The Court of Appeal for British Columbia dismissed an appeal by homeowners who argued that their insurance broker's possession of a coverage-reduction form constituted notice to their insurer of a material change in risk. The central question — whether the trial judge had erred in her treatment of that form under statutory condition 4(1) of their policy — was answered against the appellants in a decision that leaves Wawanesa Mutual Insurance Company's denial of coverage standing.

Insurer voids policy following fire investigation

The underlying facts span several years. In 2015, the appellants, Parveen and Gurvinder Kallu, purchased residential property in Abbotsford, British Columbia. The property included a main house and an outbuilding. On July 31, 2015, Wawanesa issued a personal insurance policy covering both the house and the outbuilding. It included statutory conditions, among them the material change in risk condition.

On March 1, 2018, a fire damaged the house. Mr. Kallu notified Wawanesa through his insurance broker the same day. An adjuster attended the property on March 2 or 3, 2018, and discovered a marihuana grow operation in the basement of the outbuilding. That discovery proved decisive: on March 22, 2018, Wawanesa voided the policy as of July 2016 and refused coverage for the fire damage, citing the appellants' failure to disclose the grow operation as a material change in risk.

At trial, the appellants admitted that marihuana plants were in the outbuilding on March 1, 2018, but maintained they had never inspected or used it and were unaware of the grow operation. They also asserted that they had removed the outbuilding from the scope of coverage in 2017, relying on a Reduction of Coverage form dated June 13, 2017. The form stated the reason for the request as: "Removal of outbuilding. It is leaking." Mr. Kallu stated that his insurance broker had told him the form had been submitted to Wawanesa; that broker did not testify at trial.

The trial judge found that both appellants had once held licences to grow marihuana, and that they had established the grow operation in the outbuilding after purchasing the property. Wawanesa's underwriting manager testified that the insurer would not cover a property with a marihuana grow operation and had never received or approved the request to remove the Outbuilding from coverage. He added that such a request would have been treated as a "red flag" requiring further investigation. The outbuilding continued to be covered under the express terms of the policy, and the appellants continued to pay the same insurance premiums after the alleged removal request.

Was the insurer properly notified?

On appeal, the appellants argued that the trial judge erred by overlooking that statutory condition 4 requires material risks to be disclosed "to the insurer or its agent," such that the Reduction of Coverage form in the possession of the insurance broker constituted the required notice to Wawanesa.

Wawanesa countered that the appellants had never pleaded, argued before the trial judge, or led evidence to establish that their insurance broker was its agent. Wawanesa also argued that the form disclosed only a leaking outbuilding, not the grow operation, and that the insurer had never received the removal request.

Court rejects homeowners' disclosure argument

The Court of Appeal disposed of the agency argument without resolving it: even assuming the broker acted as Wawanesa's agent, the Reduction of Coverage form still disclosed nothing about the marihuana grow operation. Its stated reason — a leaking roof — fell well short of the required disclosure.

The court held that the trial judge's unchallenged findings — particularly that the appellants had established the grow operation and failed to disclose it — were fatal to the appeal.

The appellants' alternative argument — regarding the removal of the outbuilding from coverage — did not disturb the finding that the material risk was never disclosed. The court also found no basis to overturn the trial judge's conclusion that the outbuilding had never been removed from coverage. No palpable and overriding error was found in the trial judge's factual conclusions. The failure to disclose the marihuana grow operation was a breach of the material change in risk provision — statutory condition 4 — under s. 29 of the Insurance Act, and Wawanesa was justified in declining coverage for the fire-related losses.