CHAPTER 5

REGULATION OF INSURANCE CONTRACTS

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INTRODUCTION

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This chapter includes a variety of different legal perspectives,
so we have divided it into two parts. Part 1: Regulation of
Insurance Policies provides the background and structure of

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insurance contracts. Part 2: Statutory Conditions describes how

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federal and provincial laws ensure the fairness of contracts and
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the contractual process.
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PART 1: REGULATION OF INSURANCE POLICIES

In Canada, both federal and provincial governments now have
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defined roles in regulating, supervising, and monitoring

insurance companies via statute laws. Meanwhile, the
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provincial governments of each province regulate insurance

policies.
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Regulation of Property Insurance Policies

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All provinces have adopted essentially the same standards for

property insurance policies, which have been incorporated into
the Insurance Act of each province. However, automobile
insurance is treated differently by each province.
 Regulation of Automobile Insurance Policies

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Automobile insurance is sold by the governments in many
provinces. However, in Ontario, automobile insurance is sold by

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private insurers. Ontario’s Compulsory Automobile Insurance

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Act regulates automobile insurance in our province through
policy wordings for owned private passenger vehicles, garages,
and drivers. These wordings spell out the rights and obligations

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of the policyholder and the insurer related to policy coverage,

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terms, and conditions. You will learn much more this topic in
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Chapter 9: Automobile Insurance.
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The Insurance Act

Ontario’s Insurance Act contains the legal rules governing the
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operation of the insurance industry as well as rules applying

specifically to insurance contracts, including:
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• Contents of an insurance contract.

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• Removal coverage.
• Limitation of liability clauses.
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• Right of subrogation.
• Waiver of term or condition.
• Effect of delivery of policy.
 • Policies insuring fire peril:
○ Basic coverages.

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○ Standard exclusions.

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○ Statutory Conditions.

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 Contents of an Insurance Contract
The Insurance Act requires that certain mandatory details be

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stated, or “declared,” within every contract of insurance. The
declaration, also known as the “coverage summary,”

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The other six items of an insurance contract include:

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1) Parties to the contract.

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2) Policy period.

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3) Insurable interest of others (if any).
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4) Type of insurance and amount of coverage.

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5) Rate and premium charged.

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6) Subject matter of insurance.

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PARTIES TO THE CONTRACT

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It would be impossible to enforce a contract that did not

identify the parties to it. Both the name of the insurer and
insured must be shown. The insured is the first party to the
contract, while the insurer is the second party to the contract.
 POLICY PERIOD
Both the start date and expiry date of an insurance policy must

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be stated on the policy declarations page. Note that there are
two time zones in Ontario: Eastern Standard Time and Central

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Standard Time. The Insurance Act makes the effective default
start time 12:01 a.m. local time.

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INSURABLE INTEREST OF OTHERS (IF ANY)

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The Lees borrowed money from The Bank of Montreal (BMO)
to purchase their home. As the mortgage holder, BMO stands
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to lose money if the home is damaged by an insured loss. BMO
therefore has an insurable interest in the home. Consequently,
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the law requires the policy show the loss payable to BMO on
the Lees’ home insurance policy. If there is an insured loss to
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the home, the amount owing to the Lees and to BMO would be
determined at the time of the loss.
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Leasing companies also have an insurable interest in property

they lease to others. Accordingly, their interest may also be
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shown on a policy. Here’s an example:

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Reliable Construction Limited has advised their insurance

broker they have leased several bulldozers from Caterpillar
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Corporation Inc. As the owner of the bulldozers, Caterpillar has

an insurable interest. However, the lease agreement requires
Reliable to insure the bulldozers, creating a contractual
insurable interest for Reliable Construction as well. The broker
 must endorse the policy to add coverage for equipment and
show Caterpillar Corporation Inc. as a loss payee on Reliable’s
insurance policy.

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TYPE OF INSURANCE AND AMOUNT OF COVERAGE

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The policy must identify the specific insurance coverages and
the sum of insurance applying to each item to be insured.
These include the insurance rate and premium charged.

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RATE AND PREMIUM CHARGED
The insurance rate is the cost of insurance per unit of exposure.
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For example, the rate charged to insure a building will depend

on many factors, including construction, use, and fire
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protection. An example of a building insurance rate is $1 per

$1,000 of insurance coverage. In this case, the $1,000 is the
exposure unit.
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The insurance premium is what the insured pays for the policy.
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It is calculated by multiplying the rate by the number of

exposure units.
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Let’s look at an example:

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Alex wishes to buy $500,000 of insurance coverage on his

warehouse. The insurance company advises the rate for this
exposure is $1 per $1,000 of coverage. Therefore, Alex’s
premium is calculated as follows:
 $500,000 ÷ $1,000 = 500 units
500 units × $ 1.00 = a premium of $500.00

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Removal Coverage
Many property insurance policies restrict coverage on insured

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property to the location identified on the policy declarations
page. If a loss happens when the insured property is not at the
specified location, there is no coverage.

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Furthermore, insurers are not obligated to provide coverage for
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property that is being stored at another location simply
because the insured does not have room for their property at
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the named location.

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Let’s look at an example:

Elina owns a children’s clothing store. The store is insured
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under a business policy. In the late winter, Elina purchased a

large amount of “back to school” clothing for the coming fall
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season at a very good price, providing she took delivery of the

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clothing right away. With no room for the extra merchandise at

her small shop, she arranged to store it in her brother’s garage.
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If the stock were stolen or damaged by an insured peril while in

this garage, it would not be insured under her business policy.
Why? Because it was not at the insured location at the time of
the loss. And the stock will not be insured under his home
 insurance policy because he does not have insurable interest in
his sister’s property.

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To ensure coverage for her stock, Elina should call her broker
right away to arrange to add her brother’s garage as a second

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location on her policy and pay the associated premium for the
added exposure.

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REMOVAL CLAUSE EXCEPTION

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One exception is that, to better serve the public interest, the
Insurance Act requires that property policies insuring against
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the peril of fire be extended to cover insured property if it must
be moved to another location to eliminate or reduce further
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loss.
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Limitation of Liability Clauses

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Most property insurance policies contain clauses limiting the

liability for a loss to an amount less than the limit of insurance
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purchased by the insured. The deductible clause and the co-

insurance clause are two examples of limiting clauses common
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to property insurance policies.

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 Right of Subrogation
It would go against the principle of indemnity for someone to

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profit from a covered loss by being paid twice for the same loss.
The Insurance Act prevents this by giving the insurance

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company the right of subrogation when another party causes a
loss. This right protects the principle of indemnity.

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Subrogation gives an insurer the legal right of subrogation. This
means the insurer can legally substitute itself for the insured to

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recover funds it has paid to settle a policyholder’s claim from

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the party responsible for causing the loss.
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Subrogation
(1) An insurer who makes any payment or assumes liability
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therefor under a contract is subrogated to all rights of recovery

of the insured against any person and may bring action in the
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name of the insured to enforce those rights.

Pro-rating recovery
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(2) Where the net amount recovered whether by action or on

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settlement is, after deduction of the costs of the recovery, not

sufficient to provide complete indemnity for the loss or damage
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suffered, the amount remaining shall be divided between the

insurer and the insured in the proportion in which the loss or
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damage has been borne by them.

Let’s look at an example of the right of subrogation:
 While barbecuing steaks, Paul was distracted by a phone call.
His unattended barbecue caught fire, burning the steaks and
causing fire damage to his home. The fire quickly spread to the

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home of his neighbour, Hakim.

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Paul’s insurance company paid his loss. Since Paul was
negligent, Hakim would normally have the right to sue Paul to

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recover the amount of his loss. However, Hakim’s insurance
company, Best Mutual Ltd., paid the cost to repair his home
and to replace his personal belongings. Best Mutual now has

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the right of subrogation to sue Paul to recover the amount it
has paid to Hakim.
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To avoid confusion, any legal action taken by Best Mutual to
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enforce the right of subrogation must be pursued in Hakim’s

name, even though Best Mutual would receive the proceeds of
the action.
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Effect of Delivery of Policy

The Insurance Act stipulates that when the insurance policy has
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been delivered, but not paid for, it will be as binding on the

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insurance company as if the premium had been paid. The

promise to pay is sufficient — so any claim insured under the
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policy will be paid, even if the policy premium has not been
paid or is only partially paid.
 Policies Insuring Fire Peril
When a policy insures property against the peril of fire, the

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Insurance Act requires the following three conditions be met:
basic coverages, standard exclusions, and Statutory Conditions.

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We’ll now turn to these conditions.

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BASIC COVERAGES
The Insurance Act expands basic fire insurance to include these

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three coverages: nc
1) Fire.
2) Lightning.
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3) Explosion of natural, coal, or manufactured gas.

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STANDARD EXCLUSIONS
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• Application of heat exclusion: When heat is being directly

applied to property, a loss can be expected if proper care is not
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taken. For example, an item of clothing might catch fire if the

iron is too hot. This loss is not insured by the policy.
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• Lightning damage to electrical devices or appliances

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exclusion: A fire policy is not required to provide coverage for

loss of, or damage to, electrical devices and appliances caused
by lightning or other electrical currents (for example, power
 surges in electrical systems) unless a fire originates outside the
electrical device or appliance and causes the loss or damage.

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• Electrical currents other than lightning exclusion: Sudden
surges or reductions in the power supply can cause substantial

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damage to electrical wiring and devices. If such damage is
caused by artificially generated sources of electricity, the loss is

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excluded. However, this exclusion would not apply to loss or
damage caused by a resultant fire.

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• Contamination by radioactive material exclusion: When any

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of the perils insured under the policy causes radioactive
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materials to escape, any resultant damage caused by
contamination is not insured.
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• War exclusion: The payment of certain losses caused by

deliberate acts of violence would bankrupt most insurers and,
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for that reason, are considered uninsurable. In these cases, the

fire damage is borne by society as a whole. The following are
examples of such situations:
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○ Riot.
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○ Insurrection.
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○ Civil commotion.
○ Rebellion.
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○ Revolution.
○ Invasion.
○ Civil war.
 ○ War.
○ Hostilities, whether war is declared or not.

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○ Act of foreign enemy.

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○ Military power.

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STATUTORY CONDITIONS
Statutory Conditions are a set of policy conditions imposed by

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provincial legislation outlining the duties and responsibilities of
both the insured and the insurer under contracts of automobile
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insurance, accident and sickness insurance, and fire insurance.
Statutory Conditions must be printed on every policy under
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their own clearly labelled heading.

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Misrepresentation
Statutory Condition 1: Misrepresentation reads as follows:
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The law requires insurance applicants to provide the insurer

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with an accurate description of the property to be insured.

Misrepresentation occurs when there is a false description or a
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misrepresentation of a material fact.

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 FRAUDULENT OMISSION OF A MATERIAL FACT
The insurer will have the right to void the contract only if it is

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able to show that the misrepresentation was directly linked to
the loss.

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Property of Others
Statutory Condition 2: Property of Others reads as follows:

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Businesses like upholsterers and dry cleaners often want their

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insurance policy to extend coverage to customers’ property,
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since these businesses may be held responsible for theft or
damage to their customers’ property. If so, the business
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owner’s interest in such property must be stated in the

insurance contract.
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Change of Interest
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Statutory Condition 3: Change of Interest reads as follows:

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“The insurer is liable for loss or damage occurring after an

authorized assignment under the Bankruptcy and Insolvency
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Act (Canada) or change of title by succession, by operation of

law, or by death.”
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 Material Change
Statutory Condition 4: Material Change reads as follows:

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“Any change material to the risk and within the control and
knowledge of the insured avoids the contract as to the part

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affected thereby, unless the change is promptly notified in

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writing to the insurer or its local agent, and the insurer when so
notified may return the unearned portion, if any, of the
premium paid and cancel the contract, or may notify the

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insured in writing that, if he desires the contract to continue in

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force, he must, within fifteen days of the receipt of the notice,
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pay to the insurer an additional premium, and in default of such
payment the contract is no longer in force and the insurer shall
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return the unearned portion, if any, of the premium paid.”

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Non-material Changes
Some changes are minor and are not material to the risk — in
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other words, they do not increase the chance of loss occurring.

Examples of non-material changes include:
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• Installing new carpeting to replace the old carpeting in the

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insured’s dwelling.
• Replacing an older gas furnace with a new, high-efficiency gas
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furnace.
• A residential tenant moving out of a rented dwelling and a
new tenant moving in.
 Material Changes

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A material change is any change within the control and
knowledge of the insured that:

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• Arises after the policy has been issued, and

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• Increases the chance of loss.
• Adding a wood or pellet stove to a dwelling.

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• Converting a policyholder’s private garage to a repair garage.
• Renovating a basement in a private home into an income-
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earning apartment or short-term rental accommodation.
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• Cancelling a burglar alarm monitoring contract when the

policy was written by the insurance company with the
understanding the premises would be monitored at all times.
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Effect on Policy Coverages

The insurer must be notified of any changes that would result in
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an increase in the potential for loss. When a material change is

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reported to the insurer, it may:

• Retain the risk and advise the insured, in writing, of the
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additional premium required.

• Return the unearned premium and cancel the policy.
 If the insured has not paid the additional premium within 15
days of receipt of notice, the insurer is entitled to cancel the
policy and return the unearned portion, if any, of the initial

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premium.

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If the insured does not report the material change, the insurer
is entitled to void the contract “as to the part affected.” In

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other words, losses directly attributed to an unreported
material change will not be paid.

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Termination
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Statutory Condition 5: Termination reads as follows:
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“(1) This contract may be terminated,

(a) by the insurer giving to the insured fifteen days’ notice of
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termination by registered mail or five days’ written notice of

termination personally delivered;
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REFUNDS
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The rules regarding refunds are clearly stated in Statutory

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Condition 5: Termination. When the policy is terminated by the

insurer, refunds are on a pro rata basis. As illustrated below,
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the insurer first calculates the daily cost of insurance. It then

issues a refund equivalent to the daily dollar amount,
multiplied by the number of days remaining on the policy.
 However, even in these situations, most policies are subject to
a minimum retained premium. In these cases, the minimum
premium is deducted from the refund.

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Let’s look at an example of a pro rata refund calculation.

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REFUNDS
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The amount of the refund due to the insured is calculated on a
short rate basis. This amount will be significantly less than the
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amount refunded when the policy is cancelled by the insurer.

When cancelling a policy on a short rate basis, the insurer is
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allowed to deduct certain administrative costs that would not

have been incurred had the policy been allowed to remain in
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force for the contracted period. Insurers use formulas

contained in a short rate cancellation table to calculate the
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policy refund.
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 Fraud
Statutory Condition 7: Fraud reads as follows:

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“Any fraud or wilfully false statement in a statutory declaration
in relation to any of the above particulars vitiates the claim of

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the person making the declaration.”

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Who May Give Notice and Proof

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“Notice of loss may be given and proof of loss may be made by

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the agent of the insured named in the contract in case of
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absence or inability of the insured to give the notice or make
the proof, and absence or inability being satisfactorily
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accounted for, or in the like case, or if the insured refuses to do

so, by a person to whom any part of the insurance money is
payable.”
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When the insured is away or otherwise unable to provide

notice and proof of loss, the insurance company is entitled to
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know the reason. If the insurer finds the reason acceptable,

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under Statutory Condition 8: Who May Give Notice and Proof,

an agent of the insured (for example, their lawyer, a friend, or a
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relative) is permitted to fulfil these functions on the insured’s

behalf. Acceptable reasons include extended hospitalization of
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the insured or a prolonged absence from the country.

 Salvage
Statutory Condition 9: Salvage reads as follows:

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“The insured, in the event of any loss or damage to any
property insured under the contract, shall take all reasonable

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steps to prevent further damage to such property so damaged

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and to prevent damage to other property insured hereunder
including, if necessary, its removal to prevent damage or
further damage thereto.

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Salvage is property remaining after a loss that still has some
value. The Statutory Condition 9: Salvage is designed to avoid
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the economic waste that can occur when there is loss to
property that might have been saved through a reasonable
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effort on the part of the insured.

The law requires insureds to take all reasonable steps to reduce
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or prevent loss or damage, including removal of property if

required. If insureds make no effort to salvage insured property
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from loss when it is clear that a reasonable opportunity exists,

the insurer has the right to deny insurance coverage on that
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property which could have been saved.

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Entry, Control, and Abandonment

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Entry, Control, and Abandonment reads as follows:

“After loss or damage to insured property, the insurer has an
immediate right of access and entry by accredited agents
 sufficient to enable them to survey and examine the property,
and to make an estimate of the loss or damage, and, after the
insured has secured the property, a further right of access and

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entry sufficient to enable them to make appraisement or

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particular estimate of the loss or damage, but the insurer is not
entitled to the control or possession of the insured property,

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and without the consent of the insurer there can be no
abandonment to it of insured property.”

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5.3.11 Appraisal
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Appraisal reads as follows:
“In the event of disagreement as to the value of the property
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insured, the property saved or the amount of the loss, those

questions shall be determined by appraisal as provided under
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the Insurance Act before there can be any recovery under this
contract whether the right to recover on the contract is
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disputed or not, and independently of all other questions.

There shall be no right to an appraisal until a specific demand
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therefore is made in writing and until after proof of loss has

been delivered.”
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Most claims are settled with little or no disagreement. There

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are, however, times when the insured and the insurer cannot
agree on the value of property involved in the loss. Statutory
Condition 11: Appraisal allows either party to ask that disputes
 involving valuation be settled by appraisal, the details of which
are provided in the Insurance Act.

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5.3.12 When Loss Is Payable

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When Loss Is Payable reads as follows

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“The loss is payable within sixty days after completion of the
proof of loss, unless the contract provides for a shorter period.”

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5.3.13 Replacement
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Replacement reads as follows:
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“The insurer, instead of making payment, may repair, rebuild,

or replace the property damaged or lost, giving written notice
of its intention do to so within thirty days after receipt of the
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proofs of loss.
In that event the insurer shall commence to so repair, rebuild
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or replace the property within forty-five days after receipt of

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the proofs of loss, and shall thereafter proceed with all due
diligence to the completion thereof.”
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5.3.14 Action
Action reads as follows:
“Every action or proceeding against the insurer for the recovery
of any claim under or by virtue of this contract is absolutely
 barred unless commenced within one year next after the loss or
damage occurs.”

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In other words, if an insured is unsatisfied with an offer to
settle a claim, they may, under the fire Statutory Conditions,

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sue the insurer within one year of the loss or damage.

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5.3.15 Notice
Notice reads as follows:

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“Any written notice to the insurer may be delivered at, or sent
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by registered mail to, the chief agency or head office of the
insurer in the Province. Written notice may be given to the
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insured named in the contract by letter personally delivered to

the insured or by registered mail addressed to the insured at
the insured’s latest post office address as notified to the
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insurer. In this condition, the expression “registered” means

registered in or outside Canada.”
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 GLOSSARY
• Material change: Any change within the control and

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knowledge of the insured that arises after the policy has been
issued and serves to increase the chance of loss.

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• Material fact: A fact that, if the insurer knew about it, would

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cause it to either decline the risk altogether or charge a higher
premium for accepting the risk.
• Salvage: Property remaining after a loss that still has some

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value. nc
• Statutory Conditions: A set of policy conditions imposed by
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provincial legislation outlining the duties and responsibilities of

both the insured and the insurer under contracts of automobile
insurance, accident and sickness insurance, and fire insurance.
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Statutory Conditions must be printed on every policy under

their own clearly labelled heading.
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• Subrogation: The lawful substitution of a third party in place

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of a party having a claim against another party. In insurance,

the insurance company has the right to “step into the shoes” of
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the party whom it has compensated and sue any party whom
the compensated party would have sued. This concept also
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applies in Travel Health insurance.

 REVIEW QUIZ

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1) In Ontario, automobile insurance is:

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a) Sold by the government.
b) Regulated by the Registered Insurance Brokers of Ontario.
c) Regulated by the Compulsory Automobile Insurance Act.

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d) Sold by the Insurance Bureau of Ontario.
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2) In Ontario, which act contains the legal rules governing the
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operation of the insurance industry, as well as rules applying

specifically to insurance contracts?
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a) The Compulsory Automobile Insurance Act.

b) The Canadian Insurance Act.
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c) The Registered Insurance Brokers Act.

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d) The Insurance Act.

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 3) The Insurance Act requires certain mandatory details be
stated within every contract of insurance. What is the portion
of the policy summarizing this mandatory information?

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a) The declaration.

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b) The statement.

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c) The application.
d) The insurance contract.

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4) Which of the following parties must be identified on an
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insurance policy, as mandated by the Insurance Act?
a) The insurer, the insured, and the brokerage firm.
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b) The insurer and the insured.

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c) The insurer, the insured, and the broker writing the policy.
d) The insurer, the insured, and the CEO of the insurer.
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 5) According to the Insurance Act, when does a fire policy
expire?

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a) 12:01 a.m. standard time at the address of the named
insured.

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b) 12:01 p.m. standard time at the address of the insurance

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broker.
c) 12:01 a.m. standard time at the mailing address of the
insurer.

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d) 12:01 a.m. local time at the address of the named insured.
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6) To protect the insurable interest of others in the property
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insured, the law requires an insurance policy identify certain

persons or entities, including:
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a) All parties to whom insurance monies are payable following a

loss.
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b) The heirs of the named insured.

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c) The named insured’s bank.

d) The spouse of the named insured.
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 7) Who would not be considered to have insurable interest in a
policy of insurance?

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a) The owner of a home.
b) A mortgagee of the property.

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c) The owner of a building entirely rented to others.

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d) A person who expects to inherit property after their father’s
death.

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8) Which of the following statements is correct?
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a) The insurance premium is the cost of insurance per unit of
exposure.
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b) The insurance rate is the cost of insurance per unit of

exposure.
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c) The insurance rate is what the insured pays for the policy.
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d) The insurance rate is calculated by multiplying the premium

by the number of exposure units.
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 9) Michaela temporarily removes property from her insured
premises to prevent loss, or further loss, from an insured peril.
How long must the removal of property extension on her fire

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policy provide coverage for?

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a) Seven days.

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b) 15 days.
c) 30 days.
d) 60 days.

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10) Kai moves his property to an unnamed location to prevent
further loss or damage. Which of the following statements is
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incorrect?
a) It must be shown that the removed property was in danger
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of further loss or damage from wind or burglary.

b) The amount of insurance available for any loss to the
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property while at the unnamed location will be reduced by the

amount paid for the loss at the named location.
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c) If repairs to the location specified on the policy will take

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longer than seven days, the policy must be amended to provide

coverage at the temporary location.
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d) It must be shown that the property was removed to an

unnamed location because it was in danger of further loss or
damage from a peril insured by the policy.