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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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  • On appeal from a judgment on a Wellington-type motion

    The Court of Appeal of Quebec recently ruled on a leave to appeal from an interlocutory judgment dismissing a Wellington type motion seeking to order an insurer to take up the defence of its insured. The decision of the Court in Technologies CII inc. v. Société d’assurances générales Northbridge1 follows the one issued on April 21, 2015 by the Honourable Michel A. Pinsonnault, dismissing a motion of this type in the context of litigation opposing the Attorney General of Quebec (hereinafter, the “AGQ”) and the Commission scolaire de la Rivière du Nord (the “School Board”) and, among others, Technologies CII Inc. (“CII”) and its liability insurer Northbridge General Insurance Corporation (“Northbridge”). After analysis, Ms. Justice Marie-France Bich concluded that an interlocutory judgment dismissing a Wellington-type motion must still be recognized as a judgment contemplated in second paragraph of the first alinea of article 29 Code of Civil Procedure (Quebec) (“CCP”). THE DISPUTE CII is a business specializing in the installation of heating and air conditioning systems. It was sued, solidarily with other defendants, for an amount of $16,537,687.00 by the AGQ and the School Board for a fire which occurred on September 21, 2011. The plaintiffs alleged that the fire was caused by the negligence of CII while performing its work, since it failed to comply with the legal requirements and standards of care applicable to welding activities. After it conducted a statutory examination of a CII representative, Northbridge refused to take up the defence of its insured on the ground that the coverage provided under the insurance policy was suspended at the time the events took place. It argued that CII had failed to comply with an endorsement, thus contravening to article 2412 of the Civil Code of Québec (“CCQ”) which provides that a breach of warranty aggravating the risk suspends the insurance coverage. The endorsement in question set out specific conditions for the control of sparks during welding activities, such as the use of protective screens or canvases. Therefore, Northbridge blamed CII for having breached what it considered to be a warranty by carrying out welding work in a closed environment without using any form of fire protection. For its part, CII argued that the endorsement did not constitute a warranty, but an endorsement modifying the terms of the policy. It added that this endorsement could not be held against CII because it had not been brought to the attention of a person in authority, that it did not form part of the original policy and because Northbridge would not have complied with the provisions of article 2405 CCQ. Hence CII filed a Wellington-type motion with the Superior Court to force Northbridge to take up its defence in the proceedings against the AGQ and the School Board. THE JUDGMENT ON THE WELLINGTON-TYPE MOTION2 The Superior Court concluded that, based on the allegations of the proceedings, the insurance policy, the exhibits filed and the statutory examination, CII had clearly breached the terms of the endorsement. According to the Court, [TRANSLATION] “there is no doubt that when the work was performed by its employees [CII’s] on the day the fire occurred, the employees did not use any protective screen or asbestos canvas to limit the spread of sparks (…).” The Court added that the endorsement indeed constituted a warranty incurred in the original policy, dismissing CII’s arguments and thus, its Wellington-type motion. THE LEAVE TO APPEAL FROM THE JUDGMENT OF THE SUPERIOR COURT On the basis of article 511 CCP, CII applied for a leave to appeal from the judgment of the Superior Court. From the outset, the Court of Appeal reiterated the two conditions which are necessary to obtain a leave to appeal from an interlocutory judgment, namely: the judgment is one that is contemplated in article 29 CCP; and the pursuit of justice requires that the leave be granted. The Court of Appeal wondered whether the case law prior to 2012, according to which a judgment dismissing a Wellington-type motion is a judgment contemplated in the second paragraph of the first alinea of article 29, still applied in the wake of the case of Elitis Pharma inc. v. RX Job inc.3 In this last case, Justices Rochon and Kasirer wrote that the sole economic harm or the financial or business inconvenience arising from an interlocutory judgment was not sufficient to consider same as a judgment ordering the doing of something which cannot be remedied by the final judgment. The Court concluded that it must still be recognized that an interlocutory judgment dismissing a Wellington-type motion may be appealed on the basis of this provision. Indeed, in addition to the economic harm caused to the insured by the dismissal of this type of motion, the Court was of the view that the insured is also deprived of one of the substantive rights provided in his insurance policy and by article 2503 CCQ. The second criteria, which relates to the pursuit of justice is not discussed in detail in this decision. The Court simply mentioned that this condition weighed in favour of granting the leave to appeal. In the end, the Court, reiterated that a judgment which dismisses a Wellington-type motion is a judgment contemplated in the second paragraph of the first alinea of article 29 CCP. WHAT ABOUT THE LEAVE TO APPEAL A JUDGMENT GRANTING A WELLINGTON-TYPE MOTION? If it seems henceforth clear that a judgment dismissing a Wellington-type motion is a judgment contemplated in the second paragraph of the first alinea article 29 CCP, such is not necessarily the case of a judgment granting such a motion. Indeed, the issue remains as to whether the harm suffered by an insurer who is required to take up the defence of its insured is purely economic and may be remedied by the final judgment. In the judgment rendered in the Lloyd’s Underwriters v. 4170831 Canada inc.4 on August 12 last, Justice Kasirer accepted, for discussion purposes only, that an interlocutory judgment allowing in part a Wellington-type motion satisfies the conditions of section 29 CCP., but denied the leave to appeal from on the basis of the pursuit of justice criteria. However, referring to the decision of Ms. Justice Bich, Justice Kasirer wrote the following: [TRANSLATION] “One may wonder, in circumstances where the harm suffered by the insurer is purely economic and may be redressed on the merits, whether article 29 CCP is truly satisfied in all cases. I note the relevance of the discussion of this issue by my colleague Ms. Justice Bich in the context of the dismissal of a Wellington-type motion in Technologies CII inc. v. Société d’assurances générales Northbridge, 20015 QCCA 1246, par.[9] (sitting alone). This being said, in view of my conclusion respecting the criteria set out in article 511 CCP, I reckon that it is not necessary to rule on the issue for the purposes of this motion.” Having determined that the pursuit of justice did not weight in favour of granting the leave to appeal, the Court preferred not to deal with the issue of whether the judgment allowing a Wellington-type motion is a judgment contemplated in the second paragraph of the first alinea of article 29 CCP. We’ll take a raincheck! 1 2015 QCCA 1246. 2 2015 QCCS 1988. 3 2012 QCCA 1348. 4 2015 QCCA 1333.

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  • OSFI’s new expectations with respect to the governance of federally-regulated financial institutions

    The quality of corporate governance practices increasingly represents a key factor to maintaining the trust of depositors, policyholders and most stakeholders who are active on capital markets. Considering the unique features of financial institutions and the risks arising from their responsibilities, some aspects of corporate governance are particularly important for these institutions, including banks, insurers, trust companies, loan companies and cooperative credit associations.On January 28, 2013, the Office of the Superintendent of Financial Institutions Canada (hereinafter “OSFI”) published the final version of its Corporate Governance Guideline. OSFI previously issued for comment a draft guideline on August 7, 2012. Several comments submitted at that time were taken into account by OSFI.The new version of this guideline is intended for all federally-regulated financial institutions (hereinafter “FRFIs”), which are supervised and regulated by OSFI. It does not include the Canadian branch operations of foreign banks and insurance companies since they have no board of directors in the country. However, OSFI expects their Chief Agent or Principal Officer, who oversee matters of corporate governance in Canada, to be acquainted with the Guideline.OSFI has updated the former 2003 Guideline because it was no longer in accordance with OSFI’s Supervisory Framework, revised in 2010, and to reflect the newly adopted best international standards and practices with regard to corporate governance. By updating the Guideline, OSFI is taking a stand on the global financial crisis that started in 2008 and the corporate governance of financial institutions, which has become an issue of growing importance in the last 10 years.The new version of the Guideline focuses on the following core objectives:  ensure that FRFIs have prudent corporate governance practices and procedures that contribute to their safety and soundness; promote industry best practices in corporate governance; harmonize the OSFI Guideline with the Supervisory Framework, revised in 2010 and in effect since 2011; and address international standards as articulated by a number of international organizations, such as the Financial Stability Board, the Organisation for Economic Co-operation and Development, the Basel Committee on Banking Supervision and the International Association of Insurance Supervisors.The Guideline was also updated to reinforce the role of boards and senior management, including as follows:  enhance the effectiveness of boards, particularly with regard to their responsibilities and competencies; strengthen FRFIs’ risk governance, including by developing a “Risk Appetite Framework”; and improve the overall internal control framework of FRFIs by clarifying the roles of the Chief Risk Officer and Audit Committee.OSFI expects FRFI boards and senior management to be proactive and knowledgeable about the corporate governance best practices applicable to their institution. OSFI also expects FRFIs to assess their operations according to the Guideline and take appropriate action to ensure compliance. FRFIs are required to put in writing the results of their self-assessment and the related action plans by May 1, 2013. Self-assessments are to be retained by FRFIs and made available to OSFI upon request.OSFI expects that all FRFIs will fully implement the Revised Guideline on corporate governance by January 31, 2014.

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