What to know before buying damge insurance

An insurance contract is based on the good faith of the parties. It is in the consumer’s best interest to tell the truth and nothing but the truth, not only when taking out an insurance contract, but also at renewal, during the term of the contract and when making a claim. Otherwise, in the event of a loss, the insured could be denied compensation.

Providing useful information 

In addition to the coverage included in the insurance contract, several factors come into play when the insurer decides whether or not to issue a contract, and when it calculates the insurance premium. Insureds are therefore bound to declare all the information they have that could influence the decision to insure and how the premium is calculated, including information on the property to be insured, as well as their own profile, and that of the individuals living under their roof (Code civil du Québec, article 2408).

Life is constantly changing, and sometimes new circumstances arise during the term of the contract that could lead to an aggravation of risk, create new risks, or render information in the file either inaccurate or outdated. In order to maintain proper coverage and allow the insurer to stay abreast of the situation, insureds must declare any new circumstances as soon as they learn of them (Code civil du Québec, article 2466) during the term of the contract or at renewal time.

In the event of a loss, insureds are responsible for proving the value of what they lost. If a false statement was made or an important fact was omitted when the insurance policy was purchased or renewed, this usually comes out when a claim is made. Claims adjusters are certified professionals who are mandated by the insurer to investigate the cause of the loss, determine whether the loss is allowable under the insurance contract, estimate the amount of damages, and negotiate the settlement. The adjuster guides the insured through the claims process and also asks all the questions he or she deems relevant to successfully complete the investigation. An adjuster’s investigation could therefore reveal certain issues that might lead them to question the accuracy of the information received.

What are the consequences of making a false statement when purchasing or renewing your contract, or during the term of the contract?

In the event of a loss, the insurer will compensate the insured in accordance with the coverage stipulated in his or her insurance contract.

If the insurer can prove that the insured intentionally made a false statement when purchasing the insurance, or that he deliberately failed to declare important information that should have been brought to the insurer’s attention, it can refuse to compensate the insured or declare the contract null and void: the contract is thus considered to never have existed and the insurer reimburses the premiums paid.

If the insurer cannot prove that the insured acted in bad faith, it will have to pay compensation; however, compensation might only be partial. Under certain circumstances, the insurer might still have issued the contract, but with a higher premium—compensation will thus take into account the difference between the premiums paid and the premiums that should have been paid.

Here are a few examples illustrating different types of false statements:1  

  • Eric has been insured with the same company for six years. At contract renewal time, he fails to notify his insurer that for the past two years he has been operating a small welding company out of his garage. If a fire were to break out, two scenarios are possible: his insurer could refuse compensation if it can prove that it would never have insured under such circumstances; or it could pay partial compensation, given the amount of premium that should have been paid to insure the risk.
    ​
  • When she purchases insurance, Julie declares that she has never had an insurer terminate her insurance policy; however, ten years ago, her automobile insurance contract was terminated for non-payment of premiums. When her insurer discovers this, the contract is cancelled (nullity ab initio) and she is reimbursed the premiums. She will now have to find a new insurer.
     
  • When insuring her house, Denise declares in good faith that her house was built in 1950. When she discovers that it was actually built in 1920, she does not notify her insurer in order to avoid a premium increase. However, paying less now could prove costly later: in the event of a loss, the insurer could cancel her contract, refuse compensation, or only pay her partial compensation.
     
  • Marc has not notified his insurer that he occasionally uses a sharing-economy platform to rent his apartment to short-term guests. It is only when he reads an article on the Internet that he discovers the risks he faces by not informing his insurer of the situation. He therefore notifies his damage insurance representative at contract renewal time and his premium is adjusted accordingly.
     
  • John has been insured with the same company for many years. During the term of his contract, he acquires a criminal record, but does not declare it at contract renewal time. In the event of a loss, withholding this information could result in him losing his right to compensation and his contract could be cancelled.
  • When she renews her home insurance, Nadine is unaware that she has to declare the German shepherd she has just bought. She learns this when her insurer refuses compensation for the damage her dog caused to the neighbour’s hedge.

Don’t lie when making a claim

When making a claim for a loss, it can be tempting to hide the circumstances or inflate the value of the loss. Of course, this is not advisable: if the lie is proven, the insurer could refuse to compensate the insured (Civil Code of Québec, article 2472). Here are two examples:

  • ​After a pipe bursts in their washroom, Carole and Pierre tell their insurer that a friend came to check their house regularly while they were away for three months in Florida. However, the neighbours’ testimony proves that no one was watching the house. By lying about the circumstances of the loss, the couple might have their claim for damages to the house denied.
    ​ 
  • Following a burglary, Dominique claims that the 55-inch television he recently purchased was stolen. However, given the configuration of the staircase, it would have been impossible to carry a television that large down to the basement. Furthermore, he has no invoice or proof of purchase for this television. If his statement turns out to be false, the insurer could refuse to compensate Dominique for any of the items stolen. The insurer could nevertheless compensate him for the damage caused to his residence during the burglary (Civil Code of Québec, article 2472, paragraph 2).
All false statements are not necessarily deceitful.

It is important to distinguish between intentionally false statements, and statements made in error or in good faith. The courts have recognized on many occasions that the intention behind the false statement is crucial.

Thus, an exaggeration, an inaccuracy, an omission, a contradiction, or a mistake can be made in good faith, in other words, without any intention to mislead, lie or commit fraud. Quite often, the insured makes such a statement thinking it is true and can therefore repeat it many times without malicious intent.

However, when a false statement is knowingly made, it is false representation. This is the case, for example, when someone responds “no” to a question, knowing full well that the answer is “yes”; or when they inflate the value of the damaged property in order to receive higher compensation. This is commonly described as the insured showing bad faith.

1.These hypothetical cases are for illustrative purposes only.​