Contract Formation

• Author: Denis Boivin
• Pages: 241-278

241

CHA PTER 7

CONTR ACT FOR M ATION

A. INTRODUC TION

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

INSURANCE LAW242

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.

B. CR EATING AN INSUR ANCE 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.