Insurance companies should consider wording carefully

Insurance companies may want to rethink the wording of their consumer-facing policies after the Court of Appeal for Ontario restored a class action by life insurance policy holders against their insurers, according to a Toronto lawyer.

In Fehr v. Sun Life Assurance Company of Canada, a three-judge panel of the province’s top court certified the $2.5-billion class action, overturning the decision of a motion judge who granted Sun Life summary judgment dismissing the claim. Although a judge has yet to tackle the merits of the underlying claim, civil litigator Jeffrey Leon says the latest ruling is just one in a series of decisions by Canadian courts interpreting agreements between large corporate entities and relatively unsophisticated individuals with a “consumer-focused approach.”

“The Court of Appeal’s reasons reflect the consideration given to the differences between the companies who draft these complicated agreements, and the consumers who are bound by them,” says Leon, a partner in the Toronto office Bennett Jones LLP, who is not involved with the case. 

“Regardless of how the case ultimately turns out, and the bar is set fairly low for certification, one of the lessons to be taken from it is that it’s increasingly important to draft insurance policies in a way that avoids ambiguities by using defined terms wherever possible,” he adds.

“It may also no longer be sufficient to rely on terms that are based on industry practice or custom if they’re not able to be understood by someone who is actually acquiring the life insurance coverage.”

The case concerns at least 230,000 life insurance policies sold in the years between 1985 and 1998 by the Metropolitan Life Insurance Company, whose Canadian business was subsequently subsumed by Sun Life.

According to the decision, the variable-premium “universal life” insurance policies combine a life insurance policy with an investment vehicle to realize tax advantages. Although most were sold in the high-interest-rate era of the mid to late 1980s, the lower rates prevailing since the mid-1990s drove premiums and administrative costs up, prompting complaints from policyholders who claimed they were not adequately warned about the potential downside of the scheme.  

The plaintiffs launched their class action in 2010, alleging misrepresentation in the sale of the policies and breach of contract. In a series of decisions between 2015 and 2017, Ontario Superior Court Justice Paul Perell declined the certify any of the claims and granted Sun Life summary judgment dismissing much of the action as time-barred. A costs order was also granted in favour of the insurer for $1 million.

Despite the setback at the summary judgment motion, the plaintiffs’ lawyer Megan McPhee says she always retained “full confidence in our case.”

“When we went to the Court of Appeal, our firm was on the hook for a $1-millon cost order, but there was no point at which we considered any other option,” says McPhee, a principal at class actions boutique Kim Spencer McPhee Barristers PC.

“So it was wonderful to see our confidence vindicated by the decision.” 

Writing for a unanimous three-judge panel, Ontario Court of Appeal Chief Justice George Strathy found Perell got it right when he refused to certify the part of the claim that related to negligent misrepresentation common issues. While each individual representative plaintiff testified they were misled by agents of the insurance company, the judge noted that each had a unique claim.   

“It is not enough for a common issue to provide ‘context.’ The resolution of the common issue must advance the resolution of each class member’s claim,” Strathy wrote.

“The proposed misrepresentation common issues would not do so.”

However, when it came to claims for breach of contract, which related to alleged adjustments to the cost of insurance and administrative fees, as well as the potential for premium charges in excess of the maximum identified in the policies, the appeal court noted that the complexity of the policies as financial instruments came into play.

“The language is technical and legalistic, and important terms are undefined,” reads the decision, which notes that even the meaning of apparently straightforward phrases, such as “maximum premium” and “minimum premium,” were a matter of controversy between the parties.

“Other terms, such as ‘premium,’ ‘monthly cost of insurance’ and ‘monthly insurance charge,’ are confusing. Key provisions, such as the manner in which Sun Life could adjust the COI from time to time, are opaque,” the appeal court judges wrote, adding that Perell required the filing of “extensive additional evidence” before reaching his decision.

But the appeal panel ruled Perell ultimately overstepped the mark in his decision denying certification for the breach of contract issues, instead performing the task reserved for a common-issue trial judge.

“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,” Strathy wrote on behalf of his colleagues.

“However, by requiring the parties to file additional evidence and analyzing that evidence to assess whether or not Sun Life 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.” In addition, the appeal court found that Perell had erred in dismissing some of the plaintiffs’ key claims on a summary basis as time-barred.

While the judge concluded they should have discovered their misrepresentation claims when they received their policies, the appeal court ruled that a more granular analysis was ­required of the company’s limitations defence.

“The analysis would also take into consideration the special relationship between the parties, which the motions judge himself acknowledged contained a duty of utmost good faith,” Strathy wrote.

“This relationship of particular vulnerability and corresponding duty of utmost good faith are contextual factors which should have been taken into consideration in the motions judge’s analysis of when, with reasonable diligence, the plaintiffs ought to have discovered the alleged misrepresentations, and the reasonableness of any sreliance they placed on the initial or subsequent representations made by the insurer and its agents.”

“There was much to consider in this regard,” the appeal court panel added, noting its earlier conclusion that the policy language was “impenetrable and confusing.”

A spokesperson for Sun Life told Law Times that he could not comment, given that the matter remains before the courts, but the company has sought leave to appeal the verdict to the Supreme Court of Canada.

According to McPhee, the significance of the appeal court’s decision extends well beyond those involved directly in the case.

“I can tell you that we are looking at a number of other universal life insurance companies, so they should be all be taking a hard look at their policies and how they are administering them,” she says. After dealing with the defendants’ application for leave to appeal, McPhee is already looking forward to proceeding with discoveries and getting ready for a trial now that the action has been certified.

“We need some sunshine shone on the business practices at play here, and how policyholders were treated,” she says.