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  • The Supreme Court of Canada reinforces the protection of litigation privilege by elevating it to class privilege status

    Ten years after Blank v. Canada (Minister of Justice),1 the leading case regarding litigation privilege, the Supreme Court of Canada has seized the opportunity to reaffirm and expand on the principles set out in that important decision. Indeed, in its most recent case, Lizotte v. Aviva Insurance Company of Canada,2 rendered on November 25, 2016, Canada’s highest court clarified the limits and reinforced the scope of litigation privilege. It also closely considered what legislators would have to do to derogate from the application of this common law privilege which also applies under Québec civil law. The context This case originated in the context of an investigation by the assistant syndic of the Chambre de l’assurance de dommages of a claims adjuster subject to her powers of investigation in matters of professional conduct. Relying on section 337 of the Act respecting the distribution of financial products and services (the “Act”), which provides for the duty of an insurer to forward “any document or information” on the activities of a representative under investigation, the assistant syndic asked the Aviva insurance company to provide her with a full copy of the claim file held by the adjuster. Aviva opposed the request on the ground that some of the documents were protected by litigation privilege. Although the privilege issue later became moot since a settlement was reached in the litigation involving Aviva and its insured, the syndic nonetheless decided to file a motion for a declaratory judgment before the Court on the issue of whether the general wording of section 337 of the Act is enough to set aside litigation privilege. The characteristics of litigation privilege As stated in the Blank case, rendered by the Supreme Court in 2006, the purpose of litigation privilege is to ensure the efficacy of the adversarial process, by leaving the parties “to prepare their contending positions in private, without adversarial interference and without fear of premature disclosure”.3 Litigation privilege therefore creates an immunity from disclosure with respect to documents and communications whose “main purpose” is the preparation for litigation. Due to its origins, this privilege has often been conflated with solicitorclient privilege. However, the Blank case made a very clear conceptual distinction between these two notions. In Blank, the Supreme Court noted that “[t]hey often co-exist and one is sometimes mistakenly called by the other’s name, but they are not coterminous in space, time or meaning”.4 The Court also states that litigation privilege, “unlike the solicitor-client privilege, is neither absolute in scope nor permanent in duration”.5 The distinctions between these two concepts as identified in the Blank case are repeated in the Lizotte case: The purpose of solicitor-client privilege is to protect a relationship, while that of litigation privilege is to ensure the efficacy of the adversarial process; Solicitor-client privilege is permanent, whereas litigation privilege is temporary and lapses when the litigation ends; Litigation privilege applies to unrepresented parties, even where there is no need to protect access to legal services; Litigation privilege applies to non-confidential documents. In fact, contrary to solicitor-client privilege, confidentiality is not an essential condition of litigation privilege; Litigation privilege is not directed at communications between solicitors and clients as such. Despite the clear distinctions between these two types of privilege, the Lizotte case does point out their common characteristics, particularly the fact that they serve a common cause: the secure and effective administration of justice.6 The Court is then asked to address the issue of whether litigation privilege can be raised against third parties, particularly investigators. According to the Court, it would not be appropriate to exclude third parties from the application of this privilege or to expose this privilege to the uncertainties of disciplinary and legal proceedings which could result in the disclosure of documents that would otherwise be protected, even assuming that there is no risk that a syndic’s inquiry will result in the disclosure of privileged documents. Indeed, the mere possibility of a party’s work being used by the syndic in preparing for litigation could discourage that party from writing down what he or she has done.7 As a result, unless a third party can satisfy the conditions of a recognized exception to litigation privilege, such privilege can be raised against him or her. Finally, it is interesting to note that in the Blank case, the Court recognized that while solicitor-client privilege has benefited from a liberal interpretation, commensurate with its importance, the situation has been notably different for litigation privilege, the scope of which had to be adapted to the modern trend in the legislation and case law towards mutual and reciprocal disclosure, the hallmark of the judicial process.8 The recognition of a new class privilege However, this last remark, which could correctly be referred to as an obiter dictum, did not prevent the Supreme Court from pushing further the recognized protection of litigation privilege in the Lizotte case by elevating it to “class privilege” status, that is, a privilege with a nondisclosure presumption each time its conditions of application are met. This is to be contrasted with a privilege recognized on a case-by-case basis, whose application depends upon a specific analysis based on a four-pronged test, including a balancing of the interests involved. The Court states as follows: “[36] Thus, although litigation privilege differs from solicitor-client privilege in that its purpose is to facilitate a process — the adversary process (Blank, at para. 28, quoting Sharpe, at paras. 164-65) — and not to protect a relationship, it is nevertheless a class privilege. It is recognized by the common law courts, and it gives rise to a presumption of inadmissibility for a class of communications, namely those whose dominant purpose is preparation for litigation (Blank, at para. 60). [37] This means that any document that meets the conditions for the application of litigation privilege will be protected by an immunity from disclosure unless the case is one to which one of the exceptions to that privilege applies. As a result, the onus is not on a party asserting litigation privilege to prove on a case-by-case basis that the privilege should apply in light of the facts of the case and the “public interests” that are at issue (National Post, at para. 58).” To grasp the importance of the Lizotte case, one must understand that the law has recognized precious few of these so-called “class” privileges. Except for solicitor-client privilege, which is “the most notable example of a class privilege,”9the only other class privileges which we have encountered in the case law are police informer privilege,10 spousal privilege11 and litigation privilege.12 In the case of R. v. National Post, the Supreme Court even refused to recognize class status for the privilege of journalists’ confidential sources, noting that “[i]t is likely that in future such “class” privileges will be created, if at all, only by legislative action.” Exceptions to litigation privilege As with other class privileges, litigation privilege is subject to clearly defined exceptions, rather than a balancing of interests on a case-by-case basis. The Court has therefore decided that the recognized exceptions to solicitor-client privilege are also applicable to litigation privilege,13 that is, those exceptions related to public safety, the innocence of an accused, and communications of a criminal nature. There is also the exception to litigation privilege already recognized in the Blank case regarding the disclosure of “evidence of the claimant party’s abuse of process or similar blameworthy conduct.” Legislative exceptions to litigation privilege Although it is undeniable that litigation privilege does not benefit from the same status as solicitor-client privilege — a principle of fundamental justice and a “civil right of supreme importance in the Canadian justice system”14 — it nonetheless remains the case that it has been referred to as being “fundamental to the proper functioning of our legal system”15 since it is at the heart of our accusatory and contradictory system and because it promotes the search for truth by allowing the parties to adequately prepare for litigation. For this reason, the Court reminded us of the requirement whereby the modification or revocation of common law rules, which are of fundamental importance, requires that the legislator use clear and explicit language. As a result, a party cannot be deprived of the right to claim litigation privilege in the absence of a clear and explicit legislative text. In that respect, section 337 of the Act, on which the assistant syndic was relying, was not deemed to be sufficient to set aside the application of that privilege. Therefore, the Québec legislator, as well as the legislators of the other provinces and the federal legislator, will have to take note of this important decision and will likely be called upon to amend the wording of the general provisions regarding the production of documents where they do not specify that they apply to documents in respect of which litigation privilege, or any other privilege of a similar nature, may be relied upon. [2006] 2 S.C.R. 319 (“Blank”). 2016 SCC 52 (“Lizotte”). Blank, para 27. Id., para 1. Id., para 37. Lizotte, para 24. Id., para 52. Blank, para 60, 61. R. v. McClure, [2001] 1 S.C.R. 445, para 28. R. v. Basi, [2009] 3 S.C.R. 389, para 22. Canada Evidence Act, RSC 1985, c C-5, sec. 4(3); R. c. McClure, cited above, para 28. Sable Offshore Energy Inc. v. Ameron International Corp., [2013] 2 S.C.R. 623, para 12. Smith v. Jones, [1999] 1 S.C.R. 455, para 44. Canada (Attorney General) v. Chambre des notaires du Québec, 2016 SCC 20, para 5. Canada (Privacy Commissioner) v. Blood Tribe Department of Health, [2008] 2 S.C.R. 574.

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  • The Québec Court of Appeal considers the issue of the amount of insurance:1 liability of the broker and/or chartered appraiser

    Facts Bar et spectacles Jules et Jim inc. (hereinafter the “Bar” or “Insured”) sought to renew the insurance coverage for its building, which was then insured for $424,000.2 On the recommendation of its broker, it obtained an appraisal which concluded that the reconstruction cost of the building would be $565,000, meaning that the Bar was underinsured. The Bar’s representative sent the appraisal to the broker, who took no further action and, more specifically, did not forward it to the insurer. The inevitable happened: a fire destroyed the building. The insurer paid the insurance indemnity of $424,000 as per the policy in effect. However, the reconstruction costs were admitted to be $715,000. The Bar therefore brought an action against both the broker and the appraiser alleging that the reconstruction costs, including the demolition, in fact reached $799,000. It therefore claimed the amount of $375,000 representing the difference between this amount and the indemnity received ($424,000). The Bar argued that the broker had neglected to conduct a diligent and rigorous follow-up of the Bar’s request to increase the amount of the insurance on the basis of the appraiser’s report. It also sued the appraiser on the basis that his report contained several errors that caused him to conclude that the reconstruction cost was $565,000, instead of $799,000.3 Trial judgment The trial judge found that the broker had committed several faults, namely in: accumulating delays in the process of renewing the insurance policy; failing to inform his client (the Bar) of the need to consider the demolition costs in the amount of the insurance; delaying the retention of the chartered appraiser; failing to conduct an adequate follow-up of the appraisal; and especially, failing to forward the appraiser’s report to the insurer in a timely manner. In so holding, the judge found the broker was liable to reimburse his client in the amount of $348,000, representing the difference between the indemnity received ($424,000) and the amount of the insurance it should have received ($772,000) had the broker properly fulfilled his professional obligations.4 The fault of the appraiser was admitted, however the Court held that the more significant faults of the broker broke the chain of causation that would be necessary to find the appraiser liable. The broker appealed the judgment, arguing that if he had fulfilled his professional obligations, the policy limits would have been increased from $424,000 to $565,000 in accordance with the appraiser’s report. He therefore admitted his liability for the difference between these two amounts ($141,000). The appraiser obviously relied on the trial judgment, which had held that there was no causal link between the appraiser’s faults and the damage, given that the broker’s faults had broken the chain of causation. As for the Bar, it argued that regardless of the apportionment of liability, it should be awarded the difference between the indemnity it ought to have received ($799,000), if the defendants had properly fulfilled their respective contractual obligations, and the indemnity actually received ($424,000), representing a difference of $375,000. Québec Court of Appeal’s judgment The Court noted that the faults of the broker and appraiser were not at issue on appeal, and the only question was [translation] “their respective liability to the insured”. First, the Court of Appeal reiterated the obligations of insurance brokers, noting that they have an obligation not only to provide information to their clients, but also to advise them. In that respect, the Court refers to section 39 of the Act respecting the distribution of financial products and services: 39. Damage insurance agents and brokers must, when renewing an insurance policy, take the necessary steps to ensure that the coverage provided corresponds to the client’s needs. Since the broker is recognized as a specialist in risk assessment, he must act at all times with prudence and diligence. In some cases, his obligation to advise should lead him to suggest that his client’s property be assessed by a competent appraiser. If he does so, he is generally not responsible for any damages that may result from a poor appraisal. As for appraisers, their obligations are governed by the Code of Ethics of the members of the Ordre des évaluateurs agréés du Québec. In this case, the appraiser committed three main faults: His appraisal of the building was based on the criteria for a residential property although the building was, at least in part, used for commercial purposes; He neglected to include the demolition costs; He neglected to consider the costs of upgrading to new standards in the event of the building’s reconstruction. Had he properly prepared his appraisal, his report would have concluded that the reconstruction value (including demolition) was $799,000, rather than $565,000. Both the appraiser and the broker committed faults of a contractual nature. Everyone acknowledged that the amount of the damages was the difference between the amount of the insurance that ought to have been contracted for ($799,000) and the amount of the existing coverage ($424,000), or $375,000. The Court of Appeal held that the broker’s primary fault was his failure to forward the appraiser’s report to the insurer. If he had done so, based on the conclusions in the appraiser’s report, the amount of the insurance would have been increased by $141,000. Furthermore, once the broker noticed that the appraiser had failed to consider the demolition costs, he ought to have increased the insurance amount to $610,000. This therefore increases the broker’s liability to the total amount of $186,000 ($610,000 — $424,000). As for the appraiser, had he properly carried out his work, his appraisal ought to have been for the amount of $799,000. Therefore, after the indemnity paid by the insurer ($424,000) and the portion of the damages attributable to the broker ($186,000), the balance owed by the appraiser was $189,000. The Court noted that the broker is not liable for the appraisal of the insurance amount where it is done by the insured, whether or not through an appraiser. In conclusion, the broker ought to have been found liable for the amount of $186,000 and the appraiser for the amount of $189,000. What to remember First, it is important for all of the parties involved (insured, broker and appraiser) to pay attention to the amount of insurance. Indeed, buildings can increase in value as renovations and improvements are made. Reconstruction costs can also fluctuate with changes both in building standards and inflation. The primary responsibility for obtaining the correct amount of insurance falls on the insured himself. However, the broker, who has a duty to give advice, should remind his client to verify the amount and suggest that he retain an appraiser, in appropriate circumstances. In addition, where the broker has a mandate to change the amount of the insurance, he must act with due diligence. As for the appraiser, he must comply with industry practice and should include an assessment of the reconstruction costs, demolition costs and costs of upgrading to current standards in his appraisal, since these standards can change over the years. His analysis should also be based on the proper standards, which can vary as opposed for a residential building to a commercial building. If the amount of the insurance is insufficient in the event of a loss, one or more of the insured, broker and appraiser may be at fault and the rules of civil law will apply to determine the apportionment of liability. In this regard, the decision of the Court of Appeal also contains a very interesting analysis (which we can’t review in detail in this bulletin) of various concepts relevant to causation, such as the notions of contributory fault, successive fault, fault that is a determining factor in the occurrence of the damages, and the theory of the break in the chain of causation. Maison Jean-Yves Lemay Assurances inc. c. Bar et spectacles Jules et Jim inc., 2016 QCCA 1494. All amounts are rounded up. This last amount includes the demolition costs. Note that the Court of Appeal found that the trial judge committed an error only in this respect, since the admitted amount of the damages was $799,000 and not $772,000.

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  • An obiter of the Québec Court of Appeal makes its way up to the Supreme Court of Canada

    The facts The client, Station Lands Ltd. (“Station”) retained the general contractor Ledcor Construction Ltd. (“Ledcor”) to build the Epcor tower in Edmonton. As is customary, Station and Ledcor purchased a builders’ risk all-risk property insurance to cover property damage which may occur in the course of the construction project. This insurance also covered all the subcontractors participating in the project. At the end of the project, Bristol Cleaning (“Bristol”) was hired to clean the windows of the Epcor Tower. However, in doing so, Bristol damaged the windows. The replacement cost of the windows was $2.5 million. The insureds, Station and Ledcor, filed claims with their insurers, Northbridge Indemnity Insurance Company, Royal & Sun Alliance Insurance Company of Canada and Chartis Insurance Company of Canada. The insurers denied coverage, relying on the faulty workmanship exclusion: “4. (A) Exclusions This policy section does not insure: […] (b) the cost of making good faulty workmanship, construction materials or design unless physical damage not otherwise excluded by this policy results, in which event this policy shall insure such resulting damage.” [emphasis added] The decisions of the lower courts The insureds were successful at trial2 on the basis of the contra proferentem interpretation principle applied to Clause 4. (A), which was deemed to be ambiguous. However, the trial decision was reversed by the Alberta Court of Appeal3, which concluded that coverage denial was justified on the basis that the damage to the windows was related and closely connected to the object of Bristol’s contract. The issue of the interpretation of Clause 4. (A), which seemed to exclude damages for faulty workmanship while seeming to cover damages resulting from it, ended up before the Supreme Court of Canada4. The common law principles To determine the scope of coverage and nature of the insured property, the common law jurisprudence of the Canadian provinces developed a three-step analytic approach for assessing whether the damages claimed by the insured were excluded from coverage or covered under the exception to the exclusion. Accordingly, the following had to be determined: a) the nature of the damages claimed, making a distinction as to whether they consisted in the cost for making good defective workmanship, that is, re-do the faulty work or damages to property resulting from faulty workmanship; b) the damages caused to property which was the very subject of the contract of the contractor or subcontractor at fault were invariably excluded, whether they were claimed for making good faulty workmanship or resulted from faulty workmanship; c) the damages to property which were not part of the object of the contract of the contractor or subcontractor at fault were covered under the exception to the exclusion. The above principles expressly or implicitly resulted from the following decisions: Poole-Pritchard Canadian Ltd. and Armstrong Contracting Canada Ltd. v. Underwriting Members of Lloyds (Supreme Court of Alberta), (1969) (1970) I.L.R. 1-324; Poole Construction Ltd. v. Guardian Assurance Co. (Supreme Court of Alberta), (1977) I.L.R. 1-879; Sayers & Associates Ltd. v. The Insurance Corp. of Ireland et al. (Court of Appeal of Ontario), (1981) I.L.R. 1-1436); Simcoe & Erie General Insurance Co. v. Royal Insurance Co. of Canada et al. (Alberta Queen’s Bench), (1982) (183) I.L.R. 1-1597; Bird Construction Co. Ltd. et al. v. United States Fire Insurance Co. et al., (Court of Appeal of Saskatchewan), (1985) (1986) I.L.R. 1-2047; Mr. Elegant Ltd. v. Canadian General Insurance Co. Ltd., (New Brunswick Queen’s Bench), (1987) 78 N.B.R. 225, reversed by the Court of Appeal of New Brunswick, 31 CCLI 243. However, a discordant note was heard in 1989, in the decision of the Québec Court of Appeal in the matter of Commercial Union Compagnie d’assurance du Canada v. Pentagon Construction Canada inc., 1989 CanLII 657 (QCCA). In that case, the insured, Pentagon Construction Canada, was claiming an insurance indemnity from its insurer, Commercial Union Compagnie d’assurance du Canada, for damages caused to a stake-pile jacket while in the process of being rammed in the ground. Writing for the Court, the Honourable Marcel Nichols concluded, as had the trial judge, that no faulty workmanship was involved. Accordingly, the exclusion of the policy did not apply. As an obiter, Mr. Justice Nichols stated that even if faulty work had been involved, the exclusion would not have applied to damages to the insured property resulting from the faulty performance of the construction contract. He analysed the subject of the exception to the exclusion as follows: [TRANSLATION] “The appellant maintains that the damage to the stake-pile in itself constitutes “faulty workmanship” irrespective of the fault or mishap of the contractor and thereby falls within the scope of the exclusion. The appellant however forgets to consider the proviso which follows the exclusion. The word “provided”, in the context of such an exclusion clause translates the idea that this particular exclusion does not apply to a case where faulty workmanship results in a damage being caused to the insured property. In other words, the insurer will not pay to make good the faulty workmanship, but will pay the damage to the insured property even if it results from faulty or improper workmanship. The word “provided” is nothing more than a condition to which the insurer intended to submit the exclusion it stipulated. The exclusion stipulated as to “faulty or improper workmanship” will not apply if such “faulty or improper workmanship” translates into a damage to the insured property. (…) In such a case, the insurer will not be required to pay “the cost of making good”, meaning that the cost which would represent ramming a new caisson in the correct location because the insured property would not be affected by a damage. In short, the damage which is covered is not the cost of making good faulty workmanship but the “resultant damage to the insured property.” These comments of Mr. Justice Nichols, although they do not affect the reasons for the Court’s decision in Pentagon Construction Canada, seem to have made their way to the Supreme Court5. The appeal before the Supreme Court The Supreme Court refused to follow the three-step analytic approach favoured by the common law, particularly the second condition related to damages caused to the insured property being the subject of the construction contract itself. As the Québec Court of Appeal6, the Supreme Court was of the view that the exclusion for faulty workmanship only applies to the costs of making good the faulty workmanship, while the exception necessarily has to cover all the damages to the insured property resulting from the faulty workmanship. Moreover, we note that the interpretation of an insurance clause, restrictive as to an exclusion and broad and liberal as to an exception, is reaffirmed and takes on its full meaning in the Ledcor case. To arrive at such a conclusion, the Supreme Court7 used the principles of interpretation set out in Progressive Homes8. It is incumbent on the insured to demonstrate that the damages are covered either by the initial coverage9 or by the exception to the exclusion. To promote a broad interpretation of the insurance coverage, the Court considered the reasonable expectation of the parties to a standard form contract such as most of insurance contracts. The Court noted that the underlying purpose of a builder’s risk insurance is to promote the swift indemnification of the parties involved to avoid paralyzing a construction project10. It concluded that the parties could reasonably expect that the damages caused to the insured property by faulty workmanship of a subcontractor such as Bristol would be covered. The Court then discussed the issue of the valid result from a commercial point of view, which is sought by an insured who pays significant premiums in consideration of builder’s risk coverage. If the exclusion was to receive a broad interpretation, the insurer would incur no risk because the property damaged by faulty workmanship would inevitably be excluded from coverage11. The Court dismissed the argument of the insurers whereby broadly interpreting the initial coverage and the exception to the exclusion would allow or encourage contractors to perform their work improperly or negligently12. As to the principles directing consistency in the interpretation of similar insurance contract clauses, the Court noted that each matter is unique. The object of the construction work which resulted in faulty workmanship must be reviewed to determine what, in fact, constitutes an excluded damage. The Supreme Court agreed with the trial judge, who considered that Clause 4. (A) was ambiguous, without however relying on the contra proferentem principle since it is a principle of last resort, as the ambiguity of the clause could be resolved using other interpretation principles. What is to be noted From a procedural point of view, which is however not the purpose of this bulletin, we note that the Supreme Court considers the interpretation of insurance standard contracts as an issue of law respecting which the decision of a lower court may be appealed on the basis of the standard of correctness, as opposed to the patently unreasonable standard. This decision of the Supreme Court may result in applications for review of the decision of lower courts being more frequently made. We especially note that the restrictive interpretation of an exclusion clause in a builder’s risk insurance contract, which originated from an obiter of the Québec Court of Appeal13, puts the brakes on the expansion of the common law jurisprudence whereby insured property damaged as a result of a badly performed construction contract was excluded. Exclusion from coverage, henceforth, only applies to the cost of making good faulty workmanship. Although their wording is completely different from the exclusion clause in the Ledcor case, the exclusion clauses for faulty workmanship contained in standard CGL and Umbrella commercial insurance policies had also been restrictively interpreted by the Québec Court of Appeal in 201314. While keeping in mind that the underlying purpose of a builder’s risk insurance policy is very particular and distinctive from that of a commercial insurance, it remains to be seen whether the Ledcor case will have repercussions in the interpretation of the exclusion clauses for faulty workmanship in commercial insurance contracts and on premiums. An obiter is an incidental remark that has no binding force, but is persuasive only. Ledcor Construction Limited v. Northbridge Indemnity Insurance Company, 2013 ABQB 585. Ledcor Construction Limited v. Northbridge Indemnity Insurance Company, 2015 ABCA 121. Ledcor Construction Ltd. v. Northbridge Indemnity Insurance Company, 2016 SCC 37. Id., para. 94. Commercial Union Compagnie d’assurance du Canada v. Pentagon Construction Canada inc., 1989 CanLII 657 (QCCA). Id., para. 49-51. Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada, 2010 SCC 33. Supra, note 4, para 52. Supra, note 4, para 72. Supra, note 4, para 78 and 79. Supra, note 4, para 80. Supra, note 5. Lombard General Insurance Company of Canada c. Factory Mutual Insurance Company, 2013 QCCA 446; leave for appeal denied: Lombard General Insurance Company of Canada v. Factory Mutual Insurance Company, 2013 CanLII 55903 (CSC).

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  • Wellington type motions seeking to order a CGL insurer to take up the defence of its insured

    Recent case law which confirms the criteria applicable to Wellington motions and specifies the guidelines for the duty of an insurer to defend its insured. Admissibility or not of a Wellington motion against exclusions pertaining to the insured’s “products” and “work”, depending on the nature of the damages sought through the proceedings. Last July, two judgments were rendered by the Superior Court of Québec on Wellington motions against Commercial General Liability (CGL) insurers. Elsewhere in Canada and in the U.S., a Wellington motion is a motion for a declaratory judgment aiming to force an insurer to take up the defence of its insured. The first judgment1, rendered by the honourable Michel Déziel (the “Déziel judgment”) dismissed a Wellington motion made by Couverture Montréal-Nord Ltée against its insurer, AIG Insurance Company of Canada. The second judgment2, rendered by the honourable André Wery (the “Wery judgment”) allowed a Wellington motion of Les tuyaux Logard Inc. against Northbridge. The judges in these two cases agree on the principles discussed in case law, where the criteria applicable to a Wellington motion are clear and the state of the law concerning the duty to defend is now well defined. These two judgments provide a very precise conclusion as to the admissibility of a Wellington motion against exclusions pertaining to the insured’s “products” and “work” depending on the nature of the damages sought through the judicial proceedings. Dismissed Wellington motions When the proceedings describe damages that only represent the cost of the redoing the insured’s faulty work or that of correcting defective products he delivered, the courts dismiss a Wellington motion on the ground that the “damages to your products” and/or the “damages to your work” are standard exclusions which must be applied, even by applying all the principles developed by case law whereby the duty to defend is separate and broader than the duty to indemnify and is triggered as soon as the insured is in a position where he may possibly end up being held liable for something covered by the insurance. In Couverture Montréal-Nord Ltée against its insurer, AIG Insurance Company of Canada, the proceedings were aimed at having a roof redone due to the defects of the tiles. However, no property damage or bodily harm caused by such defective tiles detaching was alleged, which may have been covered under the policy. Here are some relevant excerpts from the Déziel judgment: [OUR TRANSLATION] [33] What is sought through these proceedings is only to have the roof redone due to the defects of the tiles. [34] There is no allegation of property damage or bodily harm caused by the defective tiles detaching, which may be covered under the policy. [35] Redoing the work and replacing the tiles, in the absence of other damage, is not covered under the policy. [36] The claims respecting the costs related to the warranty of quality do not constitute damages covered under general liability policies as in the present case3. [37] Such damages are excluded from the policy at section 2 of the exclusions referred to above. The following judgments also discuss these principles: Les Prêtres de Saint-Sulpice de Montréal c. Couverture Montréal-Nord Ltée et al. [2016] QCCS 3221 Aviva Compagnie d’assurance du Canada c. Construction et pavage Dujour Ltée et RSA [2015] QCCS 4173 Université de Montréal c. Desnoyers Mercure et Ass. [2013] QCCS 481 Vélan Inc. et Vélan Proquit Inc. c. G-Can Insurance Company [2010] QCCS 4060, judgment affirmed by the Court of Appeal [2012] QCCA 1490 GCU, Compagnie d’assurances du Canada c. Soprema Inc. [2007] QCCA 113 (with nuance since rendered before Progressive) Wellington motions allowed Wellington motions are allowed when the damages claimed also include items other than “damages to your products” or “damages to your work”. Here are some excerpts of the Wery judgment in the case of Tuyaux Logard Inc. against Northbridge: [OUR TRANSLATION] [87] On balance, as we have seen, one must always keep in mind that the issue to resolve at a stage such as ours is not to determine what is covered or not but simply to decide whether something may be covered. [88] The Court is of the view that such a possibility exists in the present case. [89] Even putting aside for a moment the issue of whether the replacement cost of the drains constitutes “property damage”, the file reveals that some of the damages claimed do not only relate to their replacement cost. […] [95] In short, is there a possibility that the judge on the merits of Logard would reach the conclusion that the absence of collar clamps on the drains at appropriate locations constitutes in itself property damage to the building in the sense that the Syndicate cannot enjoy it without the risk of causing damages to it like those which occurred on May 29? Is there a possibility that the withdrawal of insurance coverage for water damages by the Syndicate’s insurer constitutes a loss of “peaceful enjoyment” of the building? Is it possible for the work for replacing the drains to cause damages to the buildings and constitute “property damage” within the meaning of the policy? […] [144] In the opinion of the Court, the portion of the damages claimed which have nothing to do with the insured’s products, such as the demolition and rebuilding of the walls to access the drains, and sprinklers, do not seem to be covered by this exclusion. […] [147] In the case of Université de Montréal (reference see decision to read), Justice Payette, relying on the Carwald case, dealt with an argument similar to that of Northbridge by writing the following: [OUR TRANSLATION] “The Court of Appeal of Ontario, faced with the same argument, concluded that if that clause may exclude the initial protection in favour of the insured for the replacement of his product, it does not exclude the protection for damages related to other items of property.” [152] The Court of Appeal of British Columbia goes as far as saying that to conclude in the same way as Northbridge would constitute a perversion of the teachings of the Progressive Homes case: “I find that the clause operates to exclude claims for damages to Bulldog Bag (the insured), including loss of use thereof, but cannot be extended to compensation for Sure-Gro’s costs (the claimant) separating those bags from its products, repackaging in different bags, and salvaging the “old” product some months later. To deny coverage would, as Mr. Ward suggested, be a “perversion” of Progressive Homes. Furthermore, even before Progressive Homes, cases such as Carwald and Gulf Plastics had established that the “own product” exclusion did not apply to loss incurred by the insured’s customer as a result of defects in the insured’s own product.4” The following judgments also discuss these principles: Syndicat des copropriétaires le Crystal de la Montagne c. Le Crystal de la Montagne S.E.C. [2016] QCCS 3218 Axor Construction Canada Inc. c. Carrelages SerCo Inc. [2015] QCCS 480 Université de Montréal c. Desnoyers Mercure & Associés [2011] QCCS 3564 Bulldog Bag Ltd. c. Axa Pacific Insurance [2011] BCCA 178 Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada [2010] S.C.R. 245 par 41 Les Prêtres de Saint-Sulpice de Montréal c. Couverture Montréal-Nord Ltée et al. [2016] QCCS 3221. Syndicat des copropriétaires Le Crystal de la Montagne c. Le Crystal de la Montagne S.E.C. et al. [2016] QCCS 3218. CGU, Compagnie d’assurances du Canada c. Soprema inc., 2007 QCCA 113; Velan inc. et Velan-Proquip inc. c. GCAN Insurance Company, 2010 QCCS 4060. Bulldog Bag Ltd v. Axa Pacific Insurance Company, 2011 BCCA 178, par. 33. LDB:8431299v1.

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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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  • “Peer-to-peer” insurance: a grassroots revolution?

    After the hospitality sector, transportation of passengers and corporate financing, insurance could be the next sector to see its business model influenced by the sharing economy. In the past few years, numerous start-up companies have launched businesses in “peer-to-peer” (“P2P”) insurance on risksharing platforms, claiming to reduce bureaucracy and costs, and insure risks not covered by the traditional markets. Below is a brief overview of this business model which, while still inconspicuous in Quebec, was the subject of a warning from the Autorité des marchés financiers (“AMF”). What is P2P insurance? The idea behind P2P insurance companies is simple: to form communities of users for the purpose of insuring similar goods or services. It is the users themselves who determine which risks associated with their goods are covered, and the community decides the eligibility of claims collectively. However, the idea is not so new. After all, this is in fact a return to its roots for the insurance industry. Already, between 1000 and 600 B.C., the Lex Rhodia — the precursor to contemporary maritime law — provided a mechanism for the indemnification of similar damages, whereby a group of merchants shipping their goods together each paid an amount prior to the voyage for purposes of indemnifying anyone whose cargo was cast off at sea during the passage in order to ensure the safe return of the ship — and remaining cargo — to port.1 While this principle still exists in maritime insurance, the business model for the property insurance and personal insurance industries has since taken a different direction. Two types of P2P businesses have emerged in the past few years: those acting as brokers for existing insurance companies, and those offering coverage independently of any other company. P2P companies claim that the simplified process they propose allows them to reduce the number of intermediaries between the user and insurance product, thereby reducing costs, particularly those associated with brokerage commissions, administrative overhead and adjusters’ fees. P2P companies also claim that they hand control over risks, claims and even indemnification back to the insureds. In this regard, some platforms have created “community courts” made up of volunteer “juries” drawn from the members who decide the merits of claims and the indemnification to be paid. In particular, this is how Besure,2 a Canadian P2P company, works. AMF warning Consumers should still be vigilant. In Quebec, the AMF recently issued a warning to potential users of these platforms,3 reminding them that the sale of insurance services or products is a regulated activity requiring a license. Furthermore, products must be offered in accordance with the requirements of the Act respecting the distribution of financial products and services. The AMF is still reviewing the similarities and differences between these platforms and the existing insurance companies. In the meantime, users are exposed to risks while they wait for the AMF to decide on the conformity of P2P platforms to Quebec regulations. For example, they could face potential losses if the indemnification fund collected by the users is not large enough to cover all their damages, or the community refuses to provide reasonable indemnification after a loss. The AMF also recommends that individuals verify whether the risk-sharing company does in fact have a license before transacting through it, since, in the event of the community’s insolvency, the insureds’ losses may not be covered by the Fonds d’indemnisation des services financiers (“financial services compensation fund”) administered by the AMF, which only protects consumers who have purchased insurance through a licensed representative. Some examples outside Quebec While the P2P insurance phenomenon is currently fashionable abroad, it is maintaining a low profile for the time being in Quebec. The Canadian platform, Besure,4 launched in January 2016, is still only a marginal player.5 This platform allows users to form small pools in order to purchase various kinds of insurance, and also benefit from a refund if there are few or no claims. Besure functions in a similar manner to Friendsurance,6 P2P enterprise in Germany. Like Inspeer7 in France and Guevara8 in England, it relies much less on actuarial data, using behavioral studies instead to set insurance premiums. Indeed, their concept is based on the theory of the deterrent effect of the community system, in which everyone benefits by acting in a prudent manner. Since the cost of the premium which is paid to join a pool depends on the conduct of its members, P2P companies claim that this discourages more risky behavior and fraudulent claims.9 While it is still early days for the P2P model, Lemonade,10 a P2P start-up company in damage insurance based in New York, was able to amass more than $13M over the past year, even before disclosing its business model.11 Further afield in China, the insureds of the company known as TongJuBao12 contribute to an indemnification fund and, following a loss, obtain an amount from the fund in accordance with the insurance they purchased. Conclusion P2P companies promise a simplified system for users. However, P2P insurance still has its share of drawbacks, particularly the uncertainty over the sufficiency of funds to indemnify all potential claims, both small and large. After all, is not the primary objective of insurance to ensure indemnification of all covered losses? While this phenomenon remains marginal for the time being, and, to our knowledge, no P2P risk-sharing program has yet been approved by the Quebec regulatory authorities, the insurance market should ensure that it fully understands these new players and their business model. Hudson, N. Geoffrey. The York-Antwerp Rules – The Principles and Practice of General Average Adjustment, 2e Ed., 1996, London, pp.1-2. https://www.besure.com/Home/HowItWorks Autorité des marchés financiers, “AMF urges caution about peer-to-peer risk sharing platforms”, April 19, 2016. https://www.besure.com To our knowledge, the AMF has not yet issued a license to Besure. http://friendsurance.com https://www.inspeer.me https://heyguevara.com Zack Guzman, “The social(ist) revolution coming for insurance”, CNBC, 18 juillet 2015. http://lemonade.com Jacqueline Nelson, “Regulator eyes peer-to-peer insurance start-ups, warns of potential risk”, The Globe and Mail, 24 avril 2016. http://www.tongjubao.com/en

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  • For rent… but mind the risks! Home Insurance in the age of the sharing economy

    Many people could hardly imagine planning their vacations without considering online vacation rental community platforms. And those who have property available for use might find it just as difficult to resist the temptation to increase their revenues by advertising their room, apartment, house or country home on sites like Airbnb, Homeaway and Chaletsauquébec. Given that these sites sometimes offer lower prices than comparable hotels, and hold out the allure of feeling at home away from home, it’s not surprising that their users have been growing in number each year. However, the misalignment between residential insurance products available in Quebec and the realities of the sharing economy, plus the fact that hosts often do not understand the legal formalities associated with insurance, can result in some very unpleasant surprises for users of such online vacation rental community platforms. Disclosing risks The Civil Code of Québec provides that an insured must promptly inform his insurer of any circumstances likely to influence the insurer in setting the premium, appraising the risk or deciding whether to maintain a policy in force.1 If this is not done, the insurer could be entitled to reduce the indemnity, exclude the claim, or even cancel the policy. The Superior Court of Québec recently considered this question in a case involving a couple that had rented out their country home a few times without declaring it to their insurer.2 Although the loss did not occur during such a rental, the Court confirmed that the insurer should have been informed that the property was being rented out, because this aggravated the risk. The indemnity paid to the insured couple was therefore reduced in regards to the shortfall in relation to premium the couple should have paid. Given this landscape, hosts, and anyone interested in being a host, must not only consider the possible effects of their leasing activities on their home insurance coverage, but also ensure — since the law requires it — that they will indeed be covered for any damage that occurs while the property is being leased. Stricter regulation In April 2016, Quebec’s Regulation respecting tourist accommodation establishments was amended as a result of the coming into force of the Act mainly to improve the regulation of tourist accommodation and to define a new system of governance as regards international promotion. The change was intended to respond to new market realities, including the arrival of new sharing economy players. Quebec legislation now makes a distinction between occasional offerings for rent and regular offerings for rent. The first type does not require a permit. However, in order to be occasional, the offer must clearly be exceptional in nature, and if the offer is repeated, it will be considered regular. Hosts who regularly offer their residence via online residential rental community platforms must now comply with the rules for operating tourist accommodation establishments.3 According to the new regulations, they must, among other things, obtain a certificate from the Corporation de l’industrie touristique,4 and ensure that zoning by-laws authorize them to carry on that type of commercial activity.5 Furthermore, hosts must collect taxes from travellers and report their income. Lastly, it is now mandatory to obtain $2 million in civil liability insurance coverage for risks associated with the operation of the tourist accommodation establishment.6 Similar platforms, differing coverages Of the most popular platforms, only Airbnb offers protection “by default” to its hosts. The “Host Guarantee”, in effect since 2011, offers hosts up to $1 million in coverage in the event of property damage caused by travellers in their lodging, if the damage is not covered by the host’s personal insurance. But this “Host Guarantee” comes with several conditions and exclusions. For example, the host must first have tried to contact the traveller to seek payment for the loss prior to asking to be indemnified under the Guarantee.7 Since October 22, 2015, Canadian Airbnb hosts have also been covered by the “Host Insurance” program, designed to protect them in the event of legal actions commenced by third parties for bodily harm or property damage that occurred during a stay.8 In Canada, the limit is $1 million per occurrence, per year.9 This means that the coverage is not currently sufficient to meet the new Quebec legislative requirements applicable to “regular” hosts, since such hosts are now considered to be operating a tourist accommodation establishment. A market with some shortcomings Legal requirements applicable to the operation of tourist accommodation establishments are getting more onerous. On its own, the “Host Insurance” program offered by Airbnb is not sufficient to bring “regular” operators into compliance with the new Quebec requirements concerning tourist accommodation. Despite this, according to a recent survey conducted by the Léger polling firm for the Chambre d’assurance de dommages, 44% of Quebecers who take part in the sharing economy have not notified their insurance company of this fact.10 There could be an explanation for this reticence: While hosts who own their lodging will find it relatively simple to adjust their residential insurance policies to take their rental activities into account, it’s a lot more complicated for tenants. In fact, most insurance products offered to tenants provide no coverage for losses resulting from even occasional vacation subletting. Conclusion The residential insurance market is still not quite adapted to the new realities of the sharing economy. Although certain insurance companies in Quebec and elsewhere are offering innovative products that respond to the specific needs of occasional hosts (e.g. insurance coverage only for the dates on which the property is being rented out) the major industry players, at least in Canada, have barely acknowledge this new market. As for hosts, it is essential that they disclose any increase in risk and any change in the use of their lodging, especially since short-term regular vacation rental to tourists is considered a commercial activity in Quebec. Indeed, although certain platforms offer basic protection to their users, that protection could prove insufficient or event inapplicable in several situations. Art. 2408 CcQ. Leblanc v. Axa Assurances Inc., 2014 QCCS 4393. Establishments providing accommodation to tourists in return for payment. See section 1 of the Act respecting tourist accommodation establishments, and section 1 of the Regulation respecting tourist accommodation establishments. Section 6 of the Act respecting tourist accommodation establishments. In addition, see the Guide d’interprétation de la Loi et du Règlement sur les établissements d’hébergement touristique. Guide d’interprétation de la Loi et du Règlement sur les établissements d’hébergement touristique. Section 11.1 of the Regulation respecting tourist accommodation establishments. https://www.airbnb.ca/terms/host_guarantee?locale=en https://www.airbnb.ca/host-protection-insurance?locale=en Ibid. http://www.chad.ca/fr/membres/publications/actualites

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  • Honesty of financial advisors and discretion of the Autorité des marchés financiers: the Québec Court of Appeal rules

    In a decision issued last May 20,1 the Québec Court of Appeal affirmed a judgment2 of the Superior Court of Québec rendered on October 28, 2013, which dismissed the action in damages for more than $7 million brought by a former representative in insurance of persons and in group savings plan brokerage, Mr. Alan Murphy, against the Autorité des marchés financiers (“AMF”). Facts Mr. Murphy was convicted in 2007 by the Disciplinary Committee of the Chambre de la sécurité financière of 32 charges,3his registration was permanently cancelled, as well as being temporarily cancelled for three years and one year, in respect of his areas of practice, and he was fined a total of $20,000. He then obtained a stay of both the permanent cancellation and the payment of the fines.4 Upon review by the Court of Québec, his sentence was reduced to a temporary cancellation for one year as well as the payment of a $12,000 fine.5 Despite the revocation of his certificate and the numerous notices from the AMF, Mr. Murphy continued acting as a representative, thereby significantly worsening his disciplinary record. Upon the expiry of the period during which his registration was temporarily cancelled, the AMF refused to renew Mr. Murphy’s certificate of practice. Claiming that in doing so the AMF had acted excessively, unreasonably and contrary to the requirements of good faith by multiplying the administrative obstacles, inspections and investigations against him, he sued the AMF in the Superior Court, contending that their actions demonstrated the bad faith required to substantiate a claim for $7 million in damages. Among other things, Mr. Murphy cited the judgment of the Court of Québec which had changed the sanction imposed on him and criticized the AMF. In response, the AMF argued that its refusal to issue a new certificate to Mr. Murphy was justified because he lacked the necessary degree of honesty to practise as a representative in insurance of persons and in group savings plan brokerage. Essentially, the issue raised was whether the AMF was protected by the relative immunity conferred on it for acts performed in good faith in the exercise of its functions, as provided in section 32 of the Act respecting the Autorité des marchés financiers.6 Judgment of the Court of Appeal Firstly, the Court stated that the clause protecting the AMF is comparable to the clause that protects the Quebec professional orders. It then cited the leading decision of the Supreme Court of Canada on relative immunity clauses, the Finney case,7 which states that bad faith includes, among other things, intentional fault, which can constitute an abuse of power. This concept also includes serious carelessness or recklessness which “implies a fundamental breakdown of the orderly exercise of authority, to the point that absence of good faith can be deduced and bad faith presumed.”8 Next, to determine whether Mr. Murphy had the necessary honesty to carry on his practice as an advisor in group insurance, the Court considered the numerous decisions which the AMF had rendered against him. It should be noted that Mr. Murphy took all the measures available to him to contest9 the decisions rendered against him, while choosing nonetheless to continue practising his profession, despite the fact he no longer had the certificate authorizing him to practice. As a result, several penal complaints10 were also lodged against him. The Court of Appeal found that the discretionary power conferred on the AMF under section 220 of the Act respecting the distribution of financial products and services11 (“ADFPS”) to assess the degree of honesty of persons applying for authorization to practise as a financial advisor, and to issue certificates based thereon, is within the exclusive jurisdiction of the AMF. The fact that Mr. Murphy had illegally engaged in activities reserved for representatives was a sufficient ground which allowed the AMF to conclude that he lacked a sufficient degree of honesty pursuant to sections 219 and 220 of the ADFPS. The Court found that the AMF had adequately assessed Mr. Murphy’s lack of honesty in refusing to issue his certificate. Accordingly, the Court of Appeal held that the AMF benefited from the immunity conferred by section 32 of the Act respecting the Autorité des marchés financiers against the action instituted by Mr. Murphy. It therefore upheld the judgment of the Superior Court dismissing his action. Murphy c. Autorité des marchés financiers, 2016 QCCA 878. Murphy c. Autorité des marchés financiers, 2013 QCCS 5764. Rioux c. Murphy, June 12, 2007, No. CD00-0404. Murphy c. Chambre de la sécurité financière, 2007 QCCQ 7950. Murphy c. Chambre de la sécurité financière, 2008 QCCQ 5427; Murphy c. Autorité des marchés financiers, 2010 QCCA 1078; application for leave to appeal to the Supreme Court of Canada dismissed (S.C. Can., 2011-01-27) 33860. Act respecting the Autorité des marchés financiers, CQLR, c. A-33.2. Finney v. Barreau du Québec, [2004] 2 S.C.R. 17. Ibid., para. 40. 2008-PDIS-0086 (July 25, 2008); 2008-DIST-0090 (September 19, 2008); 2009-PDIS- 0190 (July 23, 2009); Murphy c. Albert, 2009 QCCS 6366; Murphy c. Albert, 2011 QCCA 1147; 2011-PDIS-0249 (October 7, 2011); number unknown (January 10, 2012). Autorité des marchés financiers c. Murphy, 2010 QCCQ 11692; Murphy c. Autorité des marchés financiers, 2011 QCCS 3510; Murphy c. Autorité des marchés financiers, 2011 QCCA 1688; Autorité des marchés financiers c. Murphy, 2016 QCCQ 2992. CQLR, c. D-9.2.

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  • Fraud, nullity and compulsory professional liability insurance: the Québec Court of Appeal rules in

    On May 16, 2016, the Québec Court of Appeal adjudicated1 on whether a professional liability insurer can plead the nullity of a policy based on misrepresentations or concealment of facts by the insured. This decision is of interest because it addresses the novel issue of whether a liability insurer can claim the nullity of an insurance contract where it is compulsory for the insured to hold such insurance under the applicable legislation. Facts In preparing for their retirement, Jean-Pierre Brunet (“Brunet”) and Giovanni Berretta (“Berretta”) as well as their holding companies, invested more than $2.5M through a group savings plan brokerage firm, Triglobal Capital Management Inc. (“Triglobal”), and its president and director, Thémiskoklis Papadopoulos (“Papadopoulos”), who were registered with the Autorité des marchés financiers. Papadopoulos managed and invested the assets of Brunet and Berretta, as well as those of several other investors, in two offshore funds located in the Bahamas and in the Cayman Islands. Until the beginning of 2008, Axa Assurances Inc. (“Axa”) was the liability insurer for Triglobal and its 200 representatives. In 2007, a newspaper reported that Triglobal, Papadopoulos and another shareholder had engaged in wrongdoing with respect to the offshore funds in which Brunet and Berretta had invested. A few days later, the same newspaper published a corrected version of its previous article. At that time, based on the answers provided by Triglobal and its representatives, Axa decided to extend the coverage of the insurance policies then in effect, and to renew them thereafter. A few months after the renewal of the insurance policies, a freeze order, cease trade order and prohibition against acting as securities advisers were issued against Triglobal and Papadopoulos pursuant to certain provisions of the Act respecting the Autorité des marchés financiers2 and the Securities Act3 which were in force at that time. A provisional director was also appointed. A few days later, Axa informed Triglobal that it was canceling its insurance policy. The facts adduced into evidence revealed that Papadopoulos and one of his acolytes had funnelled certain investments entrusted to Triglobal through the offshore funds with the intention of defrauding certain investors, including Brunet, Berretta and their companies through the use of a fraudulent financial operation, namely a “Ponzi Scheme”. Brunet, Berretta and their companies sued Axa in its capacity as Triglobal’s liability insurer to recover their losses. Judgment of the Superior Court of Québec4 The trial judge held that Axa could seek the nullity of the policy. He found that Triglobal’s officers breached their obligation to disclose circumstances which would materially influence the risk, namely, the fraudulent scheme. Axa was justified in canceling the policy because if it had known all the circumstances surrounding the risk, it would not have agreed to issue the policy.Therefore, the Court dismissed the action brought by Brunet, Berretta and their companies. Judgment of the Court of Appeal La Cour d’appel confirme unanimement le jugement de la Cour supérieure. The Court of Appeal unanimously affirmed the Superior Court’s judgment. Firstly, the Court rejected the argument by Brunet and Berretta that Triglobal’s insurance policy could not be canceled because provisions of public order in the Act respecting the distribution of financial products and services (“ADFPS”)5 and the Regulation respecting firms, independent representatives and independent partnerships (“RFIRIP”)6 obliged Triglobal and its brokers to hold a liability insurance policy. After reviewing the relevant provisions of the ADFPS and the RFIRIP, it held that nothing in those provisions precluded the application of the fundamental principles governing the relationship between the insurer and the insured. Thus, in accordance with article 2410 of the Civil Code of Québec (“C.C.Q.”), a liability insurer can invoke the nullity of its own insurance policy where material circumstances were not disclosed to it that were likely to influence its decision to accept the risk. It noted that nothing in the cases of Souscripteurs du Lloyd’s c. Alimentation Denis & Mario Guillemette inc.,7 Audet c. Transamerica Life Canada8 or Larrivée c. Murphy9 supported the proposition that provisions of public order which require a professional to hold liability insurance should supersede the principle that the insured must disclose all of the circumstances that are relevant for the insurer’s assessment of the risk. Secondly, the Court of Appeal held that the conditions for the application of article 2410 C.C.Q. had been met. The misrepresentations and concealment of facts by Papadopoulos as to the true nature of his fraudulent activities when the disclosure of risks was made to Axa were attributable to Triglobal since, as director and president, he was its alter ego. In fact, the evidence showed that Triglobal communicated through him when it submitted the relevant information for the assessment of risk by Axa, while hiding the fraudulent scheme, thereby distorting the insured risk. Had the true risk been revealed to Axa, it would not have agreed to issue the insurance policy. This conclusion might have been different however if Papadopoulos had only been an employee of Triglobal. Article 2464 C.C.Q. obliges the liability insurer to pay the indemnity where the insurer covers the insured for harm caused by another person for whom the insured is responsible, such as the employer’s liability for its employee. Conclusion This decision is the first rendered by the Québec Court of Appeal on the issue of whether an insurer can seek the annulment of a liability insurance contract where it is imposed on the insured by law. It confirms that, unless prohibited by an express provision of the legislation, the insurer may apply for the nullity of the insurance policy where the conditions for doing so are met.   Brunet c. Axa Assurances inc., 2016 QCCA 832, juges France Thibault, Yves-Marie Morissette and Mark Schrager CQLR c. A-33.2. CQLR c. V-1.1. Brunet c. Axa Assurances, 2014 QCCS 5227. CQLR c. D-9.2. CQLR c. D-9.2, r. 2. 2012 QCCA 1376. 2012 QCCA 1746. 2014 QCCA 305.

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  • The Court of Appeal: The liability of the life insurance broker is not limited to the framework of the contractual relationship

    The facts of the Roy v. Lefebvre case On June 25, 2014, the Superior Court1 allowed the action of an insured against a life insurance broker and his firm. The context of the subscription of the insurance policy is somewhat unusual and deserves explanations. In 1992, the purchaser of an immovable property undertook to pay part of the purchase price through the subscription of an insurance policy (the “Policy”) on the life of the seller for the benefit of the estate of the seller. The purchaser undertook to pay the premiums by subscribing to an annuity contract with the insurer, which included the payment of the premiums for the first year. The insurance broker represented to his client and to the seller that the annuity contract would pay for all the premiums since they would be paid for the subsequent years from the accumulation fund of the policy, on the basis of an estimated annual return of 7.8%. On August 19, 2008, the purchaser notified the seller that the funds accumulated were insufficient to pay the premiums. On June 3, 2009, the purchaser notified the seller that if the insurance premiums were not paid for the next three years, the Policy would lapse. Although formally put on notice by the seller, the purchaser of the immovable and the insurance broker neglected to take the necessary means to ensure that the premiums would be paid. On August 19, 2011, the seller instituted proceedings against the purchaser, the insurance broker and the brokerage firm. The purchaser instituted warranty proceedings against the broker and the firm. Starting on June 25, 2013, the seller had no alternative but to personally assume the payment of the premiums to maintain the Policy in force. The decision of the trial court The Superior Court noted that the insurance product proposed by the broker did not meet the needs of his client. Indeed, the broker had sold a “prepaid” Policy, not a “fully paid up” Policy on which no further premiums were payable. The prepaid Policy entailed risks since the payment process for the premiums from the annual estimated return of the accumulation fund of the Policy was not adequately explained to the client. The broker was held liable to his client, the purchaser of the immovable, because he had erroneously represented that only the premiums of the first year had to be paid at the time of the subscription of the policy and that all the subsequent premiums would be paid for with the returns from the annuity contract. The broker, thus, failed to discharge his duty to inform and to advise his client. As for the extracontractual liability (tort) of the insurance broker toward the seller of the immovable property, the trial judge relied on the principles of the Supreme Court decision Bank of Montreal v. Bail Ltée2 to conclude that the broker had failed in his obligation to act in good faith and adequately inform a third party. In fact, the broker clearly understood the objectives sought by the third party. The broker was fully aware of the business agreement entered into between the third party and his client, but nonetheless failed to discharge his duty to inform and, in so doing, committed an extracontractual fault for which he ought to be held liable. The purchaser of the immovable, the broker and his firm were condemned to pay to the plaintiff an amount of $1,200,010 representing the value of the insurance coverage on his life. The broker and his firm were also condemned to indemnify the purchaser for any amount due in the principal action. The judgment of the Court of Appeal: The extracontractual liability of the life insurance broker The Court of Appeal upheld the trial decision on the issue of the extracontractual liability of the broker and his firm toward the third party. The Court of Appeal seems to send a clear message to life insurance brokers whereby they are bound by a duty to inform and a duty of good faith beyond the framework of the contractual relationship and must necessarily consider the interests and rights of a third party when selling an insurance product.   Robinson c. Lefebvre, 2014 QCCS 3045 (CanLII). Montréal v. Bail Limitée, [1992] 2 S.C.R. 554.

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  • $8 million awarded to a quadriplegic hockey player: the Court of Appeal confirms the Superior Court's decision

    Last May 2, the Court of Appeal granted a motion to dismiss an appeal against a significant decision in the area of civil liability in the context of the practice of a sport.1 Decision at trial2 The facts in the case date back to October 3, 2010. A few seconds after the start of a hockey game between two junior teams, the plaintiff, Andrew Zaccardo, was violently body checked from behind by the defendant Ludovic Gauvreau-Beaupré, a player on the opposing team. Zaccardo, who became quadriplegic as a result of the incident, brought an action in damages against Gauvreau-Beaupré and his insurer, Chartis, claiming $8 million in damages. We commented this decision in a previous publication.3 At trial, Justice Daniel W. Payette noted that a hockey rink is not [translation] "a law-free zone".4 The Court found that by body checking Zaccardo from behind, Gauvreau-Beaupré had breached the basic rules of care, thereby committing a fault within the meaning of the civil law. In addition, the Superior Court pointed out that while it is true that hockey involves certain inherent risks, Zaccardo could not reasonably have expected to become quadriplegic as a result of an illegal body check. Gauvreau-Beaupré and Chartis, his insurer, were therefore ordered to indemnify Zaccardo for $8 million, which amount had been the subject of an agreement between the parties. Court of Appeal's decision In a short decision, the Court of Appeal dismissed the appeal by Chartis and Gauvreau-Beaupré against the decision at trial, noting that it had no reasonable chance of success, since the trial judge had carefully assessed the evidence in reaching his decision. Moreover, the Court dismissed the argument by Chartis that Gauvreau-Beaupré had committed an intentional fault when he made the body check from behind, stating that [translation] "where the insured is accused of committing an intentional fault, the intention must relate not only to the act committed, but also to the results of that act".5 At trial, Chartis had, moreover, waived the right to invoke this exclusion. Ultimately, the Court of Appeal upheld the award against the insurer to pay the total amount of $8 million in compensation for the injuries suffered by Zaccardo. This amount is certainly one of the highest ever granted by a Canadian court in such a context. Chartis Insurance Company of Canada c. Zaccardo, 2016 QCCA 787 ["decision of the Court of Appeal"]. Zaccardo c. Chartis Insurance Company of Canada, 2016 QCCS 398. Need to Kwow publication, march 2016. Supra note 2, at paragraph 10. Paragraph 5 of the decision of the Court of Appeal.

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  • Insurance contract terminology: the Court of Appeal clarifies the scope of the word ”building”

    In insurance law, as well as in other areas of contract law, the precise definition and scope of the terminology used in a contract are very important since they have a direct effect on the obligations of the parties and, in the case under review, the scope of the insurance coverage. On February 11, 2016, the Nova Scotia Court of Appeal1 issued two judgments while it analyzed the scope to be given to some expressions inherent to insurance contracts. This terminology analysis led the Court to conclude that contaminated soil under an insured building does not constitute insured property within the usual meaning of the terms “dwelling”, “premises” and “building”. The Snow Case facts The members of the Snow family obtained from the trial judge2 a court order against the insurer pursuant where it was required to pay them an indemnity for the hydrocarbon contamination of the soil under their residence resulting from an oil spill from the neighbouring property. The reasoning of the trial judge relied on his broad interpretation of the terms “dwelling“, “premises“ and “building “ contained in a property insurance contract (home owner’s policy). The Snow judgment The Court of Appeal3 disagreed with the interpretation of the trial judge who gave a broad interpretation to the term “building”, which included the soil under the residence of the insured from the definition of insured property in the insurance contract. Moreover, the insurance policy was covering the specified peril of damages caused by hydrocarbons (“escape of fuel oil“). Under the principles of interpretation of an insurance contract stated in the case of Progressive Homes Ltd. v. Lombard General Insurance Company of Canada, 2010 SCC 33 (para. 21 à 24), applied to the expressions contained in Coverage A and Coverage B of the contract, the Court of Appeal concluded that the term “dwelling” referred to the residential building as described in the declarations, while the term “premises” was defined as the residential building and the items of property located within the limits of the land where the building was erected. The Court noted that one must not mix up the three concepts of “insured property”, “insured perils” and “specified perils”. The term “premises” did not constitute insured property in and of itself, even if the loss was a covered specified peril, for the latter only served to define the location where the items of property had to be located in order to be included in the definition of insured property in the insurance contract. In the case under review, the residential building of the insured included the earth floor of the crawl space located immediately below the residence, in the same manner as the concrete floor of a basement would naturally be included in the definition of insured property, including the insured building (“dwelling” and “building”). If “dwelling” and “building” may be synonyms defining the insured property, the word “premises” is not a synonym. This last term simply establishes the limits of the land on which the residence is located and cannot be used to include the soil under the residence as insured property under the insurance contract. The word “building” cannot be interpreted as broadly, in a way to require the insurer to indemnify its insured for the hydrocarbon contamination of the soil of the crawl space down to an infinite depth, as if the soil under the insured building was also an item of insured property. The land (“premises”) and the building (“dwelling”) are two separate concepts in insurance law. The word “building” was clear in its common meaning and required no interpretation. The specified peril of damages caused by hydrocarbons (“escape of fuel oil”) could not include the soil under the residence as insured property. The obligation of the insurer The cases of Snow and Garden View Restaurant Ltd. show that the words “dwelling”, “premises” and “building”, taken in their usual meaning, do not implicitly include the soil under an insured building located within the limits of the insured location, although it may constitute a specified peril. Therefore, the insurer had no obligation to indemnify its insured for the hydrocarbon contamination in the soil within the limits of the insured location.   Royal & Sun Alliance Insurance Company of Canada v. Snow, 2016 NSCA 7; Garden View Restaurant Ltd. v. Portage La Prairie Mutual Insurance Company, 2016 NSCA 8. Snow v. Royal & Sun Alliance Insurance Company, 2015 NSSC 44. Royal & Sun Alliance Insurance Company of Canada v. Snow, 2016 NSCA 7.

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  • The Ontario Court of Appeal rules on the coverage exclusion of faulty workmanship by a contractor

    On December 23, 2015, the Ontario Court of Appeal1 set aside a decision of the motion judge2 which had granted a motion for summary judgment brought by the insurer to dismiss a claim by its insured. Facts The insured had entered into an agreement with a contractor to restore the exterior cladding of her home. The restoration process involved the use of water jets. The contractor was first required to seal all areas where water might enter the interior of the home. The insured submitted a claim to her insurer for water damage caused to the interior of her home by the contractor resulting from the exterior restoration work. The insurer denied coverage based on the “making good faulty workmanship” and “property being worked on” exclusions. Motion judge The motion judge interpreted the “making good faulty workmanship” and “property being worked on” exclusions broadly to exclude coverage for all damages caused directly or indirectly by the contractor and damages caused to the property being restored, thereby rendering ineffective the specific exception for resulting damages the restoration work. According to the motion judge, the exception was overridden by the two general exclusions. The insured had contracted a Security Plus “all-risks” homeowner’s insurance policy. The first of the two aforesaid exclusions, under the heading “Losses Excluded”, read as follows: We do not insure: […] 2. the cost of making good faulty material or workmanship; The second exclusion, under the heading “Property Excluded”, read as follows: We do not insure loss or damage to: […] 4. property: (ii) while being worked on, where the damage results from such process or work (but resulting damage to other insured property is covered); The decision The Court of Appeal totally dismissed the motion judge’s reasoning, based on the following principles of interpretation3: a) Exclusions are to be interpreted narrowly b) Exceptions are to be interpreted broadly c) Ambiguities in the interpretation of the clauses of an insurance contract are to be resolved in favour of the insured The damages suffered by the insured resulted from the contractor’s work and fell within the scope of the exception which maintains insurance coverage for resulting damage to “property being worked on”. The exclusion for “making good faulty workmanship” and the exclusion for “property being worked on” could not be construed in a manner that rendered a clear exception ineffective. If the insurer had clearly wished to exclude all damages resulting directly or indirectly from a contractor’s work, it would not have stipulated an exception to an exclusion in this all-risks type of insurance policy. Therefore, the insured was entitled to coverage. It is noteworthy that the Supreme Court of Canada4 has agreed to hear an appeal from the Alberta Court of Appeal5 which, among other things, should establish an analytical process that will clarify the distinction between the concepts of “making good faulty workmanship” and “resulting damage” in the context of a builder’s risk insurance policy.   Monk v. Farmers’ Mutual Insurance Company, 2015 ONCA 911. Monk v. Farmers and Muskoka Inc., 2014 ONSC 4956. MacDonald v. Chicago Title Insurance Company of Canada, 2015 ONCA 842, para. 66. Ledcor Construction Limited, et al. v. Société d’assurance d’indemnisation Northbridge, et al., 2015 CanLII 60494 (CSC). Ledcor Construction Limited v. Northbridge Indemnity Insurance Company, 2015 ABCA 121.

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