because it had not been converted: [t]he termination of the Term Policy is inoperative because no effective date of a new policy exists. Similarly, the conversion of the Term Policy is inoperative because no new policy exists.³ The trial court, therefore, ruled in favour of Ms. Thomson.

The Court of Appeal upheld the trial decision. It first stated that the 10-day period required by section 5 of the Alberta Fair Practices Regulation applies to replacement and converted policies despite the death of the insured during that period. In referring to the Alberta Insurance Act, it confirmed that an insurance contract and an insurance policy are distinct. The case at issue had two insurance policies but only one insurance contract because the conversion option under the term policy did not require evidence of insurability at the time of conversion. The Court of Appeal found that Ms. Thomson had two policies with ivari under one umbrella contract: the term policy and the universal policy. Therefore, the replacement of the term policy and the cancellation of the universal policy was a single transaction. Once the resolutory condition was acted upon, i.e., the universal policy was cancelled within the 10-day “free-look” period, that policy had to be treated as if it never existed, and ivari was therefore required to pay the death benefit of $1.3 million under the initial policy.

At first glance, one might question the relevance of appealing a decision whose facts, i.e., the death of the life insured during the 10-day “free-look” period, are unlikely to recur. However, the impact of the Alberta Court of Appeal decision on the stability and predictability of insurance contracts can rightfully be questioned, when under the theory of a single umbrella contract with multiple insurance policies, it becomes possible to reinstate the initial policy despite a conversion clause that clearly provided for the termination of the term contract. The outcome of the appeal to Canada’s highest court will be closely monitored.

Mr. Paul-Hus purchased a critical illness policy from Sun Life for $100,000. The policy was issued on March 13, 2015, following an application completed by telephone interview in which he reported a medical history of tonsillitis and shoulder injury. At the insurer’s request, he also underwent a blood profile and urinalysis.

More than three years later, in August 2018, he submitted a claim to Sun Life, including a statement completed by the treating neurologist who indicated a diagnosis of monolemic [sic] inferior motor neuron disease (progressive muscle atrophy) on February 1, 2018, symptoms associated with the disease that had begun in 2014, and an initial medical visit on February 24, 2015.

Due to an indication of undisclosed medical history at issue time, the insurer was entitled to conduct a review of the claimant’s medical history. This investigation revealed that a few weeks before applying for critical illness coverage, Mr. Paul-Hus had consulted a neurologist for progressive weakness in his left arm and hand since August 2013. An EMG conducted on February 24, 2015, showed denervation changes in his forearm. Several additional medical investigations and consultations were conducted after the policy had come into effect, resulting in January 2018 with a probable diagnosis of a degenerative disease such as progressive muscle atrophy.

As a result, Sun Life denied the claim and cancelled the policy as the insurer’s underwriting standards would have suspended the issuance of critical illness coverage until the medical investigations had been completed. Therefore, no policy would have been issued since the investigations led to the diagnosis for which Mr. Paul-Hus made a claim. 

The judge first observed that despite clear questions to that effect in the application, the claimant had failed to report any of his medical history. Subsequently, the judge made a relevant review of the case law applicable to the burden of proof for cancelling a policy when coverage had been in effect for more than two years, which can be summarized as follows: The necessary requirement is representation, as true, of a situation or a health condition that is known to be false, for the purpose of deceiving the insurance company so that it will consent to and issue an insurance policy that it would not have otherwise consented to and issued.⁷

The judge confirmed that the insurer had discharged its burden of proof and was well founded in this case to cancel ab initio the critical illness policy, considering that the claimant could not have forgotten his symptoms when applying for this coverage nor the numerous medical consultations and investigations conducted a few weeks before the application: Paul-Hus purposely failed to disclose the information he had nonetheless reported a few weeks earlier to Dr. Brunet about his symptoms. He knowingly neglected to inform the insurer of his recent consultations with a plastic surgeon and neurologist in addition to the prescribed examinations and ongoing neurology investigation for weakness in his left hand and arm. This clearly demonstrates, in the court’s view, the claimant’s intention to conceal his true medical condition for the purpose of deceiving Sun Life and thus obtaining the desired insurance coverage.⁸

Mr. Paul-Hus has appealed the judgment. Sun Life recently filed a motion to dismiss the appeal, arguing that the application to appeal had no reasonable chance of success; however, Sun Life’s motion was dismissed.⁹ We will be interested in seeing how this case plays out before the Court of Appeal.