In Maison Jean-Yves Lemay Assurances inc. c. Bar et spectacles Jules et Jim inc., 2016 QCCA 1494, the Quebec Court of Appeal reiterates the broker’s duty to review the building’s replacement value and coverage when renewing the insurance policy for the property.
The facts
The case began in June 2010, when the insured sought to renew the insurance of its building. Following its broker’s recommendation, an appraiser was mandated to prepare; until then, the property was insured for $424,000.
On July 20th, the broker took notice of the report, in which the replacement value was increased to $565,000. However, since he was leaving for vacation, he asked a colleague to follow up on the file. Unfortunately, no further steps were taken. The building was destroyed by fire on July 23rd.
Things took a turn for the worst when the insured found out that the appraiser had underestimated the building’s replacement value, and had also forgotten to consider the cost of demolition, and of upgrading to applicable standards. To make things worse, the appraisal was based on the assumption that the whole building was a residential dwelling, whereas the ground floor was for commercial use. The overall cost of demolition and reconstruction totalled $1,003,708.
The appeal: apportioning liability
While the case was under appeal, the broker admitted that his failure to react when he received the appraisal report constitutes negligence, and he voluntarily paid to the insured the difference between the amount of the actual coverage and the amount that he considers should have been the adequate coverage. The broker filed an appeal because the trial Judge held him liable for all damages disregarding the appraiser’s fault. The trial Judge concluded that the broker’s failure to react to the appraisal report broke the causal relationship between the flaws in the report and the insufficient coverage. Accordingly, only the broker was held liable for $348,032.
The Court of Appeal, while affirming the insured’s right to compensation, came to a slightly different conclusion. It held that both the broker and the appraiser were at fault and that these faults were contractual, although not simultaneous. Each was the cause for a specific damage sustained by the insured. Failure by the broker to follow up on the appraisal report or to request increase insurance coverage could not exonerate the appraiser from the flaws in his report. While the broker has an obligation to provide information and advice, he is not liable for damages arising from the faulty evaluation of the insured’s property. As such, the Court of Appeal considered that the causal relationship had not been broken and concluded that both the broker and appraiser were liable towards the insured.
- Appraiser’s liability for under-evaluation. Initially, since the appraiser failed to abide by the applicable standards in setting the building’s value, the Court ruled that he alone was responsible for the errors in his report and held him liable for $233,865, being the difference between the correct value ($798,865) and the inaccurate value as reported ($565,000), an amount that must be decreased by the costs of demolition ($45,200). The judgment against the appraiser is therefore $188,665 with interest, additional indemnity and costs.
- Broker’s liability for breach of communication. The Court of Appeal then concluded that the broker had breached his duty to notify the insurer and failed to increase the coverage as per the report. Under Article 39 of the Act Respecting the Distribution of Financial Products and Services, “brokers must, when renewing an insurance policy, take the necessary steps to ensure that the coverage provided corresponds to the client’s needs.” The damages arising from this fault amounted to the difference between the original coverage ($424,000) and that which would have been in force had the report been filed with the insurer ($565,000). The judgment against the broker was therefore $141,000 with interest, additional indemnity and costs.
- Broker’s liability for having omitted the demolition costs. The Court of Appeal affirmed the trial Judge’s finding that the broker had breached his duty to advise by failing to notice the absence of demolition costs in the appraiser’s report. Accordingly, the broker was held liable for these costs ($42,500). This finding was not challenged by the broker before the Court, since he had already willingly paid compensation to the insured.
Finally, the Court confirmed that the broker was to be held jointly and severally liable with his firm. As for the Appraiser, he was solely responsible for his share.
By Nicolas Drolet, from our Insurance Law Practice Group.