Insurance Law Newsletter – Sept. 2020
Table of Contents
Liability Polices in Quebec: Governing Law and Erosion of Limits by Defense Costs
On April 6, 2020, the Quebec Court of Appeal rendered a decision in the SNC Lavalin inc. et al. v. Lise Deguise et al. matter. The main legal issues that were addressed by the Court are summarized below. The Court’s conclusions clarify the rules pertaining to conflicts of laws and eroding limit provisions.
The proceedings were initiated by the owners of hundreds of buildings built between 2003 and 2008 in the region of Trois-Rivières. Damages were discovered on the buildings shortly after they were built.
The degradation of the foundations of the buildings was caused by the presence of pyrrhotite in the concrete that was used for their construction. Pyrrhotite is an iron sulphide which can cause undesirable chemical reactions when present in concrete in a certain quantity.
There are three waves of litigation relating to the Pyrrhotite Case which involve private vendors, general contractors, concrete mixers, the quarrying company that produced the deleterious aggregate, the geologist, and the insurers of the parties.
The First Instance decisions
The Superior Court rendered 69 decisions on the merits relating to the first wave of claims. The second and third waves are still pending in first instance.
The first instance decisions concern 832 buildings. The claimants alleged that a major defect affected the solidity of the foundation of their buildings.
The Court ruled that the contractors, the concrete mixers, the quarrying company, the geologist, and their insurers were liable for the damages caused to the buildings.
The Questions put to the Court of Appeal
The Court of Appeal addressed questions relating to the liability of the parties involved and the applicable insurance policies. It however also provided answers to specific legal questions pertaining to choice of law clauses in insurance policies and eroding limits of insurance policies, depending on the governing law and matters of public policy.
The Applicable Law
In the case that was examined by the court, a Choice of Law and Jurisdiction clause contained within the excess insurance policy stated that the law of the province of Ontario applied and that disputes had to be submitted to the jurisdiction of Ontario. However, the primary policy provided that the law of the By Me Manal Bensafi 3 province of Quebec applied and that Quebec courts had jurisdiction.
Zurich, the insurer which issued the excess insurance policy, claimed that the law of Ontario should apply to the dispute.
Article 3119 of the Civil Code of Quebec was analyzed by the Court to determine what the applicable law was and same provides the following:
- Notwithstanding any agreement to the contrary, a contract of insurance covering property or an interest situated in Quebec, or that is subscribed in Quebec by a person resident in Quebec, is governed by the law of Quebec if the policyholder applies for the insurance in Quebec or the insurer signs or delivers the policy in Quebec.
Similarly, a contract of group insurance of persons is governed by the law of Quebec where the participant has his residence in Quebec at the time he becomes a participant.
Any sum due under a contract of insurance governed by the law of Quebec is payable in Quebec.
The Court of Appeal stated that, based on the above-mentioned article, the law of Quebec applies if the following conditions are met:
- a) An insurance contract:
- covering property or an interest situated in Quebec; or
- subscribed in Quebec by a person resident in Quebec
- b) If :
- The policyholder applies for the insurance in Quebec; or
- The insurer signs or delivers the policy in Quebec
It was concluded that the law of Quebec applied to the insurance policy regardless of the Choice of Law and Jurisdiction clause because the conditions of article 3119 C.C.Q were fulfilled.
In addition, since the insurance policy was governed by the Law of Quebec, the injured third parties had the right to bring an action directly against the insurers as provided by article 2501 C.C.Q.
Eroding Limits of Insurance Policies
The insured had subscribed to worldwide insurance policies which meant that it was covered in all the territories in which it was conducting business. However, if indemnities were paid to prioritized claimants, the annual coverage amount stipulated in the insurance policy would decrease accordingly. This was relevant in this case because, during the same year, indemnities were paid and costs were incurred in Alberta for claims which had priority over the claims initiated in Quebec.
Zurich also claimed that the policy it issued was governed by the law of the province of Ontario which, just like the law of Alberta, allowed insurers to erode the coverage amount if claim expenses were incurred to settle a claim.
The Court states that, because article 3119 C.C.Q. provides that the law of Quebec 4 applies, the other relevant articles of the Civil Code of Quebec are also applicable.
This includes article 2414 C.C.Q. which provides the following:
- Any clause in a non-marine insurance contract which grants the client, the insured, the participant, the beneficiary or the policyholder fewer rights than are granted by the provisions of this chapter is null.
Any stipulation which derogates from the rules on insurable interest or, in liability insurance, from those protecting the rights of injured third persons is also null.
Hence, a clause contained within an insurance policy, that is governed by the law of Quebec, which grants less rights than the ones provided under the Civil Code of Quebec is null.
Furthermore, article 2500 C.C.Q is a public policy provision which provides that the proceeds of insurance are applied exclusively to the payment of injured third persons. The Court stresses that case law has established that the purpose of this provision is to protect third parties by granting them the full amount of the insurance coverage and setting that amount apart from the assets of the insured.
In addition, article 2503 C.C.Q., which also applies to policies governed by the law of Quebec, specifies the following:
- 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.
Consequently, defence costs cannot erode the limits stipulated within an insurance policy which is governed by the law of Quebec. However, the Court states that, under Quebec law, the payment of indemnities for claims with a higher priority can contribute towards eroding the insurance coverage.
The Court concluded that the insured and its insurers cannot reduce the coverage amount that is owed to third parties in Quebec because claim expenses were incurred. Therefore, all the costs incurred by the insurers for claims in Alberta had to be excluded from the amount eroding policy limits available to claimants in Quebec.
In addition to the aforementioned conclusions relating to the applicable insurance policies, the Court of Appeal ruled that the contractors, the concrete mixers, the quarrying company, and the geologist were liable in solidum towards the building owners. However, the Court of Appeal found that, contrary to the Superior Court’s ruling, the contractors were not liable for the damages. Therefore, the concrete mixers and the quarrying company must indemnify the contractors for the damages they may have to pay to the building owners.