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Packed with valuable information, our publications help you stay in touch with the latest developments in the fields of law affecting you, whatever your sector of activity. Our professionals are committed to keeping you informed of breaking legal news through their analysis of recent judgments, amendments, laws, and regulations.

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  • Complaint processing: New framework to come for financial institutions and financial intermediaries

    Last September, the AMF published its draft Regulation respecting complaint processing and dispute resolution in the financial sector (the “Draft Regulation”). The consultation period for it ended on December 8, 2021. The AMF is currently reviewing the many comments it received. The Draft Regulation1 aims to harmonize and improve complaint processing in the financial sector by providing for new mechanisms to ensure prompt and efficient complaint processing, among other things. In the insurance industry, only firms and insurers are currently required to adopt and apply a complaint processing and dispute resolution policy. The Draft Regulation will make these obligations apply to independent partnerships and representatives. It also introduces new requirements and restrictions as well as monetary penalties for not including mandatory content in communications to a complainant, for example. Here are some of the Draft Regulation’s new provisions: Broadening of the definition of “complaint” to: Any dissatisfaction or reproach; That cannot be remedied immediately and for which a final response is expected; In respect of a service or product offered by a financial institution or financial intermediary; That is communicated by a person who is a member of the clientele of the institution or intermediary. The Draft Regulation does not contain a requirement that a complaint must be made in writing.2 It does make it mandatory for financial institutions and financial intermediaries to implement a complaint drafting assistance service.3 It also requires that a note be left in each record to indicate whether a complainant requested this service. Prohibition on the use of the term “ombudsman” in any representation or communication intended for the public to refer to the complaint process or to the persons assigned to its implementation.4 Specific requirements as concerns the mandatory content of a complaint processing policy, an acknowledgment of receipt and final response to a complainant, a complaint record and a complaints register.   For each complaint received, the complaint record must include the following information: The complaint Whether the complainant requested the complaint drafting assistance service The complainant’s initial communication A copy of the acknowledgment of receipt sent to the complainant Any document or information used in analyzing the complaint, including any communication with the complainant A copy of the final response provided to the complainant New time limits: Within 10 days of receiving a complaint, the insurer must notify the complainant in writing that they must also file the complaint with any other financial institution, financial intermediary or credit assessment agent involved, and the insurer must provide the complainant with their contact information.5 The complainant must be given 20 days to assess and respond to an offer to resolve the complaint, with sufficient time for the complainant to seek advice for the purpose of making an informed decision.6 If the complainant accepts the offer, the insurer has 30 days to respond.7 Financial institutions and financial intermediaries have a strict 60-day time limit to provide the complainant with a final response.8 There is a new 15-day time limit to send the complaint record to the AMF.9 There is a streamlined process for complaints that are resolved within 10 days of being recorded in the complaints register: The final response serves as an acknowledgment of receipt and must contain the following information: The complaint record identification code The date on which the complaint was received by the insurer or insurance representative The name and contact information of the employee responsible for processing the complaint referred to in section 7 of the Draft Regulation or in the Sound Commercial Practices Guideline A summary of the complaint received The conclusion of the analysis, including reasons, and the outcome of the complaint A reference to the complainant’s right to have the complaint record examined by the AMF The signature of the complaints officer A statement to the effect that the complainant has accepted the offer to resolve the complaint New monetary administrative penalties The Draft Regulation also provides for monetary administrative penalties ranging from $1,000 to $5,000 for failure to comply with certain requirements and prohibitions of the Draft Regulation. For example, the following will be subject to a monetary administrative penalty of $5,000: Attaching a condition to an offer to prevent the complainant from fully exercising their rights. Using the term “ombudsman” or any other similar title in any representation or communication intended for the public to refer to the complaint process or the persons assigned to its implementation to suggest that such persons are not acting on behalf of the financial institution or financial intermediary. In the latter case, a monetary administrative penalty may be imposed even where no complaint is involved, because the prohibition covers “any representation or communication intended for the public.” Insurers and financial intermediaries should review their communications as soon as possible, and especially the summary of their complaint processing policy appearing on their website. It concerns all entities regulated by the AMF, but the bulletin more specifically addresses financial institutions and financial intermediaries in the insurance industry. As currently indicated on the AMF’s website. Draft Regulation, s. 11. Id., s. 26, para. 2. Id., s. 15. Id., s. 13. Id. Id., s. 12, para. 4. Id., s. 25.

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  • Amendments to the categories of contracts covered by the exemptions to the obligation of an insurer to assume an insured’s defence—the Regulation to come into force

    On April 20, 2022, the government issued Order in Council 656-2022, which makes significant amendments to the Regulation respecting categories of insurance contracts and classes of insureds that may derogate from the rules of articles 2500 and 2503 (the “Regulation”). The original version of the draft regulation with the same title (the “Draft Regulation”) was the subject of one of our publications last September. The Regulation as amended will come into force on the 15th day following the date of its publication in the Gazette officielle du Québec; that is, on May 5, 2022.  Background In its articles 2500 and 2503, the Civil Code of Québec (the “C.C.Q.”) provides that the costs resulting from actions against an insured over and above the proceeds of insurance provided for in civil liability insurance contracts, including those of the defence, are borne by the insurer. In June 2021, the government amended article 2503 of the C.C.Q. to make it possible for some “categories of insurance contracts” and “classes of insureds” to be determined by regulation to depart from these rules.  It is in this context that the Draft Regulation came about. It was was significantly modified following the numerous comments and observations received from various industry stakeholders. Amendments First, sections 1 and 2 were amended to specify when the insured must meet the conditions referred to in these sections, i.e., “at the time of subscription”. The duration of the contracts covered by the first two sections of the Regulation is limited to one year pursuant to the new section 3. It also specified that in the case of contract renewal, the insured must meet the conditions set out in these sections. The provisions of the former section 5 remain, with the necessary adaptations, and are now found in section 4. Finally, sections 6, 7 and 8 were simply removed. Categories of insured covered Below are the categories of insureds who may subscribe to policies that depart from the rules set out in articles 2500 and 2503 of the C.C.Q.: Section 1 Drug manufacturers under the Act respecting prescription drug insurance;[1] Certain corporations incorporated under a private bill;[2] and Directors, officers and trustees of such businesses, except for their activities as members of a pension committee.   Section 2 Companies that are not referred to in section 1, but that meet one of the following conditions “where the total coverage under all the civil liability insurance contracts subscribed by that insured is at least $5,000,000”: Large businesses for the purposes of the Act respecting the Québec sales tax,[3] that is, businesses that have total taxable sales in a given fiscal year in excess of $10 million; A reporting issuer or subsidiary of such a reporting issuer within the meaning of the Securities Act;[4] A foreign business corporation within the meaning of the Taxation Act[5] or the Income Tax Act,[6] that is, a company that is not resident in Canada; and Directors, officers and trustees of such businesses, except for their activities as members of a pension committee. What to expect The amendments to the Draft Regulation reflect a willingness to simplify its application. In this regard, the removal of section 8 will no doubt be well received. Nevertheless, Quebec continues to be an exception to the principle of full freedom of contract. As a result, small and medium-sized enterprises in certain industries may continue to be affected by the tightening of the insurance market in Quebec, including the manufacturing sector that exports to the United States. It remains to be seen whether the Regulation will change over time. If you have any questions on the subject matter of this article or any other questions, feel free to contact a member of Lavery’s insurance team. [1] A-29.01. [2] Act constituting Capital régional et coopératif Desjardins (C-6.1), Act to establish Fondaction, le Fonds de développement de la Confédération des Syndicats Nationaux pour la coopération et l’emploi (F-3.1.2) and Act to establish the Fonds de solidarité des travailleurs du Québec (F.T.Q.) (F-3.2.1). [3] T-0.1. [4] V-1.1. [5] I-3. [6] R.S.C. 1985, c. 1 (5th Supp.).

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  • Limitation of insurer’s duty to defend: The Draft Regulation specifying the categories of contracts covered is published

    On September 8, 2021, Mr. Éric Girard, Minister of Finance, presented his Draft Regulation specifying the classes of liability insurance contracts that may derogate from public policy rules previously applicable to liability insurance (the “Draft Regulation”), namely those set out in articles 2500 and 2503 of the Civil Code of Québec (“CCQ”) concerning the insurer’s duty to defend and the exclusive application of insurance coverage to injured third parties. Background Since May 27, 2021, article 2503 CCQ reads as follows: The insurer is bound to take up the interest of any person entitled to the benefit of the insurance and assume his defence in any action brought against him. Legal costs and expenses resulting from actions against the insured, including those of the defence, and interest on the proceeds of the insurance are borne by the insurer over and above the proceeds of the insurance. However, the Government may, by regulation, determine categories of insurance contracts that may depart from those rules and from the rule set out in article 2500, as well as classes of insureds that may be covered by such contracts. The Government may also prescribe any standard applicable to those contracts. When Bill 82 was introduced for adoption, the Minister of Finance seemed to suggest that the categories that would benefit would be public companies and liability insurance for directors and officers. Although small and medium-sized enterprises are not covered by the Draft Regulation, it does provide for several categories of insureds that may benefit from exemptions. Draft Regulation – covered categories The Draft Regulation appears to cover “any liability insurance contract,” but sets out conditions that must be met by an insured in order to benefit from exemptions. Finally, many businesses and their directors and officers will be entitled to subscribe to policies that do not comply with articles 2500 and 2503 CCQ. Here is a summary of exemptions:  Section 1 Category of insured Drug manufacturers under the Act respecting prescription drug insurance; Certain corporations incorporated under a private bill;1 and Directors, officers and trustees of such businesses, except for their activities as members of a pension committee. Exemptions These insureds may subscribe to policies that depart from the rules set out in article 2500 CCQ and those set out in the first and second paragraphs of article 2503 CCQ.2 Section 2 Category of insured Companies not referred to in section 1, but meeting one of the following conditions “where the total coverage under all the civil liability insurance contracts subscribed by that insured is at least $5,000,000”: Large businesses for the purpose of the Act respecting the Québec sales tax; that is, businesses that have total taxable sales in a given fiscal year in excess of $10 million; A reporting issuer or subsidiary of such reporting issuer within the meaning of the Securities Act; A foreign business corporation within the meaning of the Taxation Act (chapter I-3) or the Income Tax Act; that is, a company that is not resident in Canada; and A corporation that pursues an activity outside Canada and derives income from that activity. Directors, officers and trustees of such businesses, except for their activities as members of a pension committee. Exemptions These insureds may subscribe to policies that depart from the rules set out in article 2500 CCQ and those set out in the first and second paragraphs of article 2503 CCQ. Section 3 Category of insured Businesses not referred to in sections 1 and 2 that conduct activities to provide services provided for in the Act respecting health services and social services as: An intermediate resource not referred to in the Act respecting the representation of family-type resources and certain intermediate resources and the negotiation process for their group agreements (chapter R-24.0.2) and who is a support for elderly autonomy-type resource; A private seniors’ residence; or A private health and social services institution operating a residential and long-term care centre or rehabilitation centre. Directors, officers and trustees of such businesses, except for their activities as members of a pension committee. Exemptions These insureds may subscribe to policies that depart from the rules set out in article 2500 CCQ and those set out in the second paragraph of article 2503 CCQ only. Section 4 Category of insured Businesses that are not covered by section 2, for example because they do not have total coverage of at least $5,000,000, and that have operations outside of Canada and earn income from them. However, exemptions are possible only for coverage of these foreign activities. Policies covering the Canadian operations of businesses must comply with the rules set out in the public interest.   Exemptions These insureds may purchase policies that depart from the rules set out in article 2500 CCQ and those set out in the first and second paragraphs of article 2503 CCQ. Section 6 Category of insured Businesses not referred to in any of sections 1 to 3 having primary liability insurance contracts in accordance with the provisions of articles 2500 and 2503 CCQ, covering legal costs and expenses resulting from actions against them, including those of the defence, and interest on the proceeds of the insurance. Exemptions These insureds may subscribe to complementary policies that depart from the rules set out in article 2500 CCQ and those set out in the first and second paragraphs of article 2503 CCQ. The Draft Regulation also stipulates that where an insurance policy does not provide for an obligation for an insurer to assume an insured’s defence (first paragraph of article 2503 CCQ), the insured retains the right to select counsel, but must keep the insurer informed of the progress of the proceedings and allow it to participate in the defence. Finally, the government, in article 8 of the Draft Regulation, provides that the proceeds of the insurance that are not applied exclusively to the payment of injured third parties may not exceed 50% of the proceeds of the insurance, unless the insured is found not to be liable or unless the payments to injured third parties do not reach such 50%. However, where a minimum amount of liability insurance coverage is required by law, that amount must be applied in full to the payment of injured third parties without regard to the exceptions discussed above. What to expect While some will welcome the government’s openness in allowing policyholders and insurers to relax certain obligations that may have contributed to a tightening insurance market in Quebec, others will fear the consequences that these changes may have, in particular on the availability of “non-exempt” insurance policies for insureds covered by the Draft Regulation.  In any case, this is a significant change that will generate much discussion between risk managers, market intermediaries and underwriters.  Also, some may be interested in obtaining additional information or commenting on the Draft Regulation. Information requests may be directed to the Direction générale du droit corporatif et des politiques relatives au secteur financier, Ministère des Finances, and comments may be made in writing to the attention of the Minister of Finance before October 23, 2021. Do not hesitate to contact a member of Lavery’s insurance team in connection with the above. Act constituting Capital régional et coopératif Desjardins (C-6.1), Act to establish Fondaction, le Fonds de développement de la Confédération des Syndicats Nationaux pour la Coopération et l'emploi (F-3.1.2) and Act to establish the Fonds de solidarité des travailleurs du Québec (F-3.2.1). As reproduced above, the first paragraph of article 2500 CCQ concerns the insurer’s obligation to assume the defence of the insured with respect to covered claims, and the second paragraph specifies that the insurer assumes the legal costs, interest and expenses, over and above the proceeds of the insurance.

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  • Insurer’s Duty to Defend: The Court Rules in a Case of Contractual Breach

    The question of insurers’ duty to defend is back in the spotlight. On March 18, 2021, the Superior Court once again considered the issue in its application of the law to facts relevant to the dispute.1 Facts In April 2016, Cégerco Inc. (“Cégerco”), a general contractor, retained the services of Construction Placo Inc. (“Placo”) for the supply and installation of exterior cladding made of metal wall panels, which were manufactured by Kingspan Insulated Panels Ltd. (“Kingspan”). On May 24, 2017, Cégerco resiliated its contract with Placo on the grounds that Placo had caused numerous delays to the work schedule. Placo therefore instituted proceedings against Kingspan to recover sums advanced to the company, and against Cégerco for the damages resulting from the resiliation of the contract. Kingspan and Cégerco filed cross-applications, alleging non-performance by Placo. Faced with these cross-applications, Placo turned to its insurer for it to take up its defence.   However, the insurer adopted the position that it had no obligation to defend Placo or accept its insurance claim. Placo then applied to the Superior Court by way of an Wellington type application to have the insurer take up its defence in the dispute opposing it to Cégerco and Kingspan. Reasons After briefly reviewing the principles of Wellington type applications and the Supreme Court’s teachings in the landmark Progressive Homes2 decision, the Court concluded that the damages claimed in Kingspan’s cross-application did not arise from material damage or a loss. It did not dwell on this question any further, judging that insurance coverage did not apply. The Court then addressed Cégerco’s cross-application. Here again, it held that the damages claimed were not the result of material damage within the meaning of the insurance policy. Thus, after having analyzed Cégerco’s breakdown of damages claimed, it concluded that the sums represented monetary damage resulting from the fact that Placo had failed to fulfill its obligation to deliver compliant panels.  The Court further noted that [translation] “monetary losses related to defective or non-compliant products” did not fall within the scope of the commercial liability insurance’s coverage. The Court drew a distinction between the facts of this case and those of Progressive Homes cited above,3pointing out that the issue here was simply the non-performance of a contract. The Court held that the panels could not be the cause of the material damage that Cégerco suffered, as they had not been installed on the building, and that the material damage [translation] “rather resulted from a normal, if not foreseeable, incident that could have occurred in the normal course of any business.” Thus, according to the Court, although Cégerco was bound to take steps to remedy the delay in the delivery of the panels, and that such steps may have resulted in damage to the structure, Placo’s breach of contract did not result in a loss that would make insurance coverage applicable. For these reasons, the Court dismissed the plaintiff’s Wellington type application and that of the cross-applicant Placo. Conclusion What this decision means is that although an insurer’s duty to defend arises as soon as there is a possibility that material damage claimed falls within the scope of an insurance policy’s coverage, monetary damage suffered purely as a result of a breach of contract is not a sufficient legal basis for triggering an insurer’s duty to defend. Construction Placo inc. c. Kingspan Insulated Panels Ltd., 2021 QCCS 1230 Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33. [2010] 2 SCR 245. Id.

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  • Adoption of Bill 82: The insurer’s duty to defend can now be adjusted

    On Thursday, May 27, 2021, article 2503 of the Civil Code of Québec was amended as part of the adoption of Bill 82, titled An Act respecting mainly the implementation of certain provisions of the budget speech of 10 March 2020, which we had discussedin a publication last December. The added paragraph provides that in cases to be provided for by regulation, it will now be possible to depart from the insurer's duty to defend and the exclusive allocation of insurance coverage to injured third parties, within the meaning of article 2500 of the Civil Code of Quebec: 2503. The insurer is bound to take up the interest of any person entitled to the benefit of the insurance and assume his defence in any action brought against him. Legal costs and expenses resulting from actions against the insured, including those of the defence, and interest on the proceeds of the insurance are borne by the insurer over and above the proceeds of the insurance. However, the Government may, by regulation, determine categories of insurance contracts that may depart from those rules and from the rule set out in article 2500, as well as classes of insureds that may be covered by such contracts. The Government may also prescribe any standard applicable to those contracts  This legislative amendment confirms the government’s desire to allow contractual limits to certain rules of public order previously applicable to liability insurance for “categories of insurance contracts” and certain “classes of insureds” to be established by regulation. According to the May 12, 2021 debates, the government does not intend to include insurance contracts for individuals and small and medium-sized businesses in the categories covered. Instead, Finance Minister Éric Girard referred to public companies and insurance for directors and officers. This is what he said when the bill was presented for adoption last May 27: In terms of insurance, there is also a change in defence costs, which can be excluded from the insurer’s liability, because we had, in Quebec’s Civil Code, a distinction with the rest of Canada that put large public companies in Quebec at a disadvantage with respect to their competitors. That is to say that insurance premiums for directors and officers were much higher in Quebec, and now, with what we are introducing here, we will be able to make a difference and help our companies to grow and encourage head offices to be here. We will continue to closely monitor the presentation of the regulation that will specify the departures allowed under the new article 2503 of the Civil Code of Québec.

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  • Insurer's Duty to Defend: Bill 82 Opens the Door to Possible Limitations

    On December 11, 2020, the Minister of Finance, Éric Girard, introduced and tabled Bill 82 entitled An Act respecting mainly the implementation of certain provisions of the Budget Speech of 10 March 2020 (hereinafter the “Bill”) before the National Assembly.  The Bill opens the door to possible limitations on the duty to defend with respect to certain categories of liability insurance contracts to be determined by regulation. Background The Civil Code of Quebec (“C.C.Q.”) provides in articles 2500 and 2503 C.C.Q. that the insurance limits provided for in liability insurance contracts and the costs resulting from actions against the insured, including those associated with the defence, are borne by the insurer in excess of these limits. Since these provisions are of public order, the parties to the contract cannot agree to the contrary and the insurer's obligation to pay these defence costs is practically unlimited. The increase in the frequency and size of claims, as well as the explosion in costs associated with the defence of insureds, have contributed to a hardening of the market since 2019.  In such a market, insurance companies are applying stricter pricing and demanding higher premiums. In some cases, some insurers are withdrawing completely from the market or from certain industries, creating real difficulties for many companies. The absence of a possible limitation on the insurers' duty to defend, a principle specific to Quebec, was likely to make this market less attractive to national and international insurers. Proposed legislative change The Bill provides that the insurers' duty to defend under articles 2500 and 2503 C.C.Q. may be limited with respect to certain liability insurance contracts that will be determined by regulation. If the proposed amendment is accepted in its present form, the new article 2503 C.C.Q. will henceforth read as follows: 2503. The insurer is bound to take up the interest of any person entitled to the benefit of the insurance and assume his defence in any action brought against him. Legal costs and expenses resulting from actions against the insured, including those of the defence, and interest on the proceeds of the insurance are borne by the insurer over and above the proceeds of the insurance. However, the Government may, by regulation, determine categories of insurance contracts that may depart from those rules and from the rule set out in article 2500, as well as classes of insureds that may be covered by such contracts. The Government may also prescribe any standard applicable to those contracts  [Emphasis added] This amendment has no practical impact in the short term since a regulation will have to be adopted to specify the contracts that may be subject to this limitation. We anticipate that the legislator will first target more special classes of liability insurance contracts, often purchased by more sophisticated insureds, such as Directors and Officers liability insurance contracts. Nevertheless, this is a significant step forward that will undoubtedly stimulate the interest of certain specialized insurers for Quebec risks. Upcoming steps The Bill, although tabled, must go through several stages before the proposed amendment becomes law. Even if the Bill could be assented to in the coming months, a regulation giving effect to the new paragraph of article 2503 C.C.Q. will also have to be drafted and passed. We will therefore continue to monitor the progress of this legislative matter.

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  • Are you protected against phishing email?
    What the Court of Appeal said in insurance matters

    Phishing fraud is a rampant problem that causes major losses throughout the world. It consists in bad actors sending emails in which they falsely claim to be a trusted third party or legitimate company in order to obtain confidential information from the recipient for the purpose of committing fraud1. In Co-operators c. Coop fédérée2, the Court confirmed the insurer's obligation to indemnify its insured for losses resulting from such fraud, thereby confirming that the insurer was precluded from raising a new defence at trial. The Court of Appeal also addressed the notion of specific insurance provided for in article 2496 of the Civil Code of Québec (hereinafter "C.C.Q.") in the presence of a plurality of insurance. Facts In August 2014, La Coop fédérée (the "Coop") was the victim of phishing fraud. Due to false pretenses, its comptroller sent a payment order to the Coop's bank (the "Bank"), which complied with the order and transferred the sum of $4,946,355.26 in U.S. dollars to a foreign company. On August 23, 2014, the Coop became aware of the fraud, but the Bank was unable to stop the transaction or recover the funds. At that time, the Coop's account was overdrawn by $3,386,361.80, to which was added the amount of the transfer. The Coop contested the validity of the fraudulent transfer and the resulting additional overdraft with the Bank. It also informed its insurers of the losses incurred. However, The Co-operators General Insurance Company ("The Co-operators") denied the claim on the basis that the increase in the overdraft was not a property covered by the policy, that the misappropriated money belonged to the Bank and, incidentally, that the Coop had not suffered a compensable loss. As for Liberty International Underwriters ("Liberty"), which had issued an insurance policy against fraud and embezzlement, it accepted the claim subject to the rules of contribution between multiple insurers. The Coop therefore went to the Superior Court to force The Co-operators to indemnify it for the loss suffered. At the same time, Liberty claimed from The Co-operators the reimbursement of part of the indemnity that it had paid to the Coop. Superior Court As for liability for the loss, the trial judge first concluded that the Bills of Exchange Act ("BEA") does not apply to electronic funds transfers ("EFT"), that is, transfers without the exchange of paper documents. He then concluded that the overdraft on the Coop's bank account constituted a loan, that the Coop had become the owner of the misappropriated sum in accordance with article 2327 of the C.C.Q., and that it thus had to bear the loss. This conclusion led the judge to, in particular, dismiss the application filed by the Co-operators to amend its defence so that it could argue that the Coop's refusal to raise the invalidity of the payment order could not be set up against it and constituted a reason for non-coverage. Instead, the judge agreed with the Coop and Liberty, which argued that The Co-operators could not invoke new grounds for denying coverage at such a late time. According to the Court, The Co-operators had sealed its fate upon the initial denial of coverage. As for The Co-operators' insurance coverage, the judge pointed out that a contract for "property and business interruption insurance" existed, and as it was considered as a negotiated policy, the intention of the parties had precedence. However, no evidence of this intention was filed. In the absence of a specific exclusion on fraud, the judge ruled that the loss suffered by the Coop constituted a risk covered by this insurance policy. The trial judge found that the loss suffered was covered by both insurance policies, namely that of the Co-operators and that of Liberty. According to the trial judge, the Liberty insurance policy was not a specific insurance policy in that it covered all of the insured's property and all the risks that could affect it, as did the Co-operators policy. Given that both insurance policies covered the same risks, the Court concluded that there was of a plurality of insurance and apportioned the contributions of each of the insurers in proportion to their respective share of the total coverage, while taking into account the applicable deductibles. Quebec Court of Appeal The judges of the Court of Appeal dismissed the appeal except for the conclusion on the nature of the Liberty insurance policy. Like the Superior Court judge, the Court of Appeal held that the BEA does not apply to a payment order because an EFT is not a bill of exchange within the meaning of the BEA. In addition, the Court of Appeal further distinguished the two by the fact that an EFT does not include a procedure for presenting payment, is immediate and final and, unlike a bill of exchange, beneficiaries of an EFT have no title or written document that enables them to claim payment should the transaction fail. Regarding The Co-operators' application to amend its defence, the Court reiterated that the decision to grant an application for an amendment belongs to the trial judge. That judge must base this decision on three principles: An amendment is permitted if it does not delay the proceedings or is not contrary to the interests of justice; If it does not constitute an entirely new application; The lateness of the application cannot be the only justification for dismissing the application. The Court of Appeal also found that The Co-operators had sealed its fate by failing to mention these grounds upon the initial denial of coverage. In addition, the Court of Appeal confirmed that the misappropriated sum was indeed the Coop’s property. As a result, the trial judge did not err in determining that the policy covered all property of any kind and all risks, including a loss resulting from computer fraud. The policy was not ambiguous and no exclusions applied. The Court ruled that there was indeed of a plurality of insurance within the meaning of article 2496 C.C.Q. Also, the Co-operators policy and the Liberty policy contained excess clauses, resulting in the effect of such clauses having to be cancelled in order to prevent the insured from finding itself in a no-compensation situation, in accordance with the teachings of Family Insurance Corp3. In this case, the Court of Appeal determined that the Liberty policy was in fact specific insurance, as it covered a particular category of risks, namely fraud and embezzlement. As a result, this insurance became the primary insurance. On the basis of the foregoing, the Court of Appeal did not rule on the calculation method the Superior Court applied to apportion the insurers' contributions when insurance penalties of the same rank exist. Conclusion This judgment contains many noteworthy points. Among other things, it is important for insurers to make sure, when denying coverage, that all the reasons for refusing to pay benefits are fully stated. Also, with regard to a plurality of insurance, we note that even if an insurance policy includes an excess clause, it may not apply if the insured has another insurance policy with the same type of clause. Ultimately, the Court of Appeal confirmed that qualifying an insurance policy as specific should not be unduly limited to only cases where certain and determinate property is covered, and that the insurance granted for a particular category of risk may, depending on the context, constitute such specific insurance.   Canadian Anti-Fraud Centre, Phishing. Compagnie d’assurances générales Co-operators c. Coop fédérée, 2019 QCCA 1678. Family Insurance Corp v. Lombard Canada Ltd., [2002] 2 SCR 695.

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  • Insurers’ Duty to Defend: The Court of Appeal makes a new ruling

    The Court of Appeal of Quebec was once again called upon to rule on a Wellington type application aiming to force an insurer to defend its insureds1. Over the years, the scope of this duty has developed extensively in case law. In this particular case, the Court ordered that defence costs be shared, because it concluded that the part of the damages that could be covered by the insurance policy was divisible and identifiable. Facts Développement Les terrasses de l’Îles Inc., Darcon Inc. and Groupe Dargis Inc. (collectively the “Insureds”) had purchased a commercial general liability insurance policy (the “Policy”) from Intact Insurance Company (“Intact”). The Insureds sued Intact to force it to defend them in an action for damages brought against them by the Syndicat des copropriétaires Prince of Wales (the “Syndicate”), who alleged the existence of defects in the construction of a divided co-ownership building. The originating application was amended during the proceedings to add damages resulting from water infiltration, mould and structural problems found in the building. The issue in dispute was whether the damages claimed were covered by the Policy, and if, as a result, the insurer had the duty to defend. The decision by the court of first instance According to the Superior Court, there was no reason to consider a design or construction defect as a loss or accident, as the Insured were claiming. The Court thus concluded that the damages claimed did not result from a “loss” within the meaning of the Policy, but rather from defects attributable to errors the Insured or their subcontractors had made. This reasoning also applied to the allegations of water infiltration and mould resulting from alleged poor design or construction defects. In addition, the Superior Court concluded that, in any event, the damages claimed were not covered under clauses 2.7, 2.9 and 2.14 of the Policy, which covered, respectively, material damage during construction, material damage to the work and material damage resulting from the provision of professional services. The appeal The Court of Appeal unanimously overturned the trial judgment. First, the Court reiterated the general principles set out in Progressive Homes2 regarding insurers’ duty to defend, namely that this duty to defend will arise when the alleged material damages, by their true nature, may possibly fall within the scope of the insurance policy. Hence, (1) the insured must demonstrate that the damage could be covered by the insurance policy. Thereafter, (2) the insurer may defer liability by proving that a clear and unambiguous exclusion clause precludes coverage. At this point, (3) the insured may still argue that an exception to said exclusion applies. The Court of Appeal went on to reiterate the principle that the coverage provisions must be interpreted broadly and the exclusion clauses must be interpreted restrictively. On this basis, the Court of Appeal determined that the trial judge had interpreted the terms “loss” and “accident” too narrowly in light of the legal precepts drawn from the case law. In this case, the design or construction defects had caused material damage to the building that was not anticipated, triggering the insurer’s duty to defend. Moreover, because Intact had not proven that an exclusion precluded the insurance coverage, it could be required to compensate for material damage resulting from the deficiencies, but not for the costs of correcting the latter. In this case, the Court of Appeal noted that the Syndicate was alleging not only a series of defects, but also problems caused or likely to have been caused by the defects, including water infiltration. However, according to the Court of Appeal, it was not clear whether the alleged defects have caused damages (often referred to as resulting damages) and whether these damages were claimed. Nevertheless, the Court of Appeal concluded, based on the proceedings, that the duty to defend had been triggered. Despite this uncertainty, it also concluded that the part of the damage that could be covered was divisible and identifiable, and it limited the insurer’s duty to this part. Comments The Court of Appeal applies the principles developed by the courts with respect to the duty to defend. Doing so, the Court of Appeal however limited the insurer’s duty to defend despite the fact that it is not clear whether the claim actually included damages other than defects. This conclusion may pose serious practical difficulties, given that it is usually hard to establish a distinction between defense measures taken, and incidentally the costs, strictly in relation to defects and those related to the resulting damages. It should be noted that, in Cirvek Fund I3, the Court of Appeal held that the insurer's duty to defend should only be limited in cases where the insurer demonstrates that the tasks required for the defence of the covered items are distinct from those relating to the uncovered items.   Développement les Terrasses de l’Îles inc. v. Intact, Compagnie d’assurances, 2019 QCCA 1440 Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, [2010] 2 SCR 245, 2010 SCC 33 245. Société d'assurances générales Northbridge (Lombard General Insurance Company of Canada) c. Cirvek Fund I, l.p., 2015 QCCA 168

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  • Bill 141 and divided Co-ownerships: What changes in insurance for co-owners?

    On June 13, 2018, Bill 141, An Act mainly to improve the regulation of the financial sector, the protection of deposits of money and the operation of financial institutions (hereinafter referred to as the “Act”), received assent. This reform has a significant impact on certain laws governing the financial sector, amending the Civil Code of Québec (“C.C.Q.”) regarding the divided co-ownership of an immovable. While many of the legislative amendments will have to wait for the regulations to come into force, others took effect on December 13. Here is an overview of them. Insurance obligations of the syndicate of co-owners The provisions of section 6411 of the Act amend the manner in which the insurance obligations of the syndicate of co-owners under article 1073 of the C.C.Q. are regulated. Here is a brief description of these amendments: Deductible Insurance taken out by syndicates must have a reasonable deductible. It will be up to the legislator to define this concept in a future regulation. Risks covered The risks covered by operation of law will be prescribed by regulation. These will be deemed to be covered, unless the policy or a rider sets out, expressly and in clearly legible characters, which of those risks are excluded. Amount of coverage The amount of insurance must cover the reconstruction of the immovable in accordance with the standards, usage and good practice applicable at that time; the amount must be evaluated at least every five (5) years by a member of a professional order designated by government regulation. Insured persons The members of the syndicate’s board of directors and the manager as well as the chair and the secretary of the general meeting of the co-owners and the other persons responsible for seeing to its proper conduct must take out third person liability insurance. It should be noted that the manager may be a co-owner or a third party, in accordance with article 1085 C.C.Q. The insured status of a management company for the purposes of a syndicate's policy could have a significant impact on insurers' potential recoveries. Identification of improvements to private portions The Act provides that the syndicate must keep at the disposal of the co-owners a description of the private portions that is sufficiently precise to allow any improvements made by co-owners to be identified2. The identification of these improvements will in principle have the advantage of clearly defining what is covered by the co-ownership’s insurance and what is covered by the co-owner’s insurance. If not identifiable, the improvements would remain the responsibility of the syndicate. Creation of a self-insurance fund In addition to having to set up a contingency fund and an operating fund, the syndicate will have to set up a self-insurance fund that is liquid and available on short notice3. This fund will be used to pay the deductibles provided for in the insurance policies taken out by the syndicates and to compensate for damage to property in which the syndicates have an insurable interest, when the contingency fund or an insurance indemnity cannot provide for it. The amount of the self-insurance fund must be based on the amount of the deductible and must provide for an additional reasonable amount to cover the other expenses for which it is established. Insurance obligation Each co-owner must take out third party liability insurance, the amount of which will be determined by regulation4. Damage to property - Repair or claim Section 642 of the Act provides for the insertion of articles 1074.1 to 1074.3 after article 1074 C.C.Q.5. These articles have the following provisions: When a loss occurs which falls under the coverage provided for by a property insurance contract entered into by the syndicate and the syndicate decides not to avail itself of the insurance, it shall with dispatch see that the damage caused to the insured property is repaired. A syndicate that does not avail itself of insurance may not sue a co-owner, a person who is a member of a co-owner’s household, or a person in respect of whom the syndicate is required to enter into an insurance contract to cover the person’s liability for expenses incurred. On the other hand, it seems that the syndicate could benefit from a right of recourse in the event of a claim not involving insurance coverage. However, the sums incurred by the syndicate to pay the deductibles and make reparation for the injury caused to property in which the syndicate has an insurable interest may not be recovered from the co-owners otherwise than by their contribution for common expenses, subject to damages it can obtain from the co-owner bound to make reparation for the injury caused by the co-owner’s fault. This reservation making it possible to claim damages is open to interpretation. It would be possible to read these new articles and conclude that the syndicate retains rights of recourse against a co-owner for damage to property in which it has an insurable interest in the event that no insurance coverage is at stake and the co-owner's fault can be demonstrated. Or, perhaps the legislator intended to preserve the syndicate’s rights to claim damages other than the cost of repairing the damage caused to the property, as permitted by article 1728 C.C.Q. in respect of latent defects. These amendments and this notion of damages will undoubtedly need to be clarified by the courts. Finally, syndicate insurance will take precedence in the event that the same risks and property are covered by more than one insurance policy. Insurers’ subrogatory action The limitations on insurers' subrogatory rights in matters of divided co-ownership are now codified. The insurer of the syndicate, co-owner, person who is a member of a co-owner’s household, or person in respect of whom the syndicate is required to enter into an insurance contract to cover the person’s liability will be denied the right to bring a subrogatory action against one of these persons. The only possible exception to this rule applies in the case of bodily or moral injury or if the injury is due to an intentional or gross fault5. Conclusion Although many of the above-mentioned amendments remain dependent on the adoption of regulations, it remains important for the representatives of co-ownership syndicates to carry out the necessary checks to validate their insurance needs and obtain the appropriate advice from professionals in this sector. Insurers will also have to adjust their practices as a result, both when insurance is taken out and when managing claims.   These amendments will come into force 12 months after the publication of a regulation made under the 3rd paragraph of article 1073 C.C.Q. A first regulation must be published by June 13, 2020, at the latest. The provisions of section 638 come into force on different dates depending on the date of establishment of the co-ownerships concerned. See sections 653 and 814 para. 2 of the Bill 141. The provisions regarding the self-insurance fund will come into force 24 months after the publication of a regulation made under the 3rd paragraph of article 1072 C.C.Q. A first regulation must be published by June 13, 2020, at the latest. The entry into force of these provisions is conditional on the adoption of a regulation to be published no later than June 13, 2020. These provisions have been in effect since December 13, 2018.

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  • Care, Custody or Control Exclusion Clause in Insurance—The SCC’s Interpretation

    On October 19, 2018, the Supreme Court of Canada handed down its decision in 3091-5177 Québec inc. (Éconolodge Aéroport) v. Lombard General Insurance Company of Canada1, written by the Honourable Mr. Justice Clément Gascon, in an appeal of a Quebec Court of Appeal decision. It deals primarily with the application of the standard care, custody or control exclusion clause. Summary This decision helps clarify the application of a care, custody or control exclusion clause on the basis of the distinction between the notions of custody and of mere physical holding. Insurers must determine, on the basis of the particular facts of each claim, if custody was truly transferred to the insured before relying on the exclusion, while bearing in mind that the exclusion should not eliminate coverage in situations for which the application of such coverage is expected by or reasonable for the insured. The facts Éconolodge Aéroport (hereinafter “Éconolodge”) offered accommodations, parking and park and fly shuttle services near the Montréal—Pierre Elliot Trudeau International Airport. In winter, guests were required to give their car keys to Éconolodge representatives so that snow could be cleared from the parking lot. In the winter of 2005–2006, the vehicles of two Éconolodge guests were stolen from said parking lot. After having compensated their respective clients, the guests’ property insurers both instituted subrogatory recourse against Éconolodge to recover the compensation paid out, arguing that Éconolodge had not taken reasonable measures to prevent theft. In each case, Éconolodge’s insurer, Lombard General Insurance Company of Canada (hereinafter “Lombard”), was either sued directly or impleaded in warranty. Ultimately, the lawsuits for both cases of theft were joined. Lombard argued that it was not required to pay the claims, as per the exclusion, according to which the insurer was not liable for the loss of vehicles in Éconolodge’s custody and control. The exclusion read as follows: [Translation] This insurance does not apply to: (...) H. “Property damage” to: (...) (d) Personal property in your care, custody or control; Judicial history The lower courts all concluded that Éconolodge was liable for the theft of the two vehicles. In characterizing the contract between Éconolodge and its guests as a contract for services, they concluded that Éconolodge breached its obligation, as defined in article 2100 of the Civil Code of Québec, to act with prudence and diligence in the best interests of its guests. With regard to the care, custody or control exclusion clause, the Court of Québec concluded that it did not apply because Éconolodge had neither custody nor real control or care of the vehicles. In the Court’s view, the fact that the keys had been handed over to Éconolodge representatives in order to clear the parking lot of snow did not constitute a real transfer of custody of the vehicles. The Court of Appeal, for its part, was of the opinion that since the guests had handed over their keys to Éconolodge representatives, this meant that the vehicles were necessarily in Éconolodge’s custody. According to the Court, it was also incongruous to conclude that there was an obligation of prudence and diligence toward the vehicles without concluding there was a transfer of custody. The Court of Appeal thus found that the exclusion clause should apply. The SCC decision Like the lower courts, the Supreme Court concluded that Éconolodge was liable for the theft of the vehicles. However, it set aside the Quebec Court of Appeal’s conclusion that the exclusion clause relied on by Lombard was applicable, determining that the hotel operator did not have custody or control of the vehicles in the legal sense of these terms. It considered that in this case there was no ambiguity in the exclusion clause that needed to be resolved through an interpretation. For the purposes of applying this clause, the Court had to determine the effect of the guests handing over their keys on the notion of custody, given the distinction between custody and mere physical holding of property. Context determines whether a person or entity has custody or mere physical holding of property. In the aforementioned cases, the guests handed over their keys to the hotel operator for a specific reason—to facilitate parking lot snow removal. Moreover, guests were not required to hand over their keys in the summer. The Court determined that Éconolodge did not have real custody of the vehicles since it only had limited, clearly circumscribed power, namely to move the vehicles in the event of an accumulation of snow. In its analysis, the Court stated that the rationale behind the exclusion clause is to prevent the insurer from [Translation] “tying its obligation to pay compensation to uncertainties resulting from initiatives that may be taken by an insured [...] and have nothing to do with the kind of commercial activities engaged in by the insured and known to the insurer”. However, according to the Court, parking is an essential part of the range of services offered by Éconolodge, as it is a park and fly hotel. As Éconolodge’s insurer, Lombard knew the business model of the hotel operator and had knowingly issued the insurance policy. The Court was of the opinion that applying the exclusion would undercut the usefulness of the coverage for one of the insured’s three main activities. Finally, according to the Court, it would be absurd for the exclusion to be applicable dependent on the season. The Court concluded that Lombard must compensate Éconolodge for the theft of the cars. Conclusion The very contextual nature associated with characterizing the notion of custody requires a rigorous analysis of the facts surrounding the legal relationship between the insured and the lost or damaged property. In this analysis, insurers must attempt to determine if custody has truly been transferred to the insured or if it is a case of mere physical holding. Moreover, it should be noted that the application of the exclusion must not ultimately undercut or eliminate coverage in situations for which the application of such coverage is expected or reasonable for the insured.    3091-5177 Québec inc. (Éconolodge Aéroport) v. Lombard General Insurance Company of Canada, 2018 SCC 43.

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  • Wellington-Type Motion And Reserve Of Rights Letter

    On July 9, 2018, the Superior Court once again examined the principles applicable to Wellington-type motions in connection with a matter opposing two contractors against their liability insurers in a legal proceeding initiated by the Société des traversiers du Québec (hereafter “STQ”). The contractors were, among other things challenging the application of some exclusions, alleging that the denunciation of said exclusions as ground to deny coverage were raised too late. The Facts During a storm, an STQ platform on which the contractors were working was damaged. The sheet pilings provided by the STQ and installed by the contractors detached from the platform and fell into the river. Initially, the adjusters mandated by the insurers denied coverage by referring to the exclusions concerning damage to the property owned, leased or occupied by the contractors. In its proceedings, STQ was summarily alleging the contractors' faulty work and non-compliance of the work with the welding plans and specifications. The contractors filed a Wellington-type motion in order to force their insurers to take up their defence. A few days afterwards, the STQ modified its proceedings to specify the defects that were affecting the contractors’ work. It also filed two expert reports in support of its allegations. It was only during the contestation of the Wellington-type motion that the insurers finally raised the application of the exclusions concerning the damages to a part of the building on which the contractors were called to work on because of faulty work.  The decision From the outset, the Court reiterates that an insurer owes a defense to an insured when the allegations of the proceedings entail a mere possibility of coverage under the policy. At this stage, the judge does not have to inquire as to whether the insured’s responsibility will be merited, but must simply determine whether there is a possibility of coverage. In light of the allegations of STQ’s Amended application, the Court concludes that the exclusions initially raised by the insurance adjusters did not apply, since the contractors were never the owners, lessees or even borrowers of the sheet pilings. As for the exclusions concerning the contractors' faulty work, the Court concludes to their application to the extent that the STQ allegations are considered as proven. The contactors also argued that these exclusions were submitted late. Indeed, it is acknowledged that an insurer cannot invoke an exclusion which is submitted late or kept in reserve in the event of the failure of another means of defence.1 According to the contractors, the insurers should not have been allowed to invoke the exclusions relating to faulty work at the stage when the Wellington-type motion was already filed, without having previously raised the application of said exclusions. In response, the insurers argued that, while the STQ’s initial Application included general allegations regarding the contractors' faulty work, they were justified in raising these new exclusions after the modification made by STQ which crystallized and clarified the complaints made against the contractors. Incidentally, the insurers emphasized that they had also reserved their rights to invoke any other exception of the insurance policy in their initial coverage letter. In the end, the Court sided with the insurers and rejected the Wellington-type motion filed by the contractors. The Court, “considering the development of the allegations in the Application” and the recent addition of the allegations clarifying and crystallizing the complaints, concluded that the insurers were not in default of having raised in a timely manner the exclusions on which the denial was now based. Conclusion Wellington-type motions continue to be a hot topic. The importance of the reservation of rights and denial letters should also be reiterated. As indicated by the Court, there may be instances where developments in the allegations made against an insured will allow for the application of exclusions heretofore not invoked. Nevertheless, it remains that any potentially applicable exclusion must be invoked as soon as possible and it is also suitable to include, in the reservation of rights letters and the coverage letters, the right to invoke any other condition, limitation and exclusions set out in the policy should new developments or facts be brought to the attention of the insurer.   The Continental Insurance Company v. Tracy Plate Shop Inc., 1987 CanLII 211 (QCCA)

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  • Increased risk: the importance of questions to policyholders

    On 23 January 2018, in a case in which Marcelin Fortier (hereinafter the “applicant”) sued his insurer, the Superior Court rendered a decision1 whereby it reiterates the principles applicable to the notion of increased risk in insurance, and insisted on the importance of the questions asked by insurers at the time an insurance contract is purchased.  On 8 January 2015, the applicant’s home was seriously damaged by fire. The applicant thereafter turned to his insurer, seeking compensation for the damages resulting from the fire. The insurer denied coverage and asked that the contract be declared void ab initio, arguing that the applicant had failed to disclose the fact that his ex-wife, who has a serious criminal record, had returned to live in his house since October 2011. The insurer argued that this constituted an increased risk, sufficient to invalidate the insurance contract. For starters, we point out that an insured person has the obligation to disclose to his or her insurer any increased risk that may change the insurance contract that was signed initially, such obligation being limited to disclosing increased risks resulting from the insured party’s actions2. Once that increased risk is disclosed, an insurer can choose to do nothing, to increase the premium, or to terminate the contract from the onset of such increased risk. Consequently, an insured’s failure to disclose an increased risk may lead to a proportional reduction in compensation, or to the nullity of the contract in the event of a claim. In the latter case, the insurer needs to prove that a prudent insurer in the same circumstances would have terminated the contract if it had been warned in due course about such increased risk, or else that the insured has acted in bad faith. In this case, the insurer claimed that, had it been informed about the spouses resuming their life together in the house, it would have terminated the contract, arguing that the criminal records of policyholders are of the utmost importance in damage insurance. Here, the insurer argued that this justified the termination of the contract. For his part, the applicant argued that the insurer had never asked him about the criminal records of the members of his household, not even at the time of the initial declaration of risk. In this context, he did not deem it necessary to disclose to his insurer that he had resumed cohabiting with a person with a criminal record. In its decision, the Court pointed out that, in order to establish whether an increased risk entails consequences for the indemnification, a two steps test needs to be performed. First, one has to establish whether the allegedly increased risk is such as to influence a prudent insurer in its decision to accept it. Then, the Court needs to assess whether the insured has acted as a normally provident insured. The Court mentioned that the criminal record of a third party to the insurance contract cannot have the same impact as that of the insured party, basing this on the fact that such a third party would not have any financial benefit to gain if he or she were to deliberately damage the insured property. In the case at hand, the Court noted that the insurer had never asked the applicant any specific questions about the criminal records of the members of his household. The Court therefore concluded that the insurer’s behaviour did not demonstrate that it conferred the “utmost importance” to the arrival of a resident with a criminal record during the contract period, thus triggering a declaration obligation in mid-contract. The Court emphasized that insurers need to take the necessary measures to make sure the persons they insure are able to understand the importance the insurer gives to a specific risk, in particular by asking them specific questions. Ultimately, the Court rejected the insurer’s defence, concluding that the applicant had acted as a normally prudent insured person by not disclosing the resumption of his cohabitation with his ex-wife, despite the fact that she has a serious criminal record. Moreover, the Court said it was convinced that many homeowners would not have the instinct to inform their insurers in mid-contract if a member of their household was found guilty of a crime connected with the insured risk, thereby limiting the residual obligation of policyholders to declare all the circumstances known to them that are such as to materially influence an insurer’s risk assessment. This decision was appealed on 26 February of this year. In the meantime, this decision urges insurers to ask more questions of those they insure, and to take a more proactive approach to clearly establish what could constitute an increased risk for them. However, we point out that insurers should take care not to ask excessively precise questions, so as to prevent limiting or even canceling out a policyholder’s residual duty to inform with regard to the subject of the question.   Fortier c. SSQ, Société d’Assurances Générales Inc., 2018 QCSC 1495. Art. 2466 C.C.Q.  

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  • Nullity ab initio – misrepresentations during policy underwriting process

    On August 18, 2016, the Honourable François Duprat, writing for the Superior Court of Québec, rendered judgment in the action brought by Jimmy Laporte (the “Plaintiff”) against his property insurer, Intact Insurance Company.1 The Court dismissed the Plaintiff’s action and declared the insurance policy in issue void ab initio because of the Plaintiff’s misrepresentations to his mortgage creditor. The issue On July 24, 2011, Plaintiff’s home was seriously damaged by fire. Plaintiff claimed damages from Intact for the total loss of the building, loss of contents, and living expenses. Intact refused to pay. The Court summarized the insurer’s position as follows: The insurer refuses to pay the claim and offers a defence on all points: the fire was criminal and was caused with the complicity of the insured. The insurance policy is void ab initio given Jimmy Laporte’s ties to organized crime. The insurer also submits that the policy must be declared void ab initio since Mr. Laporte cannot prove his income and, in fact, declares no income, and gave his mortgage creditor a false picture of his financial situation. In addition, Mr. Laporte kept cannabis for the purpose of trafficking in his residence and this triggers the exclusion for crimes committed by the insured or results in cancellation of the insurance policy given the uncertain moral hazard. Last, the amount of the claim for contents is exaggerated or false and provides grounds for rejecting the claim. [our translation] After its analysis, the Court accepted only one mean of defence: the misrepresentations made by the Plaintiff to his mortgage creditor. Reasons for judgment on the nullity ab initio based on the misrepresentations made to the mortgage creditor Intact submitted that false documents were provided to the mortgage creditor by the Plaintiff to obtain a mortgage loan. According to Intact’s underwriting department, knowledge of that situation would have resulted in refusal to insure, in that the Plaintiff’s concealment of the truth from his mortgage creditor corrupted the moral hazard at the time the policy was issued. Intact explained that it had also refused to compensate the mortgage creditor, alleging, inter alia, that it had been negligent in its analysis of the documents on the basis of which the loan was granted. It appears from the facts presented to the Court that the mortgage creditor received a certificate of employment signed by the Plaintiff, a statement of income and deductions showing an annual salary of $84,000, and tax returns from the Canada Revenue Agency and Revenu Québec. Plaintiff admitted that the content of the employment certificate was false. However, he stated that he had never seen the statement of income and deductions and he did not recognize the tax returns introduced in evidence. The Court did not accept Plaintiff’s testimony; rather, it found that he lied in his loan application. In its analysis, the Court pointed out that the insurer must prove that the undeclared information was material to its appraisal of the risk or its decision to cover it, within the meaning of article 2408 of the Civil Code of Québec. The insurer must also prove the existence of a connection between the circumstance in issue and the risk covered. The Court concluded that Intact had met its burden and proved that the Plaintiff’s misrepresentations to his mortgage creditor were material to the appraisal of the risk. The Court noted that it is not the existence of a loan that created a problem; it is the fact that Plaintiff obtained the loan as a result of his misrepresentations. The Court wrote: ... The loan is closely connected with the purchase of the residence and the mortgage affects the insured property. There is nothing surprising or illogical about the insurer’s assertion that if it had known, at the time the policy was issued, that the loan had been granted on the basis of false information, it would not have accepted the risk. Three underwriters testified for Intact, stating that coverage would have been refused if Plaintiff’s misrepresentations to his mortgage creditor had been disclosed. No contradictory evidence was presented on that point. Conclusion Based on this decision, it appears that misrepresentations made by an insured outside the context of the purchase of an insurance policy can constitute a material change in the moral hazard and may be relied on in support of an application to declare a policy void ab initio. Very often, a mortgage creditor’s interest in an insurance policy is recognized by the inclusion of a mortgage clause. However, insurers ordinarily have little information about how the loans were obtained, other than the identity of the creditor. To some extent, this decision allows insurers to investigate more thoroughly, beyond the representations made by the insured during the policy underwriting process, to try to identify contradictions, reluctance to answer and misrepresentations made to other parties. The issue remains regarding how far they will be allowed to go in gathering information. We however note that a notice of appeal was filed by plaintiff on or around September 20, 2016. To be continued. Laporte v. Intact, Compagnie d’assurances (Axa Assurances inc.), 2016 QCCS 3922.

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