Life Insurance Policy Lapse
The Importance of the Payment of the Insurance Premium
The law is well settled that the punctual payment of an insurance premium is a condition precedent to the liability of an insurer and that the payment of the premium is the essential factor for bringing the contract into effect and for it continuing to be in force. There can be no coverage for a term for which payment has not been made. In the circumstances of a required payment which has not been made by the insured, the contract or policy of insurance automatically terminates or lapses on its own terms, and in accordance with the wording of the contract which specifically provides for such.
In fact, the Court has held that the obligation to pay the premium according to the terms of the contract is prima facie absolute, and no sickness or infirmity will be accepted as an excuse for its non-payment.
Pekar v. Maritime Life Assurance Co., 2008 Carswell Ont 9450, Ontario
Superior Court of Justice at paragraph 35
In Pluzak v. Gerling Global Life Insurance Co. the Ontario Court of Appeal held that there is no coverage under a life insurance policy when premiums are not paid.
Pluzak v. Gerling Global Life Insurance Co. (2001), 52 O.R. (3d) 520 at paragraph 18
Where a policy of insurance expires because of the non-payment of its premium, no formal termination procedure need be followed by the insurer. In other words, a policy which has lapsed because the insured has not paid the premium for it does not need to be formally terminated by proper notice from the insurer.
Patterson v. Gallant,  3 S.C.R. 1080 (S.C.C.), at paragraph 38
Paul v. CUMIS Life Insurance Co. 2011 BCSC 276 British Columbia Supreme Court at paragraphs 61-63
There is no obligation on the insurer to tell the insured that the required premium has not been paid or that the contract or insurance policy has lapsed or come to an end.
Williams v. Paul Revere Life Insurance Co. (1997), 34 O.R. (3d) 161 (Ont. C.A.)
Teasdall v. Sun Life Assurance Co. of Canada (1926), 60 O.L.R. 201 (Ont. C.A.)
THE IMPORTANCE OF THE DATE OF DEATH ON A LIFE INSURANCE POLICY
For a life insurance policy, benefits under the policy are payable only where the policy is in good standing as of the date of the qualifying event, which is at the time of the death of the insured.
As the Supreme Court of Canada said in Duplisea v. T. Eaton Life Assur. Co.:
“The obligation to pay death benefits arises “On the death of the Life Insured while this policy is in force.” It is at the moment of death that, in my opinion, the effectiveness of the policy must be tested in order to determine the obligation of the insurer. The question, therefore, is whether, as at that date, the policy was in force.”
QUALIFYING CONDITIONS TO THE LAPSE/TERMINATION OF THE POLICY
The effect of a non-payment of a premium is subject to two qualifying restrictions. Firstly, that the effect of non-payment does not apply during the Policy’s “Grace” period, and secondly, that the legal principle of Waiver can operate to temper and prevent the fatal effect of the non-payment of the required premium.
The Grace period is generally provided for in the policy of insurance between the parties.
Because of the significance of the effect of a failure to pay a premium when it is due, the Insurance Act contains enactments to protect against unintentional lapses in a policy due to an inadvertent failure by an insured to do that which was required or as the result of imperfect compliance with the insurance agreement. Section 129 of the Insurance Act states:
Relief from forfeiture
129. Where there has been imperfect compliance with a statutory condition as to the proof of loss to be given by the insured or other matter or thing required to be done or omitted by the insured with respect to the loss and a consequent forfeiture or avoidance of the insurance in whole or in part and the court considers it inequitable that the insurance should be forfeited or avoided on that ground, the court may relieve against the forfeiture or avoidance on such terms as it considers just. R.S.O. 1990, c. I.8, s. 129.
Subsection 131 (1) of the Insurance Act has been amended to allow the Court to have greater discretion in relieving an insured from forfeiture. The old section stated:
Waiver of term or condition
131. (1) No term or condition of a contract shall be deemed to be waived by the insurer in whole or in part unless the waiver is stated in writing and signed by a person authorized for that purpose by the insurer.
The new section provides:
Note: On a day to be named by proclamation of the Lieutenant Governor, subsection (1) is repealed and the following substituted:
Waiver and estoppels
(1) The obligation of an insured to comply with a requirement under a contract is excused to the extent that,
(a) the insurer has given notice in writing that the insured’s compliance with the requirement is excused in whole or in part, subject to the terms specified in the notice, if any; or
(b) the insurer’s conduct reasonably causes the insured to believe that the insured’s compliance with the requirement is excused in whole or in part, and the insured acts on that belief to the insured’s detriment. 2012, c. 8, Sched. 23, s. 5.
See: 2012, c. 8, Sched. 23, ss. 5, 77.
The Court in Paul v. CUMIS Life Insurance Co. held that a statutory provision like Section 134 (4) of the Insurance Act which states that notice of termination of the policy is required from the insurer deals only with a method by which an insurer may exercise a right of termination by notice and that it would not apply where the insurance terminated automatically without notice by the terms of the contract when the premium was not paid within the Grace period.
Non-payment of premium
Effect of delivery of policy
134. (1) Where the policy has been delivered, the contract is as binding on the insurer as if the premium had been paid, although it has not in fact been paid, and although delivered by an officer or agent of the insurer who had not authority to deliver it.
Right of insurer in respect of unpaid premium
(2) The insurer may sue for the unpaid premium and may deduct the amount thereof from the amount for which the insurer is liable under the contract of insurance.
Where note or cheque for premium not honoured
(3) Where a cheque, bill of exchange or promissory note is given, whether originally or by way of renewal, for the whole or part of any premium and the cheque, bill of exchange or promissory note is not honoured according to its tenor, the insurer may terminate the contract forthwith by giving written notice by registered mail. R.S.O. 1990, c. I.8, s. 134.
In addition, polices of life insurance are governed by Part V of the Insurance Act, R.S.O. 1990, C. 1.8. Section 182(2) of the Insurance Act mandates for the following statutory grace period in the event of non-payment of a life insurance premium:
182(2) Where a premium, other than the initial premium, is not paid at the time it is due, the premium may be paid within a period of grace of,
(a) thirty days or, in the case of an industrial contract, twenty-eight days from and excluding the day on which the premium is due; or
(b) the number of days, if any, specified in the contract for payment of an overdue premium,
whichever is the longer period.
Contract in force during grace period
(3) Where the happening of the event upon which the insurance money becomes payable occurs during the period of grace and before the overdue premium is paid, the contract shall be deemed to be in effect as if the premium had been paid at the time it was due, but the amount of the premium, together with interest at the rate specified in the contract, but not exceeding 6 per cent per year, and the balance, if any, of the current year’s premium, may be deducted from the insurance money. R.S.O. 1990, c. I.8, s. 182.
Note: On a day to be named by proclamation of the Lieutenant Governor, subsection (3) is repealed and the following substituted:
Contract in force during grace period
(3) Where the happening of the event upon which the insurance money becomes payable occurs during the period of grace and before the overdue premium is paid, the contract shall be deemed to be in effect as if the premium had been paid at the time it was due and, except in the case of group insurance or of creditor’s group insurance, the amount of the premium may be deducted from the insurance money. 2012, c. 8, Sched. 23, s. 17 (2).
See: 2012, c. 8, Sched. 23, ss. 17 (2), 77.
Waiver is an aspect of the legal principle of relief from forfeiture. Waiver occurs where one party to a contract or to proceedings takes steps which amount to foregoing reliance on some known right or defect in the performance of the other party.
Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co.,  S.C.J. No. 59 (S.C.C.), at paragraph 19
The power to grant relief against forfeiture is an equitable remedy and is purely discretionary. The appropriate questions for the Court to consider in determining whether there should be relief from forfeiture are:
was the conduct of the plaintiff reasonable in the circumstances;
was the object of the right of forfeiture essentially to secure the payment of money, and
was there a substantial disparity between the value of the property forfeited and the damage caused the vendor by the breach?
Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co.,  S.C.J. No. 59 (S.C.C.), at paragraph 33
Pekar v. Maritime Life Assurance Co., 2008 Carswell Ont 9450, Ontario
The test for finding waiver is a stringent one because no consideration moves from the party in whose favour a waiver operates. An overly broad interpretation of waiver would undermine the requirement of contractual consideration. Insurance contracts are governed by the same principles of contractual construction as other types of contracts. The Supreme Court of Canada has summarized the law for the proper construction of insurance contracts as being:
“The court should give effect to the clear language of the contract, interpreted in the context of the agreement as a whole. It should also endeavour to interpret similar insurance contracts consistently. Where the language of the agreement reveals two possible interpretations, the court should seek to resolve this ambiguity by searching for an interpretation that reflects the true intent and reasonable expectations of the parties when they entered the contract, and achieves a result consistent with commercial reality and good sense. Considerations of reasonableness and fairness inform this exercise. An implied term should not be added to the contract unless it “goes without saying”, or is necessary to provide business efficacy. Nor should the court imply terms that render the express words of the contract meaningless, or contradict them. The onus to establish an implied term rests on the party seeking to rely on it.
If these principles do not resolve the ambiguity, the principle of contra proferentem will operate to favour construction against the insurer. This principle may not be used, however, to create or magnify an ambiguity.”
Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, 2010 SCC 33 at paragraphs 21-24
Accordingly, before one can find waiver there must be express and unequivocal language or conduct on the part of the insurer permitting the insured to pay premiums late. Waiver will be found only where the evidence demonstrates that the party waiving had:
(1) a full knowledge of his rights: and
(2) an unequivocal and conscious intention to abandon them.
Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co.,  S.C.J. No. 59 (S.C.C.), at paragraph 20
Pekar v. Maritime Life Assurance Co., 2008 CarswellOnt 9450, Ontario
Superior Court of Justice at paragraph 38
DEMAND FOR PAYMENT AS WAIVER
In some circumstances a demand by the insurer for payment from the insured may constitute waiver. However, the demand for payment must be “a clear and unequivocal expression” of the insurer’s waiver of the time requirements for payment under the policy to the extent that there is an express acknowledgement by the insurer that the demand for payment overrides the non-payment of the premium. The overriding consideration is whether one party communicated a clear intention to waive a right to the other party.
Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co.,  S.C.J. No. 59 (S.C.C.), at paragraph 24
A demand for payment by an insurer will more likely amount to “waiver” where the demand from the insurer for payment of the outstanding premium makes no reference or mention of requiring evidence of the insured’s insurability or it does not speak of reinstatement, which has its own qualifying conditions.
In the Anguish v. Maritime Life case, although the insurer could have taken the position that the policy had lapsed, Maritime Life had continued to submit debit vouchers to the insured – as of the date of his death – for the insured to satisfy the payment requirements of the life insurance policy. Maritime Life sought to collect and collected the premium, not only for the 31-day Grace period but for the period in excess thereof, following each default, up until the insured’s death. In other words, Maritime Life displayed a willingness to accept the payment of premiums after the expiration of the Grace period notwithstanding the terms of the policy. The Court of Appeal accepted the findings of fact by the trial judge who had found an unequivocal intention by Maritime Life to waive the lapsing provision set out in the policy because the insurer’s course of conduct expressed a conscious intention on the part of Maritime Life to relinquish some of its rights under the policy. Consequently, Maritime Life was found to have waived its right to take the position that the policy had lapsed for failure to pay the premiums within the required time.
RETRACTION OF WAIVER
Waiver can be retracted by an insurer if reasonable notice is given to the party in whose favour it operates.
Saskatchewan River Bungalows Ltd. v. Maritime Life Assurance Co.,  S.C.J. No. 59 (S.C.C.), at paragraph 27
The law is well-established that reinstatement of a policy of insurance is not effective until the date on which all of the conditions for reinstatement are completed. The conditions imposed upon an insured for reinstatement are as follows:
(i) submit an application for reinstatement within two years of the lapse of the policy;
(ii) pay to the insurer the overdue premiums and other indebtedness with interest;
(iii) submit evidence of good health and other evidence of the insured’s insurability which is satisfactory to the insurer.
The term “reinstatement” describes the point of time from which the policy of insurance becomes entered into force again. Reinstatement can only be applied prospectively because the conclusion that the reinstatement date can be retroactive to an earlier date of the lapse would be contrary to the concept of insurance, which protects persons only from future loss. The term “insurance” does not provide protection for a loss which has already occurred.