Author: Mike Thomas

Loss adjusters must interpret policy contracts in relation to each reported claim and make decisions on coverage. Therefore, a fundamental knowledge of contract law is essential to understanding the policy contracts you will come into contact with during your daily activities.

Civil law concerning the private rights of individuals falls into two systems: Common law, which is practiced in all provinces and territories except Quebec, and the Civil Code of Qubec.

Civil law in its application to the business of insurance is concerned mainly with the law of contract and the law of tort. In this article, we will focus on contract law.

Claims are adjudicated according to the terms and conditions of a contract–the insurance policy. Knowledge of contract law is not only useful to adjusters when analyzing policy coverages, but it also is helpful when assessing hold harmless agreements, lease agreements, releases and any other contracts. When the fundamental elements of contract law are not contained within an agreement, a legally enforceable contract does not exist. Contracts can be either written or oral; both are equally enforceable.

To be legally binding contracts must have five essential elements:

Bob Duncan had always dreamed of owning his own business. He was unsure what type of business he would open until the day that he saw an advertisement for a hot dog stand in the local newspaper. The asking price was $12,000, which was perfect for him, since he had already saved nearly $15,000 to put towards a new venture. Bob immediately called the number in the ad and spoke with Ed McLeod, the current owner of the Ed’s Superdogs Ltd., to set up a meeting for later that week. During the meeting, Bob negotiated with Ed to bring the price down to $11,000 and Ed agreed to sell the business to Bob for that price.

Agreement

There must be an agreement between the parties.

When Bob decided to purchase the hot dog stand, he made a fair offer to purchase the business. When Ed accepted the terms of the offer, an agreement was reached. Bob wanted to buy the business and Ed wanted to sell it. Bob presented terms and conditions to Ed who agreed to them. The element of agreement was met.

Capacity to Contract

Parties must be legally able to enter into contracts.

Bob Duncan and Ed’s Superdogs Ltd. are legal entities and therefore legally able to enter into contracts. On the other hand, Bob Duncan and Ed’s Superdogs (not Limited) would not be able to enter into a contract because Ed’s Superdogs is not a legal entity.

Consideration

One party must give consideration for the act or promise of another party.

Bob agreed to pay cash in exchange for the business and all of its property. The cash payment constitutes consideration.

In the case of an insurance contract, consideration is the premium the insured agrees to exchange for the promise of indemnity in the event a covered loss occurs. To make a contract binding there must be an exchange of promises. For example, when an insurance company agrees to pay the insured a certain sum of money in settlement of a claim under a homeowner’s policy it is fulfilling a policy obligation. If the insured were asked to sign a “release” it would not qualify as a contract. The insurance company is not providing anything for the insured’s waived right to sue. Rather, the insurance company is merely fulfilling the policy obligation already paid for by the insured. In some instances an insurance company may ask for such a “release” merely as acknowledgement from the party that the sum has been paid. If the insured did decide to sue, such a “release” would not be binding because the insured was legally obligated in contract to pay that sum of money to the insured. On the other hand, when a third party claimant is asked to sign a release in settlement of an injury suit, such a release would fulfill the criteria for a contract. The insurance company is providing a stipulated sum of money in exchange for the third party relinquishing a right to sue.

Genuine Intention

There must be intent among the parties to create a legally enforceable agreement.

Both Bob and Ed were clear on the terms and conditions of the agreement and genuinely intended to create a legally enforceable contract. The fundamental difference between a contract and a simple agreement is that contracts are enforceable by law. If one party defaults on obligations under a contract, the injured party has recourse to the courts. Both parties must have genuine intent to enter into an agreement that is legally enforceable. In the scenario, both Bob and Ed were in agreement to make the transaction happen and therefore the agreement was legally enforceable.

Legality of Object

The sale and purchase of the business were lawful.

A contract cannot be established for a purpose that violates a civil statute, criminal law or public policy. To insure someone against the effects of a fortuitous loss (for example a fire or a windstorm) is legal. A contract to commit a crime or to obstruct justice is an illegal purpose and would not be enforceable through the courts. In the scenario, transferring ownership of a legitimate business is legal and so, Bob’s purchase of the hot dog stand satisfies this final element of a legal contract.

Special requirements apply to the making of insurance contracts further to the generic rules applicable to contracts. The additional elements include the principle of indemnity, insurable interest and utmost good faith. Provincial insurance legislation and regulations in the common law provinces (the common law), and in Quebec (the Civil Code of Qubec) establish how the law affects insurance contracts. Although governed by contract law, insurance policies are subject to certain unique requirements that distinguish them from other types of contracts.

Policies are based on the principle of indemnity. In the event of a claim, the payment made represents the actual extent of damage. The insured should not benefit from any loss but, instead, should be returned to the same financial position they were in immediately prior to a loss.

An insurable interest exists where it can be established that the insured has a financial interest in preserving the property. In other words, the insured must have a financial relationship to the property to be insured. Ownership of the property qualifies it for insurable interest. Insurable interest also extends to a mortgagee, a lessee, a bailee, a consignee or anyone else who is in a position to suffer a financial loss if the property is damaged.

There is an implicit obligation to deal in good faith in any contractual relationship, but in insurance a tradition of utmost good faith demanding a higher standard of honesty and trust from both parties has evolved in the common law. It is an obligation not to do something, without reasonable justification, to counter the reasonable expectation of the other party in the exchange of promises. Utmost good faith in claims weighs heavily on insurers as the obligations created for claims handlers equate to consumer protection. The insurer must act in a balanced and reasonable manner. Provincial legislation mandating ethical standards for insurance dealings and public policy govern how utmost good faith will be judged.

Insurance companies and their loss adjusters must not act in ways that would unreasonably affect the resolution of a claim under a policy. Most insureds are in a weaker financial position than insurance companies and it creates an imbalance in the bargaining status of the parties. This vulnerability is heightened when a loss occurs. To deny a claim, delay payment, or to take advantage of the insured’s economic vulnerability by offering an inappropriately low settlement does not represent good faith. When an insurance company refuses to pay a legitimate claim that it should know is valid, the conduct may be labelled as malicious, oppressive, and high-handed The law recognizes that the insurer is the more powerful contracting party, and would be looking to balance the power between the contracting parties.

Insurers are obliged to act fairly and preserve the contractual rights of the insured under the policy. The insurer owes a duty to be prompt in handling and assessing losses. As a result, loss adjusters have a duty to follow through on the contract and promise. Knowing your contract law is an important part of this obligation.

Laval, Qubec police have broken up an alleged auto theft ring that may prove to be the biggest ever uncovered in Canada.

Police estimate there are more than 700 fully assembled vehicles, plus 200 with parts removed on the 1,000-square foot lot of Recyclage d’Auto Yasmine in Laval, reported the Montreal Gazette.

An investigation by authorities was sparked after patrol officers noticed frequent comings and goings at the offices of the auto recycler, adding to suspicions was the high volume of luxury cars brought to the lot, Nathalie Lorrain, a constable with Laval’s police forces, told the Gazette.

Investigators then arranged for the Socit de l’assurance automobile du Qubec (the auto insurance board) to do a spot check on the business, the Gazette reported. The check turned up evidence of three stolen vehicles.

The next morning officers returned with a search warrant and, “the first three vehicles we verified were reported stolen,” Lorrain told the paper.

“From what we have seen, we think it will be the biggest (illegal car parts ring) in Canada.”

Srete du Qubec investigators have been called in to analyze information on the company’s computers.

The owner of the lot, Nasser Mahmoud Aoude of Saint-Eustache faces five charges, including three counts of possession of stolen property, reported the Gazette.

The B.C. government has capped at $1 million the vicarious liability car rental companies–and by extension, their insurers–face for accidents and damages caused by customers who rent vehicles.

“Currently, car rental companies face unlimited liability for accidents and damages caused by their customers,” the B.C.’s attorney general said in a press release. “Changes will limit companies’ liability to $1 million for bodily injury and property damage claims and shift some responsibility to the driver.”

British Columbia’s attorney general says the move, which was one of many recent amendments to the Motor Vehicle and Insurance (Vehicle) Act portion of Bill 35, will serve to bring B.C. up to speed with other North American jurisdictions with regard to vicarious liability. In addition, the changes will help business in B.C., such as the car rental industry, to support tourism, the ministry says.

The Trial Lawyers Association of British Columbia (TLABC), on the other hand, said the new legislation will be bad for any B.C. motorist who is involved in an accident while driving a leased or rented vehicle.

“The changes mean the most seriously of injured accident victims would be without sufficient insurance coverage,” Rose Keith, TLABC president, said in a release. “At the same time, the legislation unjustly benefits the automotive industry and financing companies by unfairly limiting the liability of lessors.”

The bill protects the lessor, leaving the lessee exposed in the event of an accident, the TLABC said.

The amendments passed first reading on Apr. 2 and second reading on May 14. It is expected that the law will be passed before the legislative session ends on May 31.

The IBC was unavailable for comment.

Mitchell International has released a report examining owner/policy-holder’s experience with direct repair programs and the impact on satisfaction and loyalty.

According to researchers, in the collision repair industry customer satisfaction and customer loyalty are more closely linked than in other markets.

Because of the nature of automotive collisions, the most important transaction a repair shop has is when the customer brings in a vehicle for repair.

“This single encounter around a repair can determine whether or not a customer will be loyal-willing to give repeat business and references to a repair shop, and it can significantly impact loyalty to carriers, though the repair transaction is only one component of the policy-holder’s relationship with their insurer,” a Mitchell statement said.

Customer satisfaction was measured through survey questions relating to details about the experience with a specific transaction or process, Jason Bertellotti, general manager, special business unit at Mitchell, explains in the report.

Key factors included keeping customers informed, on-time delivery, shop service and shop quality.

Measuring loyalty, he continues, is more complex because it is based on the entire relationship, not a single transaction.

Scaled responses to questions like, “How likely is it that you would refer this company to a family or friend?” were used for this factor.

The report is available online at www.mitchell.com.

Ontario’s Court of Appeal has deemed the 2002 biting of an outdoor worker by a West Nile Virus-carrying mosquito an accident and has awarded the worker $130,000 of coverage under his policy.

Ryszard Kolbuc was working as a plasterer when he was bitten by the virus-carrying mosquito, rendering him a paraplegic.

At the time of the accident, Justice Karen Weiler wrote in her endorsement, while mosquito bites were common to a person in Kolbuc’s occupation, there had been no reported cases of the West Nile Virus in Ontario.

“It was an unforeseen, unexpected event that was caused by an external source–a mosquito–and falls within the ordinary definition of an accident,” Justice Weiler wrote.

“The cause of the illness was an accidental event.”

While ACE Insurance Company of North America argued that an illness is not an accident, Weiler noted that that proposition standing alone is correct, but that an accident can cause a disease.

The costs of the trial and the appeal were awarded to Kolbuc, as well as the $130,000 of coverage he was entitled to under his policy.

The Institute for Catastrophic Loss Reduction (ICLR) is unveiling a winter storm- and tornado-resistant home in Edmonton, Alberta.

The home retrofit includes: anchoring cabinets, office equipment and bedroom furniture to walls; bracing TV stands, televisions and refrigerators with appliance straps; outfitting the washing machine with armoured water supply hoses; anchoring the hot water heater; installing snow melt cables on roof edges and gutters to prevent the formation of ice dams, among other measures.

On average, the tornado season in Canada ranges from April to October–roughly 160 days, says an ICLR release.

Canada ranks second in the world for tornado occurrences after the United States. According to Environment Canada, in the summer, an average of one tornado every five days is reported in Canada.

“Actions taken to make a home more resilient to natural catastrophes should reflect local hazard risk,” Glenn McGillivray, ICLR managing director, said in a statement.

“The Edmonton area–indeed much of Alberta–represents an active zone for tornado and winter storms.”

This is the fifth year that ICLR has retrofitted an existing home as part of Emergency Preparedness Week. Other retrofits include an Ottawa home made more resilient to earthquakes and winter storms, a Vancouver home protected against earthquakes and a Halifax home was bolstered against hurricanes.

There is a 75% chance the 2007 hurricane season will be above normal, according to the NOAA [National Oceanic & Atmospheric Administration].

An average season is one in which there are 11 storms, six of which become hurricanes and two of which become major [Category 3-5] hurricanes.

“For the 2007 Atlantic hurricane season, scientists predict 13 to 17 named storms, with seven to 10 becoming hurricanes,” said NOAA administrator Conrad C. Lautenbacher, a retired Navy vice admiral and undersecretary of commerce for oceans and atmosphere. Of these hurricanes, Lautenbacher said, “three to five could become major hurricanes of Category 3 strength or higher.”

According to the NOAA, the “on-going multi-decadal signal [which describes the set of ocean and atmospheric conditions that spawn increased hurricane activity], warmer-than-normal sea surface temperatures in the Atlantic Ocean and the El Nio/ La Nia cycle,” are all factors increasing the severity of the 2007 hurricane season.

The severity of the season is largely based on whether El Nia forms, the NOAA notes. If it does form, its strength will play a factor in whether storm activity will be in the upper end (or beyond the upper end) of the predicted range.

Even if El Nia doesn’t form, it is expected that we will still see a higher than normal season this year, the NOAA predicts.

“With expectations for an active season, it is critically important that people who live in East and Gulf Coastal areas as well as the Caribbean be prepared,” Bill Proenza, NOAA National Hurricane Center director, said. “Now is the time to update your hurricane plan, not when the storm is bearing down on you.”

The Colorado State University’s Department of Atmospheric Sciences, also found that the 2007 hurricane season is likely going to be “very active,” with landfall probabilities well above their long-period averages.

This is largely due to the rapid dissipation of El Nio conditions, according to researchers at the University.

The researchers say the probability of at least one major (Category 3-5) hurricane reaching landfall on the U.S. coastline is 74%, compared to an average of 52% for the last century.

“We estimate that 2007 will have about nine hurricanes (average is 5.9), 17 named storms (average is 9.6), 85 named storm days (average is 49.1), 40 hurricane days (average is 24.5), five intense (Category 3-5) hurricanes (average is 2.3) and 11 intense hurricane days (average is 5),” Dr. William Gray writes.

Researchers are hesitating to link the potentially active season to global warming or climate change, explaining that Atlantic hurricanes go through “multi-decadal cycles.”

“This active cycle is expected to continue for another decade or two, at which time we should enter a quieter Atlantic major hurricane period like we experienced during the quarter century periods of 1970-1994 and 1901-1925,” Gray predicts.

The Supreme Court of British Columbia recently awarded a widow $6.4 million, $4.2 million of which was for the potential loss of support due to her husband’s death in a 2002 car accident.

In July, 2002 Barry Carter was driving a van owned by his employer, a cable company, when he went into hypoglycaemic shock and lost consciousness, veered into oncoming traffic and struck the vehicle that Dr. Donald Johnson, a laser eye surgeon, was a passenger in.

Johnson died as a result of the collision.

Justice Harry Slade awarded Johnson’s widow $4.2 million for future losses, including pre-retirement family consumption and savings.

While the court heard that Johnson experienced financial issues prior to his death, Justice Slade was convinced that he would not only have bounced back, but likely expanded his business as a successful laser eye surgeon.

“An increase in Dr. Johnson’s time expended in surgery that would yield a substantial increase in income was a strong possibility, more at the level of probability,” Justice Slade wrote in his decision.

“There was also a realistic potential for earning business income based on an ownership interest.”

While Johnson did not have any shares in the company that owned and operated the clinic in which he worked at the time of his death, Justice Slade decided that was likely due to potential difficulty with his creditors, but that would have likely changed.

“There is no evidence of any established plan to develop and take an ownership interest in any clinics,” he wrote.

“There is, however, evidence that would support a finding of a realistic possibility that Dr. Johnson would, at some future time, have sought to capitalize on his reputation and experience by methods other than the personal provision of surgical services.”

A recent B.C. Supreme Court jury decision in Rallahan v. Siu and Litt reinforces the need for claimants to provide complete and accurate information when making a claim with auto insurers.

The court ruled Balwinder Singh Rallahan failed to provide medical history to the Insurance Corporation of British Columbia (ICBC) when filing a claim.

“It’s vital that claimants understand that failing to accurately inform their doctors and ICBC about their medical history can affect their credibility in the eyes of the court,” Joseph P. Cahan, lawyer for Alexander, Holburn, Beaudin & Lang representing ICBC, said in a press release.

Rallahan, a taxi cab driver, was working when he was involved in accidents in both 2001 and 2002. He filed a claim and had his car repaired and received medical benefits. In addition, he claimed $200,000 in lost wages and a further $50,000 for pain and suffering.

However, it became apparent during the trial that he had failed to provide information surrounding a previous related injury.

Because of this, he received only $1,000 for the first accident and nothing for the second. Since the jury awarded less than what the ICBC previously offered, Rallahan may be required to pay ICBC’s court costs.

“ICBC needs its customers to provide complete and accurate information in a timely fashion when making a claim,” Sue Carle, ICBC vice-president, claims services, said. “Without the complete picture, ICBC cannot accurately assess the claim and provide fair compensation to the claimant. Paying too much for claim settlements is unfair to all ICBC customers who pay premiums, but paying too little is unfair to claimants.”