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Defined terms key when drafting insurance policies

A recent Ontario Court of Appeal case shows the importance of using defined terms when drafting insurance policies, Toronto insurance lawyer Rohan Haté tells AdvocateDaily.com.

The decision by a unanimous three-judge panel of the province’s top court restored a potential $2.5-billion class action by life insurance policyholders against their issuer after the judges ruled a lower court judge erred in dismissing the entire claim.

The panel certified parts of the claim related to allegations of breach of contract and noted that it was not clear what even simple phrases, such as “maximum premium” and “minimum premium,” meant in the policy.

“The language is technical and legalistic, and important terms are undefined,” the judges wrote. “Other terms, such as ‘premium,’ ‘monthly cost of insurance’ and ‘monthly insurance charge,’ are confusing.”

The case will now return to the Superior Court for a hearing on the merits of the claim, but even at this preliminary stage, there are lessons for insurers, says Haté, partner with McPhadden Samac Tuovi Haté LLP.

“When insurance companies are drafting their policies, it’s very important to use defined terms. That was a big issue here,” he says. “They have to be careful because if there is any ambiguity in a policy, a court will construe it against the drafting party, and in favour of plaintiffs.

“This case also provides valuable guidance on how the courts will approach issues related to the interpretation of insurance policies,” Haté adds.

At the heart of the case are more than 200,000 “universal life” insurance policies sold from 1985 to 1998 by a large international company whose Canadian business was subsequently sold several times.

According to the decision, the plaintiffs launched their class action in 2010, alleging they were misled about the variable nature of the premiums for the policies, which combined life insurance with an investment vehicle to save on tax.

When it comes to policyholders, Haté says the matter should also encourage consumers to seek advice about what they’re agreeing to, particularly when buying complicated products.  

“Instead of going directly to the insurer with questions, it may be better to ask a broker, who will hopefully take you through the policy and explain all the ins and outs of it,” he says.

The class action was initially dismissed by a Superior Court judge who refused to certify any of the plaintiffs’ claims and granted the insurer summary judgment based on a limitations defence.

However, the appeal court reversed part of the motion judge’s decision, ruling that he acted more like a trial judge in denying certification for several of the claims.

“In my view, it is entirely reasonable for a certification motion judge to expect the parties to produce evidence relevant to whether there is some basis in fact that the issue is common across the class,” the appeal court decision reads. “However, by requiring the parties to file additional evidence and analyzing that evidence to assess whether or not [the insurer] had actually breached the contract, the motions judge went beyond determining whether there was ‘some basis in fact’ for the common issue. Rather, he decided the proposed common issue by interpreting the contract and making a finding that there was no breach.”

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