The Renovation That Changed the Risk
Marc owns a duplex in Sherbrooke insured under a Quebec homeowner's form with $350,000 building coverage and a $2,000 deductible. In March he begins converting the ground-floor unit into a licensed daycare for up to 12 children, installing a commercial kitchen and a fenced outdoor play area. He does not tell his insurer, believing that because the building is owner-occupied and the work is 'residential,' nothing changes. In July a kitchen fire causes $85,000 in damage, and the insurer discovers the daycare during the adjustment. Marc's broker, Amélie, must now advise him. The policy contains the standard clauses on material change in risk, occupancy, and the insured's duty to disclose. Marc asks Amélie whether the claim will be paid and what he should have done differently.
1. Analyze whether the insurer can invoke a material change in risk to deny or reduce the claim, and explain the reasoning Amélie should give Marc.
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The key question is whether converting part of the building to a commercial daycare is a material change in the risk that increases the insurer's exposure and was not disclosed.
- Nature of the change: a licensed daycare for 12 children introduces new hazards - commercial cooking equipment, more occupants, supervision liability, and a higher fire load. This is not a cosmetic alteration; it changes the occupancy from purely residential to a mixed residential/commercial use.
- Materiality test: a change is material if a reasonable insurer would have charged a different premium, imposed conditions, or declined the risk had it known. A commercial kitchen and daycare occupancy almost certainly meet that test.
- Consequence: under the standard material-change clause and the insured's duty to disclose, the insurer may be entitled to deny the claim or to reduce the indemnity to what the premium paid would have purchased. The outcome depends on the clause wording and on whether the change was within Marc's control - it clearly was.
- Practical advice for Amélie: she should not promise payment. She should tell Marc the insurer will likely investigate whether the fire originated in the new commercial kitchen, document the timeline, and prepare him for a possible dispute. Going forward, Marc must notify the insurer before any change in occupancy, use, or construction, and obtain written confirmation of coverage.
2. What professional and ethical obligations does Amélie have toward Marc and toward the insurer in this situation?
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Amélie sits between a client who may have breached a policy condition and an insurer entitled to accurate underwriting information.
- Duty to the client: she must act in Marc's interest, explain the policy clearly, and not abandon him. She should review the file to see whether any prior communication could support an argument that the change was disclosed or that the insurer waived its right to rely on the clause.
- Duty of honesty to the insurer: she must not help Marc conceal or mischaracterize the daycare. Presenting the loss as purely residential would be misrepresentation and could expose both Marc and Amélie to serious consequences, including disciplinary action.
- Conflict management: if Marc asks her to 'word the report carefully,' she must refuse and explain why. She can advocate for a fair interpretation of the policy without misstating facts.
- Documentation: she should record her advice in writing, including the date she warned Marc about disclosure, to protect both of them.
- Referral: if a coverage dispute arises, she should recommend independent legal advice rather than opine on the insurer's legal rights.