Canada
In this chapter of our Annual Insurance Review 2024, we look at the main developments in 2023 and expected issues in 2024 for Canada.
Key developments in 2023
As we entered a “post-pandemic” environment, we continued to grapple with the impact of the global pandemic on economic and social sectors. 2023 has been marked with financial challenges and geopolitical strife that have directly impacted the global supply chain. In this chapter we recap some of the major changes impacting the insurance industry moving into 2024.
Continued impacts of the Pandemic, Inflation, and Labour Shortages on the Construction Industry
There are a number of issues which are currently impacting the construction industry which could result in increased numbers of claims against design professionals. The most immediate risks are those arising from interruption in supply chains dating back to the start of the COVID-19 pandemic in 2020 and from lack of adequate skilled labour.
Historically, (circa 1989/1990) these conditions resulted in a wave of claims against design professionals based on three types of errors: failure to detect substitutions of specified materials during site review, acceptance of substituted materials which were not fit for purpose and acceptance of deficient construction during improperly conducted inspections/site review.
Since the onset of the COVID-19 pandemic, everyone involved in the construction industry has faced unprecedented disruption due to delays in delivery, increasing material prices and a shortage of skilled labour. While some people believe that delivery times should improve in the short run and that inflation has reached its peak, it is highly likely that the problems related to rising material and equipment prices, labour shortages and overheating in the construction sector will continue to impact customers, contractors, suppliers of materials and professionals in the years ahead.
Appeal Ruling on the Interpretation of Material Change in Risk
In Wynward Insurance Group v. Smith Building and Development Ltd, 2023 SKCA 57, the Saskatchewan Court of Appeal found that the discovery that an insured’s subtenant may be affiliated with a biker gang did not amount to a material change in risk.
The insured, Smith Building and Development Ltd. (“Smith Ltd.”) owned a commercial building insured at the date of loss by Wynward Insurance Group. Smith Ltd. rented units to two subtenants, one being a motorcycle club called the Reapers Riders, which at some point, changed its name to the Heretics Motorcycle Club.
On April 13, 2016, the building was destroyed by fire. An investigation concluded the fire had been caused by an unknown arsonist. Nothing in the fire investigation implicated either Smith Ltd. or the Heretics. Smith Ltd. submitted a claim to Wynward pursuant to its policy seeking indemnity for its losses.
Wynward assigned a senior claims examiner to investigate and adjust the loss. He conducted certain post-loss internet and local media searches where he learned of alleged links between the Heretics and the Hell’s Angels Motorcycle Club. He concluded the Heretics were affiliated with the Hells Angels, which he described at trial as a notorious motorcycle club with suspected links to criminal activities In a May 30, 2016 letter based on his investigation, without consulting the underwriter, the examiner denied coverage. The letter asserted Smith Ltd. (1) failed disclose a material change in risk due to the tenancy of “a motorcycle club related to the outlaw biker club ‘Hells Angels’”, and (2) failed to provide details of the subleases it entered into with the Heretics and another subtenant.
Smith Ltd. commenced an action against Wynward in contract and negligence for (a) the value of the insured property, (b) business interruption losses, and (c) various costs and expenses.
The issue at trial was whether a material change in risk was shown by the act of Smith Ltd. allowing the Heretics to be a subtenant. The trial evidence showed Wynward’s underwriters prepared an inspection report in 2012. The underwriter expressed no concern with the presence of a motorcycle club on the premises and concluded “Renew normally”.
The trial judge found that Wynward had not led admissible evidence required to meet its onus to show if and when the Heretics were involved in the illegal activity which supported its coverage denial.
On appeal, the Court of Appeal cited the well-known legal principle established by the Supreme Court of Canada that a fact material to the risk is shown where “if the facts had been truly represented they would have caused a reasonable insurer to decline the risk or required a higher premium.”
The Court upheld the trial judge in finding that Wynward had not demonstrated through admissible evidence that the presence of the Heretics in the insured premises was a fact material to the risk.
The Risk Environment, Increasing Interests Rates and Climate-Related Risks
The Canadian Office of the Superintendent for Financial Institutions (OSFI) published its Annual Risk Outlook for Fiscal Year 2023-2024. OSFI highlights risks associated with the higher interest rate environment, unregulated non-bank financial intermediation, climate-related risk, and geopolitical risks.
With respect to housing market downturn risk, OSFI noted that following record increases during the pandemic, house prices declined significantly in 2022. The steep increase in interest rates has eroded debt affordability. This is a growing concern from a prudential perspective. Mortgage holders may not be able to afford continued increases on monthly payments or might see a significant payment shock at the time of their mortgage renewal, leading to higher default probabilities.
Financial institutions face climate-related physical risks (i.e., weather events) and transition risks as Canada and their trading partners move toward a “low carbon” economy. These climate-related risks could exacerbate more traditional risks, including credit, market, insurance, and operational risks. As corporations strive to meet climate-related target commitments and disclosure obligations, they could become increasingly exposed to climate-related legal and reputational risks.
New insurance Rules for Ontario Drivers coming in 2024
As of January 2024, motorists in Ontario will have the option not to buy into direct compensation property damage (DCPD) coverage, which protects car owners from costs related to vehicle damage from a collision if they are not at fault. This coverage also covers the loss of the vehicle or its contents.
While opting out will reduce the driver’s bill, this will mean that they will not be reimbursed for vehicle repairs, loss of a vehicle or its contents, or a replacement vehicle, among other items.
Employment Practices Liability Insurance Growing in Popularity
Employment Practices Liability Insurance (“EPL”) was traditionally not a large part of the Canadian Insurance Market offering. This type of insurance covers employers’ defence costs and losses from employment-related claims, including wage and hour disputes and allegations of discrimination, harassment, retaliation and unlawful termination.
EPL claims are on the rise as the frequency of lawsuits that trigger EPL cover have significantly increased in the past two decades. Employers are becoming more vigilant when it comes to protecting themselves against these claims and considering EPL insurance.
MGA Regulation
Calls for the regulation of Managing General Agencies (MGAs) are prompting consideration of changes in Ontario laws to allow for regulation by the self-governing Registered Insurance Brokers of Ontario (RIBO). RIBO, which already registered MGAs on a voluntary basis, would look to establish licensing for MGAs along with codes of conduct so as to enhance competency and best practices in the industry. MGAs compose a significant part of the wholesale offering of insurance products in Canada, and other Canadian provinces already regulate MGAs, making Ontario, with the nation’s largest broking community, a logical candidate for regulation.
What to look out for in Canada in 2024
We expect to see the continued economic fallout in Canada’s housing market and risks associated with higher interest rates.
We anticipate that the construction industry in Canada will continue to face pressures from supply chain disruptions, labour shortages and price increases due to inflation. While the root of the problem was supply chain disruptions due to the COVID-19 pandemic, new challenges — including geopolitical risks — continue to put pressures on pricing.
A developing economic risk involves the increase in construction costs due to inflation along with an decrease in the ability of consumers to complete purchases of residential properties (in particular condominiums). The lack of funds has imperiled some developers, projects are beginning to stall and buyers are starting to default on deposits.
Some contractors and developers are facing increased challenges to secure funding for projects amidst questions about the bankability of projects. In a high inflationary environment, funders will generally be more cautious when offering funding to projects that are high in value, complex, or have long build times.
Should this trend continue there will likely be failures of developers and their projects; historically, this has resulted in claims against the designers which were responsible to certify payments should the financiers determine after the fact that the value in the construction is less than was certified.
Written by Mark R. Frederick and Vanessa De Sousa.