Contract Formation

AuthorDenis Boivin
Time plays a key role in insurance law. Because of science, one can usu-
ally identify the precise moment when a given risk materializes, down
to the exact hour and minute. Because of contract law, one can usually
pinpoint the moment when an insurance contract is formed, renewed,
or terminated. In most ca ses, it is clear that the losses suffered by the
insured occurred at a time when she had valid insurance. However, in
this chapter, we will rev iew some diff‌icult situations — that is, cases
in which the parties may have been negotiating the contract when the
risk materia lized, cases in which the term of the polic y may have ended
prior to the loss, and cases in which the insured, the in surer, or both
parties may h ave put an end to their agreement before the critical date.
In each situation, the question is e ssentially the same: was the person
who suffered the losses in sured when the risk materia lized?
Generally speak ing, Canadian courts resolve disputes of this na-
ture by using principles of contract law. This chapter will outline these
principles and highlight some import ant nuances specif‌ic to the f‌ield
of insurance law. In Chapters 4 and 5, we examined t he substantive
requirements for the creation of an insurance contract. As noted, the
main conditions are an in surable interest in the object of the contract
and disclosure of all material circumstances with respect to the r isk.
In Chapter 6, we discus sed the legal impact of errors, omissions, and
wrongful acts th at occur during contract formation and that may be
traced to the involvement of an intermediar y. In Chapter 7, we will
focus on procedural matters concerning t he creation of an insurance
contract. Assuming t hat all the substantive ing redients are present, how
does one create a binding insurance agreement? In this respect, what
are the roles played by the insur ance provider, the insurance consumer,
and the intermediary? What is the difference between an insurance
contract and an insurance policy? When does the agreement come into
force and when does it end? How does one renew or terminate the agree-
ment? In order to address these questions, we have div ided the chapter
into three sections: (1) creating an insurance agreement, (2) renewing
an insurance agreement, and (3) terminating an i nsurance agreement.
Insurance policies are long and complex documents. Consumers have
little to say when it comes to the manner in which they are drafted.
Def‌initions, conditions, exclusions, warranties, and most other stipu-
lations are imposed by in surers rather than negotiated. However, this
does not mean that the will of an insured is immaterial. An insurance
policy is evidence of an insurance contract;1 it does not supersede the
underlying agreement. Unless an insurer and prospective insured have
agreed to form a contractual relat ionship, the words of a policy are
worth less than t he paper on which they are printed.
1) Essential Elements
An insurance contract i s formed once the parties agree on the es sential
elements of the contract. These elements are (1) the insured perils (the
dangers protected against), (2) the insured objects (the people and/or
property covered), (3) the term of the insurance (the date the cover-
age begins and ends), (4) the amount of the insurance (the maximum
payable by the insurer in the event of a loss), and (5) the premium (the
amount that must be paid by the insured).2 The will of the insurer and
prospective insured must be a d idem: there must be a so-called “meeting
1 See Insurance Act, RSO 1990, c I.8, s 1: “‘pol icy’ means the inst rument eviden-
cing a contract.” See al so Alberta Insurance Act, RSA 2 000, c I-3, s 1(uu); British
Columbia Ins urance Act, SBC 2012, c 1, s 1.
2 This list is b ased on the description s found in ER Hardy Ivamy, Genera l Prin-
ciples of Insurance Law, 4th ed (London: Butte rworths, 1979) at 97–101 and
Nicholas Le gh-Jones, ed, MacGillivray on Insurance Law, 9th ed (London: Sweet
& Maxwell, 1997) at 89. For two sim ilar lists, see Crai g Brown, Insurance Law in
Contract Form ation 243
of the minds” on each point. Indeed, uncert ainty with respect to any one
of these elements may prevent the agreement from coming into effect,
even if the substantive conditions di scussed in earlier chapters are met.
A telling example is provided by McCunn Estate v Canadian Imper-
ial Bank of Commerce.3 In this case, the decea sed and her husband had
a joint line of credit with the Can adian Imperial B ank of Commerce
(CIBC), which was insured by a separate entit y, Mutual Life Assura nce
Company of Canada (Mutual Life). The insurance was a form of credit
protection insurance: upon the death of either Mr or Mrs McCunn, the
insurer would pay down the credit line. The McCunns had no direct
dealings with Mutual Life when they agreed to purchase this coverage.
All steps required to put the insurance in place had been car ried out by
employees of CIBC. In addition, once per month, the bank deducted
the insurance premium from the line of credit and transferred this
amount to the insurer, minus its own administration fee. The certif‌i-
cate of insurance issued by Mutual Life clearly stated that coverage for
either insured ended at age seventy. Nevertheless, after Mrs McCunn’s
seventieth birthday, her portion of the premiums continued to be de-
ducted from the line of credit until her death, si xteen months later.
When contacted by her estate, Mutual Life took the position th at the
deceased was no longer insured at t he time of her death, and CIBC took
the position that the withdrawals made after her seventieth birthday
were the result of an admini strative error. In the end, the bank agreed
to credit the McCunns’ joint account with the sum of $1,067.38 — the
amount that would not have been deducted, but for the bank’s mistake.
In a subsequent action brought by the estate of Mrs McCunn, the
trial judge concluded that CIBC, by its conduct, had extended the con-
tract beyond the termin ation date provided in the certif‌icate of insur-
ance. On appeal, Feldman JA agreed w ith this interpretation. In her
view, the bank’s monthly deductions constituted an offer, on behalf of
Mutual Life, and the deceased’s lack of objection during t he sixteen
months following her seventieth birthd ay constituted an acceptance.
However, the majority reversed the trial judge’s conclusion by apply-
ing two “basic principles of contract law” to the fact s. First, a con-
tract is not created un less one party makes an offer “with the requisite
knowledge and intent” and the other party accepts t he offer “with the
requisite knowledge and intent.”4 In this case, the deceased’s portion
of the premiums was deducted by mist ake, once she reached the age of
Canada, 7th student ed (Toronto: Carswell, 2010) ch 6 at 3 and Barbara Billi ngs-
le y, General Principles of Ins urance Law (Markham, ON: LexisNex is, 2008) at 67.
3 (2001), 53 OR (3d) 304 (CA) [McCunn E state].
4 Ibid at para 18.

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