What is a material change and how can it hurt you?

The policyholder Hubert Thomas was described by the court as an “an elderly gentleman with very limited formal education”.  Shortly after Christmas 2007, Thomas’ home sustained fire damage resulting from a wood-burning stove.

What made a bad situation much worse is this: although he had purchased an insurance policy, the insurer refused to pay the claim.  Why?

Every insurance policy is considered at law to be a contract of “utmost good faith”.  The insurer agrees to fulfill their promise to pay if certain unforeseen events occur.  And the insured policyholder confirms that the detailed information on which the contract was based, is accurate and true.

A material change in risk occurs when something relevant to the insured context changes – example: a private vehicle is now being used as a taxi cab – and the policyholder fails to notify the insurer.

But to be material, the change must be of sufficient consequence that if disclosed, the insurer would have charged more premium, or refused/terminated the contract altogether.  In other words, changes that do not clearly alter the risk profile do not count.

This was the issue that Thomas brought recently before the New Brunswick Court of Appeal.  In his application for insurance, Mr. Thomas indicated his home’s primary source of heat was electric baseboard heaters; however, during the next year he installed the woodstove to lessen his electric bills.  The first stove was replaced with a second, which the court identified as “unlabelled”, generally meaning it was not produced by a recognized manufacturer, and not CSA or ULC approved.

The insurer – Aviva Canada* – took the position that Mr. Thomas had changed the rules of the game by not advising he had changed his heating with the installation of a non-approved, wood-fuel unit.  He had created a material change in risk, one that they would have refused to insure, had they known the truth.  In fact, their policy renewal documents carried this warning: “Please ensure that all information is accurate, as your coverage and premium are based upon the information you provided”.

However, Mr. Thomas countered that the application for insurance asked about his primary source of heat; and he continued to consider the electric baseboard heaters as his primary source, using the wood stove to supplement when necessary.  Therefore, he did not understand, since he was not changing his primary heating type, that he was compelled to notify his insurer of auxiliary heat sources.

The appeals court sided with Mr. Thomas and against the insurer.

This incident raises an important legal principle: a change in use, operation, or system (like a heating source) can potentially void an existing policy if it is deemed to be material.  A discussion with your broker can help determine if any change you have made, fits that definition.

Disclosure: our brokerage represents Aviva Canada.

Tags: aviva, broker, change, claims, coverage, damage, heat, insurance, material, material change, premium, risk, wood, woodstove