This case is referred to as the “Pyrrhotite matter”, as this is one of the components found in the concrete utilized for the construction of certain buildings in the Trois-Rivières area. The pyrrhotite caused chemical reactions that triggered a structural weakness in the concrete used in the foundations of the buildings, giving rise to numerous litigations involving the participants to the construction as well as certain insurers.

Amongst the parties involved was SNC-Lavalin Inc. [“SNC”] covered by insurance structures involving multiple insurers, designated as “insurance towers”. Within the scope of the insurance tower put in place to cover the professional liability of SNC during the period between March 31, 2006 and March 31, 2012, ACE acted as an excess insurer. Based on the evidence, Assurance ACE INA [“ACE”] accepted to participate to “follow form” coverage. ACE maintained that the claims against SNC were based on a fault which occurred before March 31, 2006 and since its policy contained a retroactive date of March 31, 2006, all claims flowing from negligent acts occurring prior to this date were excluded.

The Superior Court was called upon to decide whether ACE, which had accepted to be part of a follow form system, could stipulate such a retroactive date in its policy whereas the reference policy did not contain such a limitation. The Court of first instance concluded that the evidence established that SNC’s insurance proposal required that there be a follow form system. Consequently, the insertion of a retroactive date was incompatible with the system and the evidence demonstrated that SNC never had the intention of negotiating or accepting a limitation clause. The Court also underlined that any modifications to an insurance contract must be done by virtue of endorsement as provided for by article 2400 of the Civil Code of Québec [“C.C.Q.”]. The existence of a retroactive date in ACE’s policy renewed for the period of 2008–2009 constituted a modification to the original insurance contract. ACE had the burden of establishing that it had clearly advised SNC of the reduction of its obligations, which it had not done. The Court further added that ACE’s policy did not contain a true retroactive date whereas only the documents accessory to the policy contained such a mention.

The Court of Appeal addressed three issues: restrictions to the follow form system and whether it allowed ACE to include a retroactive date despite the fact that the reference policy did not contain one; whether the inclusion of a retroactive date constitutes a divergence in virtue of Article 2400 C.C.Q. adding that the response lies in the proof accepted by the Superior Court; the facts on which ACE based its claim that the retroactive date was valid.

The follow form system

The Court of Appeal dismissed ACE’s argument that follow form is a blurry practice, adding that it is sufficiently recognized in the insurance industry. The Court cited both doctrine and jurisprudence to conclude that excess policies of a follow form type offer the same coverage and generally adopt the same coverages and are subject to the same exclusions as the reference policy. The Court relied on the testimony of SNC’s director of financial risks maintaining that his understanding of the follow form system was similar to that which is explained by both doctrine and jurisprudence. This was also the understanding of ACE representatives. The Court underlined that in Quebec civil law, even if an obligation is not specifically stipulated in a contract, article 1434 C.C.Q. may supplement it. A contract binds the parties not only by that which is expressed in it but also by all that flows from it by its nature and usages. In this case, the Court concluded that the use and the nature of the insurance contract of a true follow form and the clear will as expressed by SNC allow

The Court of Appeal concluded that ACE had accepted the invitation of the broker to participate in the insurance tower in virtue of a follow form system.

The inclusion of a retroactive date

The Court stated that in principle, there is no restriction to providing a retroactive date. However, within the context of a true follow form, the Court questioned whether such a clause respected the fundamental elements of the reference policy. The Court concluded that not only did the proof demonstrate that SNC sought a policy constituting a true follow form system but also that ACE had accepted same. The Court then referred to the reference policy. In first instance, there was a debate as to which was the true reference policy. The court of first instance concluded that the identification of the reference policy was not determinant given that both the AIG and Lloyd’s’ policies contained quasi identical wording and clause 2.2 applied since ACE accepted to apply to its policies the true follow form:

ACE invoked the following clause in the reference policy giving it an implicit authorization to include a retroactive date in its own policy even if the reference policy did not contain such a date.

The Court held that since ACE had accepted to adopt the true follow form system, it had to stipulate the identical clauses as in the reference policy in order to consistently follow the lower layers. Despite clause 1.2, the primary insurer renounced to stipulating in its policy a limitation of the nature of a retroactive date. Other than ACE, all of the insurers involved in the tower for 2009–2010 acknowledged their obligations towards SNC for the claims linked to the Pyrrhotite files. This contradictory application of the excess policies is proof that ACE’s policy did not grant to its insured identical coverage as provided for by the other members of the tower. ACE had undertaken to insure and respect the true follow form system and to provide constant protection conform to the reference policy. The retroactive date contained in ACE’s policy was incompatible with the contents of the reference policy. The judge of first instance was right to conclude that the reference policy had to prevail.

The issue of divergence

This is a question of fact and the testimony of SNC’s representative unequivocally established that SNC expected insurance coverage for previous faulty acts. By attempting to impose a retroactive date, ACE failed in its obligation inherent in the true follow form system. The judge of first instance did not err in concluding that in case of conflict between the reference policy and ACE’s policy, the reference policy prevailed. By including a retroactive date, ACE was introducing a divergence between SNC’s proposal which required a true follow form and certain policies of the insurers in which it was stipulated that this limitation was incompatible with the reference policy. Since ACE had not made proof by a separate document of the divergence in the policies and of SNC’s acceptance of the retroactive date, the insurance proposal had to prevail. This limitation was thus not opposable to SNC in virtue of article 2400 C.C.Q.