Gregory v. Jolley et al. [Indexed as: Gregory v. Jolley]

54 O.R. (3d) 481

[2001] O.J. No. 2313

Docket No. C31874

Court of Appeal for Ontario

Laskin, Sharpe and Simmons JJ.A.

June 18, 2001

• Application for leave to appeal to the Supreme Court of Canada was dismissed with costs January 31, 2002 (Gonthier, Major and Binnie JJ.). S.C.C. File No. 28814. S.C.C. Bulletin, 2002, p. 149.

Insurance--Misrepresentation--Waiver--Insurer does not waive any obligation of material disclosure by not insisting upon written application by insured for reinstatement of policy --Applicant for reinstatement of disability insurance policy has obligation to disclose facts that could make applicant uninsurable whether or not insurer asks for written application.

The plaintiff applied for disability insurance in 1989. He did not reveal that he suffered from bowed legs, which caused uneven wear to his knee joints, that he had had surgery on his left knee in 1985 and that he had been advised that he would require surgery on the other knee. He also made serious misrepresentations with respect to his income. On the 1989 application, he stated that his earned income (from his own business) was $100,000. The policy lapsed in 1990 and the plaintiff applied for identical coverage, stating that his 1989 income was $100,000 and estimating his 1990 income to be $90,000. In fact, he had no employment income in 1989 and a net business loss of $58,840. In 1990, he earned no employment income and had a net business loss of $9,615. The policy lapsed for non-payment of premiums in March 1993 and was reinstated in April 1993 upon the plaintiff's application. The defendant insurer's underwriter did not require the plaintiff to submit a written application for reinstatement. The plaint iff underwent knee surgery later that year. He suffered complications from the surgery and since then claimed to have disabling difficulties with blood pressure, arthritis and diabetes. He claimed benefits under the policy in 1994. The claim was originally approved, but the defendant subsequently purported to rescind the policy on grounds of material misrepresentation. The plaintiff brought an action for the policy benefits. The action was allowed. The trial judge found that the plaintiff had misrepresented material facts but declined to make a finding of fraud on the basis that the misrepresentations were not calculated to mislead and that the plaintiff had not intended to defraud the defendant. He found that, as fraud had not been proved, the plaintiff was entitled to the benefit of the "incontestability" clause, which provides that in the absence of fraud, the insurer cannot avoid the policy for misrepresentation after two years from the application for insurance. The defendant appealed.

Held, the appeal should be allowed.

Civil fraud is proved where it is established that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it is true or false. The trial judge erred in not taking into account the possibility that fraud could be made out if the plaintiff made misrepresentations of material fact without regard to their truth.

At the time of the application for reinstatement, the plaintiff was under a positive duty to disclose the fact that he had no insurable income, and the defendant did not effectively waive any obligation of disclosure by not insisting upon a written application. It would be inconsistent with the terms of the Insurance Act, R.S.O. 1990, c. I.8 and with basic common law insurance principles to allow an insured to withhold material facts that plainly bear upon insurability. It was unnecessary on the facts of this case to determine the full extent of an insured's obligation to disclose facts when seeking reinstatement. Where, as in this case, an insured is in possession of facts that any reasonable person would know could make him or her uninsurable, there is a duty to disclose those facts even if the insurer does not ask for a written application. When one applies for reinstatement of a disability insurance policy, there is an implicit representation that one is at the very least insurable, i.e. that one is earning income that can be insured, whether or not the insurer asks for a written application. Where the insurer does not insist upon a written application for reinstatement, any doubt regarding the materiality of undisclosed facts will be resolved in favour of the insured. No such doubt arose in this case. The trial judge erred in rejecting the defendant's claim of entitlement to avoid the policy on the ground that the plaintiff had failed to disclose material facts on his application for reinstatement in 1993. As the misrepresentation or failure to disclose was within two years of the date of the reinstatement of the policy, the incontestability clause had no application and it was unnecessary for the defendant to prove fraud. The policy was voidable, and the defendant was not obliged to pay the benefits claimed by the plaintiff.

APPEAL from a judgment for a plaintiff in an action for benefits under a disability insurance policy.

Derry v. Peek (1889), 14 A.C. 337, [1886-90] All E.R. Rep. 1, 58 L.J. Ch. 864, 61 L.T. 265, 54 J.P. 148, 38 W.R. 33, 5 T.L.R. 625, 1 Meg. 292 (H.L.), apld Ipapo v. Citadel Life Insurance Co., 1989 MBCA, [1989] I.L.R. 1-2449, 57 Man. R. (2d) 272 (C.A.); Johnson v. Eaton/Bay Life Assurance Co. (1984), 3 O.A.C. 238, [1984] I.L.R. 1-1761 (C.A.), revg [1983] I.L.R. 1-1686 (Ont. S.C.), consd Other cases referred to Armstrong v. North West Life Insurance Co. of Canada (1987), 1986 BCSC, 34 D.L.R. (4th) 757, [1987] I.L.R. 1-2167 (B.C.S.C.), affd (1990), 1990 BCCA, 48 B.C.L.R. (2d) 131, 72 D.L.R. (4th) 410 (C.A.); Edgington v. Fitzmaurice (1885), 29 Ch. D. 459, [1881-85] All E.R. Rep. 856, 55 L.J. Ch. 650, 53 L.T. 369, 50 J.P. 52, 33 W.R. 911, 1 T.L.R. 326 (C.A.); McArthur v. Prudential Life Insurance Co. of America, 1969 ONSC, [1969] 2 O.R. 689, 6 D.L.R. (3d) 477, [1969] I.L.R. 1-279 (H.C.); Nuraney v. MBA Insurance Brokers Inc., 1989 ONSC, [1989] I.L.R. Â1-2439, 38 C.C.L.I. 243 (Ont. H.C.) Statutes referred to Insurance Act, R.S.O. 1990, c. I.8, ss. 308, 309, 310 Authorities referred to Baer, M.G., Study Paper on the Legal Aspects of Long-Term Disability Insurance (Toronto: Ontario Law Reform Commission, 1996) Brown, C., Insurance Law in Canada, looseleaf, vol. 1 (Toronto: Carswell, 1999) Hayles, R., Disability Insurance: Canadian Law and Business Practice (Toronto: Carswell, 1998)

Kirk F. Stevens, for respondent. Robert J. Howe and David Cherepacha, for appellant.

The judgment of the court was delivered by

SHARPE J.A.:--

Introduction

[1] The respondent Walter Gregory asserted a claim for disability benefits under an accident and sickness insurance policy issued by the appellant Aetna. The appellant purported to rescind the policy on grounds of material misrepresentation. The respondent brought this action for the policy benefits and was successful after a 19-day trial. The trial judge found that the [respondent] had misrepresented material facts relating to his medical condition and his income, but declined to make a finding of fraud. The trial judge found that as fraud had not been proved, the respondent was entitled to the benefit of the "incontestability" clause, providing that in the absence of fraud, the insurer cannot avoid the policy for misrepresentations after two years from the application for insurance. As a result, the respondent's claim for benefits was allowed.

[2] The appellant submits that the trial judge erred in several respects. It argues that the trial judge failed to apply the proper test for civil fraud and that had he done so, he would have found fraud entitling the appellant to avoid the policy. The appellant also submits that the respondent misrepresented or failed to disclose facts when the policy was reinstated after having lapsed for non-payment of premiums and that, as two years had not elapsed from the date of reinstatement, the incontestability clause had no application. Finally, the appellant submits that the claim should have been dismissed on the ground that the respondent was caught in a lie at trial on the issue of his disability. The trial judge found that the appellant was gainfully employed for six months during the period he claimed to be disabled from working. The trial judge did not disallow the claim on this ground, but reduced the benefits award by the amount the respondent had earned. The appellant submits that this was an error of law and that the finding that the respondent was able to work when he claimed he was disabled was fatal to his claim.

Facts

[3] The respondent took early retirement in October 1985 at age 51 from a large corporation. He had a pension of approximately $40,000 and his former employer hired him on a short-term contract basis to provide training programs. The respondent and two colleagues started their own company to carry out this contract and to offer similar services to others. The business was unsuccessful and rather than earn income, the respondent suffered losses in all years relevant to this action.

[4] In 1989, the respondent and his partners decided to obtain disability insurance. They applied for the insurance through Ron Jolley, a friend of one of the appellant's partners. Jolley had recently become an insurance agent, selling the appellant's disability insurance products. The respondent applied for insurance in an amount sufficient to cover his mortgage and fixed living expenses. The first policy was issued in 1989, but it lapsed in October 1990. The respondent applied for identical coverage that same month. The policy was delivered in January 1991 and came into effect in July 1991 when the first premium was paid. The policy lapsed for non-payment of premiums in March 1993, and was reinstated on April 12, 1993 upon the respondent's application. The respondent completed a written application for reinstatement but the appellant's underwriter did not require him to submit it.

[5] The trial judge found that the respondent had made material misrepresentations on his applications for disability insurance in 1989 and 1990 with respect to both his health and his income. The respondent suffered from genu varium, or bowed legs, causing uneven wear to his knee joints. He had had surgery to his left knee in 1985 and was advised that he would require surgery to his right knee as well. He suffered serious complications from the surgery to his left knee and put off the surgery to his right knee. The appellant required the respondent to undergo a paramedical examination in December 1990 in connection with his application for insurance. The respondent disclosed that he had had surgery to his left knee "due to cartilage problems" in 1985 and stated that he had been "fine since". In fact, he had consulted a doctor with respect to discomfort in his left knee in July 1990. The respondent also described his knee surgery as "cosmetic".

[6] The misrepresentations with respect to the appellant's income were more serious. The respondent's income tax returns show that his business venture lost money and that, during the entire period, he had no insurable earned income. On the 1989 application, he stated his earned income to be $100,000. On the 1990 application, he stated his 1989 earned income to be $100,000 and estimated his 1990 earned income to be $90,000. In fact, the respondent's income tax returns show that in 1989, he had no employment income and a net business loss of $96,220. Even after taking his pension income into account, he showed a net income loss [of] $58,840. In 1990, he earned no employment income, showed a net business loss of $9,615 and, after taking his pension into account, a net income loss of $440. At no time from the date he applied for disability insurance forward, including 1993 when he applied to have his policy reinstated after it had lapsed, did the appellant have any insurable income. His inc ome tax returns showed no income for employment for any year, and net losses in every year.

[7] In November 1993, the respondent underwent surgery on his right knee to deal with the problem that had been identified in 1985. Once again, he suffered complications from the surgery. A blood clot formed and further surgery was required. Since then, he has had what he claims to be disabling difficulties with blood pressure, arthritis, and diabetes. On February 15, 1994, he submitted a Statement of Accident or Illness to the appellant, claiming benefits for the surgery under the policy. The claim was originally approved and benefits were paid. A subsequent review by the appellant's claims department revealed the medical information the respondent had failed to disclose at the time of his application for insurance. The appellant's claims officer ordered that no further payments be made and by letter of May 4, 1994, advised the respondent that his policy was "invalid in accordance with [its] General Provisions". The respondent pressed his claim for benefits, and the appellant countered that Gregory had also misrepresented his income when applying for the insurance.

[8] At trial, the respondent submitted medical evidence of disability and swore that he had not worked during the period for which he claimed disability benefits. The appellant led evidence to show that in fact the respondent had worked for 6 months for which he had been paid approximately $18,000.

Policy Provisions and Legislation

[9] Part VII of the Insurance Act, R.S.O. 1990, c. I.8, dealing with "accident and sickness insurance" contains the following provisions under the heading "misrepresentation and non-disclosure". The basic duty of disclosure imposed upon an insured person and the consequences of non-disclosure is dealt with in s. 308:

Duty to disclose

308(1) An applicant for insurance on the person's own behalf and on behalf of each person to be insured, and each person to be insured, shall disclose to the insurer in any application, on a medical examination, if any, and in any written statements or answers furnished as evidence of insurability, every fact within the person's knowledge that is material to the insurance and is not so disclosed by the other.

Failure to disclose

(2) Subject to sections 309 and 312, a failure to disclose or a misrepresentation of such a fact renders a contract voidable by the insurer.

The right of the insurer to avoid the policy for misrepresentation of non-disclosure is limited by the "incontestability" provision:

309(1) Subject to section 312 and except as provided in subsection (2),

(a) where a contract, including renewals thereof, except a contract of group insurance, has been in effect continuously for two years with respect to a person insured, a failure to disclose or a misrepresentation of a fact with respect to that person required by section 308 to be disclosed does not, except in the case of fraud, render the contract voidable;

(b) where a contract of group insurance, including renewals thereof, has been in effect continuously for two years with respect to a group person insured or a person insured, a failure to disclose or a misrepresentation of a fact with respect to that group person insured or person insured required by section 308 to be disclosed does not, except in the case of fraud, render the contract voidable with respect to that group person insured or person insured.

Exception

(2) Where a claim arises from a loss incurred or a disability beginning before a contract, including renewals thereof, has been in force for two years with respect to the person in respect of whom the claim is made, subsection (1) does not apply to that claim.

These provisions are specifically made applicable to reinstatement of policies:

310. Sections 308 and 309 apply with necessary modifications to a failure at the time of reinstatement of a contract to disclose or a misrepresentation at that time, and the period of two years to which reference is made in section 309 commences to run in respect of a reinstatement from the date of reinstatement.

The policy at issue in this appeal contains its own incontestability provision, which is to a similar effect:

Incontestability

Statements made in the application for this policy, in any application for reinstatement or in any application for substitution of a person insured, other than fraudulent statements, will be considered incontestable after this policy has been in force for two years from the policy date, the date of reinstatement or the date of substitution of the person insured. This provision will not apply if disability commenced or a loss was incurred before the end of the two year period.

Findings of the Trial Judge

[10] The trial judge found that the respondent's misrepresentations "as to health and income were material to the contract and might have been sufficient grounds for rescission within two years, but not later". The trial judge held that the incontestability clause applied, because more than two years had elapsed from the date the policy came into effect and he was "not satisfied that Mr. Gregory had any fraudulent intent at the time the insurance contract was made".

[11] With respect to health, the trial judge found that the failure to disclose the 1990 visit to the doctor "was not calculated to mislead or misrepresent". With respect to income, the trial judge found that the income information supplied by the respondent was "wrong". The figure for income included pension income, which is obviously not insurable as it is not lost upon disability. The figure also included an estimate of anticipated income. The trial judge found that "[a]t the time of the second application [in 1990], if not the first, his estimate was optimistic, even unrealistic, given the apparent failure of the business in whose name to policies were purchased." The trial judge also found that it was clear that the appellant "would not have offered this policy if the application had included the fact that there was no established history of earning in the business [the respondent] was then engaged in". However, the trial judge declined to make a finding of fraud against the respondent: "Nothing in the evidence demonstrates that Mr. Gregory intended to defraud Aetna by means of these representations." In the absence of fraud, the trial judge found that the respondent was entitled to the benefit of the two-year incontestability clause.

[12] The trial judge rejected the appellant's contention that the respondent had been guilty of misrepresentation when he applied for reinstatement in 1993 after the policy had lapsed for non-payment of premiums. This finding was based on the fact that the appellant had not required a written application from the respondent. The trial judge's finding on this point was as follows:

Section 310 [of the Insurance Act] speaks of a failure to disclose or misrepresentation "at that time", being the time of reinstatement. I interpret the policy provision as consistent with the section. No statements were made "at that time", because [the appellant's underwriter] reinstated the policy without requiring any. A subsequent reinstatement does not restart the time relative to statements made in the original application."

[13] The trial judge also found that the respondent "was not truthful when he testified that he had worked only as a volunteer since the onset of his disability". Although he found that "this lack of candour before the court is troubling", he held that it did not defeat the claim under the policy, and that the appropriate remedy was to reduce the claim by the amount the respondent had been paid.

[14] As a consequence of these findings, the trial judge awarded the respondent damages in the amount of $154,633.50, and declared both that the policy was valid and subsisting and that the appellant had been totally disabled from November 24, 1993 to May 27, 1998. The damages were reduced by $19,309.02, the amount the appellant earned during the period he claimed to be disabled. The appellant was also awarded pre-judgment interest. As the trial judge found that the appellant had made an unfounded allegation of fraud, the respondent was also awarded solicitor and client costs.

Issues

(1) Did the trial judge err in failing to find fraud with respect to the initial application?

(2) Did the trial judge err in failing to find misrepresentation sufficient to avoid the policy with respect to the application for reinstatement?

(3) Did the trial judge err in failing to find that the claim for disability benefits was defeated by the fact that the respondent had been able to work for six months?

Analysis

Issue 1: Did the trial judge err in failing to find fraud with respect to the initial application?

[15] It is common ground between the parties that the appropriate test for civil fraud to be applied here is that stated by Lord Herschell in Derry v. Peek (1889), 14 A.C. 337 at p. 374, [1886-90] All E.R. Rep. 1 (H.L.):

[f]raud is proved when it is shewn that a false representation has been made (1) knowingly, or (2) without belief in its truth, or (3) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement being fraudulent, there must, I think, always be an honest belief in its truth. And this probably covers the whole ground, for one who knowingly alleges that which is false, has obviously no such honest belief. Thirdly, if fraud be proved, the motive of the person guilty of it is immaterial. It matters not that there was no intention to cheat or injure the person to whom the statement was made.

[16] The appellant submits that the trial judge failed to apply the third branch of this test relating to reckless statements and that, had he done so, he would necessarily have found that the respondent was reckless with respect to the truth of the representation he made as to his income.

[17] In his reasons for judgment, the trial judge referred to a passage from Nuraney v. MBA Insurance Brokers Inc., 1989 ONSC, [1989] I.L.R. 1-2439, 38 C.C.L.I. 243 (Ont. H.C.), which in turn refers to Derry v. Peek. However, in analyzing the facts and making his findings, the trial judge made no reference to the possibility of making a finding of fraud on the basis of recklessness.

[18] As I have already noted, the trial judge found that the respondent's estimate of income was "unrealistic". However, he rejected the allegation of fraud on the basis that the respondent's misrepresentations were "not calculated to mislead or misrepresent" and that "nothing in the evidence demonstrates that Mr. Gregory intended to defraud Aetna by means of these representations" (emphasis added). The trial judge offered as a reason for rejecting the allegation of fraud with respect to the misrepresentation as to income the fact that the respondent "wanted coverage only in an amount sufficient to cover certain fixed expenses, such as mortgage payments".

[19] In my respectful view, the trial judge erred both in fact and in law in his treatment of the allegation of fraud. I deal first with the facts. While the respondent was estimating the income he would receive from his new business venture in 1989, by the time he made the second application in 1990, he must have known that he lost a significant sum in his business venture in 1989, yet he stated his income for that year to have been $100,000. The trial judge does not appear to have considered this point when he characterized all the income figures as estimates. In 1990 the respondent was not estimating his 1989 income.

[20] With respect to the law, the trial judge's reasons show that he failed to consider whether the appellant had made out a case of fraud on the basis of recklessness. While he referred to a case that in turn referred to the test from Derry v. Peek, the reasons for judgment demonstrate to my satisfaction that the trial judge simply did not take into account the possibility that fraud could be made out if the respondent made misrepresentations of material fact without regard to their truth. The trial judge's reasons speak only of an intention to defraud or of statements calculated to mislead or misrepresent. He makes no reference to recklessness or to statements made without an honest belief in their truth. As Derry v. Peek holds, that state of mind is sufficient proof of the mental element required for civil fraud, whatever the motive of the party making the representation. In another leading case on civil fraud, Edgington v. Fitzmaurice (1885), 29 Ch. D. 459 at pp. 481-82, [1881-85] All E.R. Rep. 856 (C.A.), Bowen L.J. stated: "[I]t is immaterial whether they made to statement knowing it to be untrue, or recklessly, without caring whether it was true or not, because to make a statement recklessly for the purpose of influencing another person is dishonest." The failure to give adequate consideration to the contention that the respondent had been reckless with the truth in regard to the income figures he gave in order to obtain disability insurance constitutes an error of law justifying the intervention of this court.

[21] The respondent points out that the agent Jolley did not complete all the blanks on the application and did not require the respondent to provide income figures from his income tax returns. The appellant did not insist on more information. However, the respondent cannot escape the consequence of the seriousness of his misrepresentations on the basis that the appellant had the responsibility to make inquiries and satisfy itself that the respondent had supplied accurate income figures. The admittedly casual approach of the appellant must be considered in relation to grossly exaggerated income figures given by the respondent. An insured may not exaggerate his income and thereby shift the burden of truthfulness into a burden on the insurer to make additional inquiries: Armstrong v. North West Life Insurance Co. of Canada (1987), 1986 BCSC, 34 D.L.R. (4th) 757 at p. 767, [1987] I.L.R. 1-2167 (B.C.S.C.); McArthur v. Prudential Life Insurance Co. of America, 1969 ONSC, [1969] 2 O.R. 689, 6 D.L.R. (3d) 477 at pp . 695-96 O.R., pp. 483-84 D.L.R. (H.C.J.).

[22] In view of the conclusion I have reached on the second ground of appeal, it is not necessary for me to decide whether it would be appropriate for this court to substitute a finding of fraud or order a new trial on this first ground of appeal. I would note, however, that there was a considerable body of evidence that would support a finding [of] fraud.

[23] First, the trial judge described the respondent's estimate of income as "unrealistic". Given the obvious importance of representations regarding income in an application for disability insurance, a finding that an applicant for insurance gave an "unrealistic" estimate comes very close to a finding of recklessness.

[24] Second, the respondent's income figures were not just wrong in detail, they were wildly wrong. They presented the picture of a man in a business that earned him a very substantial income, whereas in truth the respondent was losing a very substantial amount of money and had no income to insure.

[25] Third, the record reveals a remarkable pattern of lack of candour and deception by the respondent with regard to his dealings with the appellant and other insurers. In addition to the misrepresentations of health and income on the application, the respondent lied to the court regarding his employment during the period for which he claimed disability benefits. While the appellant did not require a written application for reinstatement in 1993, it was revealed at trial that the respondent had in fact completed a written application for reinstatement, again misstating his income, at a time when there could have been no doubt about the failure of his business. It was also shown at trial that while he was claiming disability benefits from the appellant, he completed no fewer than five new applications for insurance with other companies. Three of these applications were for life insurance and two were for disability insurance. All five contained serious misrepresentations with respect to the respondent's health or income.

Issue 2: Did the trial judge err in failing to find misrepresentation sufficient to avoid the policy with respect to the application for reinstatement?

[26] When the respondent applied for reinstatement of the policy in 1993 after it had lapsed for non-payment of premiums, he had no insurable income. He did not disclose that fact to the appellant. Both s. 310 of the Insurance Act and the policy itself expressly provide that the obligation to disclose material facts and the two-year incontestability period apply to reinstatements of insurance policies. The appellant submits that the trial judge erred in law in failing to find that the respondent either failed to disclose or misrepresented facts sufficient to avoid the policy when he applied for renewal of the policy in 1993. The respondent submits that the trial judge correctly concluded that as the appellant did not require a written application, there was no misrepresentation and that the respondent was under no obligation to disclose the truth about his income.

[27] I agree with the trial judge that reinstatement of the policy does not restart the time under the incontestability clause with respect to the original application for insurance. The more difficult issue is whether the respondent was under a positive duty to disclose the fact that he had no insurable income, or whether the appellant effectively waived any obligation of disclosure by not insisting upon a written application.

[28] There appears to be no decided case directly on point. Ipapo v. Citadel Life Insurance Co., 1989 MBCA, [1989] I.L.R. 1-2449, 57 Man. R. (2d) 272 (C.A.) dealt with a life insurance policy that had lapsed for non-payment. The insured warranted in a reinstatement application that she was in good health, despite having gone through treatment for cancer the previous year. The insured died within two years of the reinstatement, and the insurance company denied liability to pay the insurance money to the beneficiaries on the grounds of material misrepresentation. Twaddle J.A. recalled that "at common law an insurer had a right to avoid a policy on discovering that the insured had misrepresented, or failed to disclose, a material fact in the application for insurance". He then examined the provisions of the Manitoba Act (essentially the same as those in Ontario's), and held that the statutory duty was the same as that at common law. Regarding the running of the two-year incontestability period, Twaddle J.A. held that "the insurer has two years from reinstatement within which to avoid the policy for misrepresentation or non-disclosure in the application for reinstatement."

[29] Similarly, in Johnson v. Eaton/Bay Life Assurance Co. (1984), 3 O.A.C. 238, [1984] I.L.R. 1-1761, leave to appeal to S.C.C. refused [1984] 1 S.C.R. ix, this court dealt with misrepresentations in a written application for reinstatement. Thorson J.A. held:

[T]he finding made by the trial judge, that the medical information which was later obtained by the insurer was material to the risk sought to be insured and would "in all likelihood" have resulted in a refusal to reinstate the policy had it been known at the time, leaves me with no choice but to conclude that the insured, by not answering the question as she should have, failed to disclose facts material to the insurance. This being the case, the appellant insurer was entitled to treat the contract as voidable within the two-year period referred to in the "incontestability" clause in the policy, and thus to void the contract as, in fact, it did.

[30] In both Ipapo and Johnson, reference is made to the insured's failure to disclose, but in both judgments the obligation was being considered in relation to a written application for reinstatement. To determine whether there is an obligation to disclose material facts where no written application is required, it is necessary to turn to first principles.

[31] The duty of an insured to make full disclosure of material facts is a well-established principle of insurance law. It is discussed in relation to disability insurance by M.G. Baer, Study Paper on the Legal Aspects of Long-Term Disability Insurance (Toronto: Ontario Law Reform Commission, 1996) at p. 5, where Baer writes

(emphasis added):

Disability insurance contracts like other insurance contracts are said to be contracts of the utmost good faith. . . . Utmost good faith involves not only an obligation on the insured not to misrepresent his or her situation, but also a positive obligation on the insured to volunteer information which the reasonable insurer would consider relevant in assessing the risk. In spite of its name, the requirement goes beyond a general standard of honesty and fair dealing. Over the years it has developed into a requirement which extends beyond the actual or reasonable expectation of the insured and failure to meet it results in the severe penalty of forfeiture of any claim under the policy.

The requirement of the utmost good faith requires the insured to disclose to the insurer all material facts. The onus is on the insured to disclose these facts on his or her own initiative whether or not the insurer has inquired about them.

[32] Similarly, Craig Brown, Insurance Law in Canada, looseleaf, vol. 1 (Toronto: Carswell, 1999) at p. 5-2, states:

A person applying for insurance must disclose all matters within his/her personal knowledge which are relevant in determining the nature and extent of the risk. The duty applies even in the absence of questions from the insurer.

(Footnotes omitted)

[33] While this passage addresses the original application for coverage, Brown states in vol. 2, at pp. 16-23 and 16-24, with respect to reinstatements, that: "[p]olicies of accident and sickness insurance often lapse and are then reinstated. The insurer may void the policy for a misrepresentation or non- disclosure made at the time of the reinstatement, but the incontestability provision applies after two years pass." (Emphasis in original)

[34] Richard Hayles, Disability Insurance: Canadian Law and Business Practice (Toronto: Carswell, 1998) at p. 142, is clear on the point:

Most insurers ask insureds to submit a new application, including written evidence of insurability, as a condition of reinstatement. Even if this is not done, however, the insured would be subject to a duty of disclosure at the time of the reinstatement, and the insurer could avoid liability for a failure on the part of the insured to make full disclosure of any health problems existing at the reinstatement date.

(Emphasis added)

[35] As I will explain below, the failure of an insurer to insist upon a written application may have some significance. However, I do not accept the submission of the respondent that an insured is entirely absolved of the obligation of good faith where the insurer does not insist upon a written application. It would, in my view, be inconsistent with the terms of the statute and with basic common law insurance principles to allow an insured to withhold material facts that plainly bear upon insurability.

[36] In some cases, there may be a question about whether a fact must be disclosed. In the present case, no such doubt arises. The respondent had not earned any income for at least four years before he applied for reinstatement and he had no realistic prospect of earning income in the near future. On the facts of the present case, it is unnecessary to determine the full extent of an insured's obligation to disclose facts when seeking reinstatement. Here, we are dealing with one of the most basic facts of insurability for disability. Where, as in the present case, an insured is in possession of facts that any reasonable person would know could make him or her uninsurable, there is a duty to disclose those facts even if the insurer does not ask for a written application. To put the point in a slightly different way, where one applies for reinstatement of a disability insurance policy, there is an implicit representation that one is at the very least insurable, in other words, that one is earning income that can be insured, whether or not the insurer asks for a written application.

[37] The significance of the insurer not insisting upon a written application, in my view, is similar to the failure of an insurer to ask a question on the application. As Brown points out, at p. 5-4, the insurer's failure to inquire may provide evidence that the insurer does not consider the information relevant. Similarly, where the insurer does not insist upon a written application for reinstatement, any doubt regarding the materiality of undisclosed facts will be resolved in favour of the insured. No such doubt arises in the present case.

[38] I conclude, accordingly, that the trial judge erred in rejecting the appellant's claim of entitlement to avoid the policy on the ground that the respondent had failed to disclose material facts on his application for reinstatement in 1993. As the misrepresentation or failure to disclose was within two years of the date of the reinstatement of the policy, the incontestability clause has no application and it is unnecessary for the appellant to prove fraud. On this basis, the policy is voidable, and the appellant is not obliged to pay the benefits claimed by the respondent.

Issue 3: Did the trial judge err in failing to find that the claim for disability benefits was defeated by the fact that the respondent had been able to work for six months?

[39] In view of the conclusion I have reached with respect to the first and second grounds of appeal, it is unnecessary for me to consider this ground of appeal and accordingly, I express no view on it.

Conclusion

[40] For these reasons, I would allow the appeal, set aside the judgment below as against the appellant, and dismiss the action with costs, both of the trial and the appeal.

Appeal allowed.