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Insurance & Reinsurance
Our traditional annual review of the judgments that marked the year across Canada:
In the wake of the COVID-19 pandemic, Quebec dental clinics brought class actions against their insurers, seeking compensation for losses related to the interruption of their business. In one of the first judgments appealed in Canada, the Quebec Court of Appeal upheld a judgment of the Superior Court refusing to authorize the clinics to institute the proposed class action. The insurers that were sued, including Royal & Sun Alliance Insurance Company of Canada, represented by Clyde & Co, successfully argued that COVID-19 was not a risk covered by the insurance policies, which instead covered only losses resulting from physical damage to insured property.
In this case, Allianz Insurance Company, also represented by Clyde & Co, successfully invoked a clause providing that any dispute between the insured and Allianz regarding the application of the policy was to be submitted to a process of mediation and arbitration to the exclusion of the civil courts (known as an arbitration clause). The insured restaurant owner had brought an application for authorization to institute a class action, seeking indemnification for business interruption losses caused by the COVID-19 pandemic. The Quebec Court of Appeal upheld the decision of the Superior Court granting the declinatory exception presented by Allianz and referred the dispute to a mediator in accordance with the policy provisions. This judgment confirms that coverage disputes concerning commercial insurance policies may validly be decided by alternative dispute resolution methods to the exclusion of the civil courts, even in the context of class actions.
For more information, we invite you to read our article written after the publication of the Superior Court judgment here.
In this recent chapter of the legal proceedings brought by the owners of buildings damaged by pyrrhotite in the Trois-Rivières area, the Quebec Court of Appeal declared that Lloyd’s Underwriters were barred from raising arguments denying coverage against a request for reimbursement from its insured SNC-Lavalin for amounts paid as damages to the injured owners. Recall that this case was the subject of a lengthy trial following which the Superior Court, in 2014, ordered the professional liability insurers of SNC-Lavalin, including Lloyd’s, to apportion among themselves the damages in connection with the liability of their insured. The grounds for denying coverage raised in this case by Lloyd’s had not been raised in defence at trial. However, the Court of Appeal was of the view that the 2014 judgment gave rise to a presumption of res judicata with respect to all insurance coverage issues raised by the dispute. Accordingly, the Court of Appeal prohibited Lloyd’s from raising new grounds of coverage denial, reminding them that they should have been raised at the trial on the merits of the case.
For more information, we invite you to read our full article on this judgment here.
This case concerns a Wellington application presented by a subcontractor responsible for installing wall panels in a construction project, to force its comprehensive general liability insurer to take up its defence in the context of actions brought against it by the general contractor and the manufacturer of the wall panels in question. The general contractor claimed from the insured the additional costs associated with delays in the delivery of the panels by the insured, as well as with the non-compliance of the panels delivered. First, the Court recalled that the occurrence of physical damage or bodily injury is an essential condition for triggering the coverage available under a comprehensive general liability insurance policy. Next, the Court found that the general contractor’s claim did not allege any physical damage because the panels provided by the insured were never installed. Accordingly, the Court concluded that, even at this stage in the proceedings, the claim against the insured raised no possibility that the insurance coverage could be triggered, such that the insurer had no duty to defend.
Compare this judgment with Syndicat Square Benny c. Développements McGill inc., 2021 QCCS 3862, another case involving a supplier of wall panels. In that case, however, the panels had been installed and the insured’s Wellington application was granted.
This judgment addresses the notion of fin de non-recevoir (a civil law concept similar to estoppel) when an insurer denies coverage after having agreed to defend a claim. In this case, a real estate appraisal firm was sued in regard to erroneous appraisal reports prepared by its employees, who were not sued personally. Initially, the Fonds d’assurance de l’Ordre des évaluateurs agréés du Québec (the insurance fund of Quebec's association of professional appraisers) agreed to take up the defence of the defendant firm. Over a year later, the Fonds changed its position and denied coverage on the basis that the firm was not an insured under the policy the Fonds had issued to the employees at fault. The defendant firm argued that the Fonds had failed to reserve its rights and had waived its right to deny coverage by agreeing to defend it. The Court rejected this argument. It found that the Fonds had not renounced its right to deny coverage in a “clear and unequivocal” manner. It also noted that the doctrine of fin de non-recevoir cannot add coverage that is not otherwise found in a contract of insurance. This case highlights the importance for insurers to carefully draft their reservation of rights letters.
In its only 2021 judgment on damage insurance, the Supreme Court considered the application of the doctrine of promissory estoppel once the insurer has taken up the defence of its insured and the scope of the insurer’s duty to investigate the claim. Promissory estoppel prevents a party from resiling from a statement on which the other party has relied. In this case, the insurer had taken up the defence of its insured in the context of proceedings brought against him further to an automobile accident. An examination for discovery revealed that the insured had been driving under the influence of alcohol. The insurer promptly denied coverage and ceased defending the insured. An injured third party brought proceedings alleging that the insurer had made its bed by agreeing to defend its insured and had to assume its duty to indemnify.
The judges of the country’s highest court found that the doctrine of promissory estoppel was of no assistance to the injured third party because the insurer was not aware of the fact that the insured had been driving under the influence of alcohol when it examined coverage. Moreover, the Court noted that the insurer is required to conduct only a “good faith” investigation of the claim, such that a third party cannot fault it for failing to consider information that was neither notorious nor in the possession of the insurer when it agreed, subject to a reservation of rights, to take up the defence of its insured.
This judgment considers the exclusion for claims arising from breach of contract in a liability insurance policy and the common exception to the exclusion for liability that the insured would have in the absence of the contract. In this case, the insured had missed certain deadlines in the context of a construction project, such that its co-contracting party commenced arbitration proceedings against it, claiming the amount of liquidated damages set out in the contract for such breach. The insurer refused to defend the insured on the basis of this exclusion. After finding that the exclusion applied, the Court of Appeal examined its scope. It found that the clause providing for liquidated damages was a purely contractual obligation that the insured would not have had to bear by law in the absence of the contract. In the words of the Court of Appeal, the insured had “effectively contracted out of its insurance coverage”. The Court therefore refused to apply the exception and confirmed that the insurer had no duty to defend.
For more information, we invite you to read our full article on this judgment here.
This judgment deals with the interpretation of an exclusion in a property insurance policy for loss of profits attributable to corrosion. The insured, a seller of medical isotopes, presented a claim to its insurer for loss of profits following the temporary suspension of its isotope supplier’s activities. Its supplier’s shutdown was necessary to repair a leak of contaminated water in its nuclear reactor. It was established that the leak was caused by the corrosion of the nuclear reactor’s core wall over a long period of time. Other than the corrosion of the walls, no other property damage was caused to the nuclear reactor.
First, the Court of Appeal confirmed that the exclusion covers all losses attributable to corrosion, and not only “non-fortuitous or anticipated” corrosion, as the trial judge held. The Court found that the exclusion applied in this case. That said, the policy included an exception to the exclusion for covered physical damage caused by corrosion. In the Court’s view, the exception could not be extended to include the loss of use resulting from corrosion in the absence of any physical damage to the reactor. The Court therefore confirmed that the insured was not entitled to any indemnity under the policy.
An application for leave to appeal to the Supreme Court is pending.
Is an insurer required to reimburse defence costs incurred by the insured before giving notice of claim? No, according to the Saskatchewan Court of Appeal, at least not where the insurance policy provides that the insurer is not responsible for costs incurred without its consent. In this case, the insurer had issued a wrap-up policy covering the civil liability of the persons involved on the construction site of a seniors’ retirement living facility. The owner sued the general contractor, who in turn called various subcontractors in warranty. Three years later, the insurer informed the subcontractors that they were insureds under the wrap-up policy and agreed to take up their defence, but for the future only, which the subcontractors challenged. The Court of Appeal first confirmed that it was not possible to impute knowledge on the insurer of the claims, which did not exist against the subcontractors when the insurer was informed of the action brought against the general contractor. Next, the Court applied the clause of the policy providing that the insurer was not liable for defence costs incurred without its consent. The Court therefore confirmed that the insurer could validly refuse to pay the defence costs incurred by the subcontractors before it confirmed that it would take up their defence.
This judgment of the Ontario Superior Court of Justice illustrates the risks an insurer exposes itself to when a court finds that an exclusion clause is drafted in ambiguous and equivocal terms. In this case, the insured had received a demand letter from a former business partner before the policy’s renewal date. A statement of claim was served on the insured after that date, and the insured reported the claim to its insurer at that time. The insurance policy issued by the insurer included an exclusion for any claim of which the insured was aware as of the inception date of the policy. The insurer therefore denied coverage on the basis of this exclusion because the insured was aware of the circumstances set out in the statement of claim before the renewal of its policy. The Court did not agree and found that the term “inception date” was ambiguous. The Court resolved the ambiguity in favour of the insured, finding that the term referred to the date the initial policy issued to the insured took effect – not the date of each successive renewal. Accordingly, the Court ordered the insurer to take up the defence of its insured
Finally, an annual review of Quebec insurance law developments in 2021 would not be complete without mentioning the tabling of a draft regulation setting out the categories of insurance contracts the government proposes to exempt from article 2503 of the Civil Code of Québec, which provides that defence costs are to be borne by the insurer over and above the policy limit. For more information, we invite you to read our full article on the subject here.