Termination Clauses – Will Bhasin v. Hrynew Impact Insurance Contracts?

Termination of an insurance contract typically occurs in one of three circumstances: by natural expiry of the time period specified in the contract, by mutual agreement between insurer and insured, or by unilateral procedure of the insurer. The last of these circumstances may become contentious with an insured, especially when an insured has to find new coverage or experiences a subsequent loss.

Canadian courts have consistently found that either party to an insurance contract containing statutory conditions governing its termination may terminate coverage arbitrarily and without stated reasons, provided that the cancellation complies strictly within the terms of the condition. [See for example Confederation Lincoln Mercury Sales Ltd. v. Prudential Assurance Co. 1986 I.L.R. 1-2065]

A recent Alberta case considering a termination clause in a non-insurance context may test this law. Bhasin v. Hrynew , 2011 ABQB 63 has been granted leave to the Supreme Court of Canada and will be argued this month. This case arises from a dispute over the use of a discretionary non-renewal clause in a contractor's agreement, an analogous situation to that of the unilateral termination of an insurance contract. The outcome of Bhasin may have extensive implications in the insurance industry in regards to how the cancellation of insurance policies is handled in the future.

In Bhasin, good faith performance of a contract was central to Justice Moen's decision. The Plaintiff was considered an Enrollment Director under contract to Canadian American Financial Corp. (Canada) Limited ("CAFC"). In 1998 CAFC entered into a standard agreement with all Enrollment Directors, a process into which the Plaintiff had input. The Plaintiff entered into the contract after assurances by CAFC that a discretionary non-renewal clause would not be interpreted strictly as a means to end their relationship. Eventually CAFC did rely on this clause and allowed the contract to lapse rather than renewing it.

Justice Moen concluded that the discretionary non-renewal clause of the Plaintiff's contract had preconditions that were not expressly stated in the contract. A duty of good faith performance was implied into the clause even though the clause was unambiguous on its face (not dissimilar to the statutory termination condition clauses in insurance policies). Justice Moen stated that this duty of good faith was necessary where there is an imbalance of power between contracting parties. The...