An insured must disclose potential claims when applying for insurance
Failure to disclose a potential claim constitutes a material non-disclosure in an application for insurance in an errors and ommission insurance policy.
Here is the case citation: Agresso Corp. v. Temple Insurance Co.[2007] B.C.J. No. 2466. British Columbia Court of Appeal. L.S.G. Finch C.J.B.C., C.A. Ryan and I.T. Donald JJ.A. November 21, 2007.
Here is a link to the decision.
This case was originally summarized by Shanti Davies and edited by David Pilley.
The Insured software company applied for Information Technology Errors and Omissions insurance from the Defendant Insurers for the period of February 28, 2002 to February 28, 2003. Prior to that time, in September and October 2000, the Insured had signed a software license, implementation and maintenance agreement with the Third Party. The maintenance part of the agreement was stated to continue until September 24, 2005, or when cancelled by one of the parties. By January 20, 2003, the Insured was aware that the Third Party was not satisfied with the Insured's progress on solving a major problem with the software. Correspondence between the Third Party and the Insured, which was before the Trial Judge on the Insured's application, indicated that the Third Party was dissatisfied with the services being provided by the Insured and that problems with the software remained unsolved into 2003.
On February 21, 2003, the Insured applied for a second policy for the period from March 28, 2003 to March 28, 2004, with a retroactive date of February 28, 2002 . The Insured did not disclose to the Defendant Insurers that there was a potential claim from the Third Party. In April 2003, the Third Party abandoned the software agreement and retained legal counsel. The Insured notified the Insurers on January 20, 2004 of a potential claim. The Insurers took the position that the Insured had no coverage due to non-disclosure of a potential claim in the application form of February 21, 2003. The Third Party subsequently commenced an action against the Insured for misrepresentation and breach of contract.
The issue on appeal was whether the trial judge erred in finding that the Insured had failed to disclose information that was material to the insurance contract in its application for insurance on February 21, 2003. The Court of Appeal considered two questions in the application for insurance which required the Insured to first, attach a list and status of all "claims, disputes, suits or allegations of non-performance" made during the past five years against the Insured and second, to advise whether the Insured was aware of any "facts, circumstances or situations that may reasonably give rise to a claim other than advised in the previous question". The Insured had answered in the negative to both of these questions.
After confirming that the Trial Judge had correctly stated the law regarding material non-disclosure in an application for insurance, the Court of Appeal concluded that the Insured's failure to disclose a potential claim from the Third Party constituted a material non-disclosure for the purpose of both questions at issue in the application. The Trial Judge had found that there was only a material non-disclosure in respect of the Insured's answer to the second question and not in respect of the first. The Court of Appeal held that, from the outset of its contract with the Third Party in 2000, the Insured was aware that the Third Party had complaints about deficiencies in the system and that the system was not functioning as intended. The Court of Appeal found that there was "ample" evidence that the Insured had knowledge of a "dispute" and of "allegations of non-performance" in the preceding two years arising out of its contract with the Third Party.
Accordingly, the Court of Appeal dismissed the Insured's appeal.
This case was digested by Shanti Davies of Harper Grey LLP. If you would like to discuss this case further, please feel free to contact her directly at sdavies@harpergrey.com or review her biography at http://www.harpergrey.com.