| On April 6, the Court of Appeal of Québec rendered its decision in SNC-Lavalin inc. (Terratech inc. et SNC-Lavalin Environnement inc.) c. Deguise, 2020 QCCA 495.
Considering the importance of this decision for both the construction and insurance industries, RSS offers a series of newsletters discussing the main issues at stake. This is one segment of the complete series found here. |
July 3, 2020 — The decision of the Court of Appeal in Deguise and its conclusions arising from the problems caused by pyrrhotite in the foundations of many buildings in the Trois-Rivières will leave a significant impact in Quebec’s judicial history. The decision also confirms important concepts as to the interpretation of certain clauses in liability insurance policies as to the protection offered for specific insurance periods.
As part of the decision against SNC-Lavalin [“SNC”] and its employee geologist (“the insureds”), questions related to the application of insurance policies covering their liability arose, regarding namely the application of this policy to only one indemnity period, thus greatly limiting the amounts to be paid by the insurers.
Before discussing the questions of interpretation, we will review the context. The insureds were covered by an insurance policy protecting its liability as well as that arising from the actions of its employees. This insurance policy is composed of insurance policies issued individually by the members of a group of four insurers, each contributing in different proportions. From year to year, the insurers were ranked differently, and each rank corresponded to a given share (known as an insurance tower). When there is a claim, the insurer on the top layer covers the claim until its coverage runs out. The insurer on the second layer takes over, and so on. The insurance policies making up the whole are for all practical purposes identical.
The first tower was set up in 2004 and has been renewed since then. A declaration from the insureds were required to trigger the application of the insurance policies. During the renewal process, the insureds were deemed to have declared any situation that could eventually lead to a claim, allowing the insurers to assess the potential risk from those situations.
The applicable clauses are as follows:
| [AIG policy]
4.1 Claim Means: [art. 4.1.1 ou 4.2.1 depending on the policy] A written or oral demand from a third party requesting compensation for damages arising out of, or an allegation by a third party of, an error, omission or negligent act by the lnsured in the conduct of their Professional Duties. [Lloyd’s policy]: [2nd indentation of section 4.1 or 4.2 depending on the policy] Claims arising from a single error, omission, or negligent, dishonest, fraudulent criminal or malicious act, or breach, or loss or destruction or damage shall be considered a single Claim regardless of the number of lnsureds or the number of third parties making a Claim. […] [Exclusion – AIG and Lloyd’s policies]This policy does not cover any liability or Claim whatsoever arising out of: […]6.5 Any circumstance or occurrence: 6.5.1 Which has been notified to lnsurers on any other policy of insurance effected prior to the inception of this Policy; 6.5.2 Known to the lnsured prior to the inception of this Policy. […] [AIG and Lloyd’s policies]7. CLAIMS CONDITIONS Insured’s Duties in the Event of Claim 7.1 lt is a condition precedent to lnsurers’ liability under this Policy that: 7.1.1 Upon receipt by or on behalf of the lnsured of notice whether written or oral of intention by any person or body to make a Claim against the lnsured or of any allegation of any error, omission or negligent act which might give rise to such a Claim or on the discovery of any such error, omission or negligent act the lnsured shall notify the Claim Officer for transmission to lnsurers of such receipt, allegation or discovery in accordance with the Claim Procedures below. 7.1.2 If during the subsistence hereof the lnsured shall become aware of any occurrence which may subsequently give rise to a Claim against them by reason of any error, omission or negligent act and shall during the subsistence hereof give written notice to the Claim Officer, for transmission to lnsurers of such occurrence, any Claim which may subsequently be made against the lnsured arising out of that error, omission or negligent act shall be deemed to have been made during the subsistence hereof. |
In this case, the first claims related to the pyrrhotite were reported to the insurers during the 2009–2010 insurance period. Over the following months, SNC informed the insurers of additional claims as they were filed, but also of the potential number of claims as they progressed.
Based on the aforementioned insurance clauses, the insurers maintained that 2009–2010 was the only insurance period applicable to all claims, even those reported subsequently, therefore under the scope of other policies. These allegations were based on the following:
- The geologist working for SNC had committed only one negligent act;
- This act was the starting point of the losses leading to the claims;
- The claims arising from this act could be brought together under the terms of the insurance policies;
- Although part of the claims were reported later, the collective claims were all covered by the insurance policy in force at the time of the initial reporting, being during the 2009–2010 insurance period.
As the trial Court did, the Court of Appeal disagrees with the insurer’s interpretation of the insurance policies.
The Court of Appeal first emphasizes the importance of outlining that the insurance policies are only triggered when the insureds reports a claim from a third party (claims made and reported), not merely when proceedings are filed by the third party (claims made).
The Court of Appeal considers that the insurers did not include any limitations or reservations while renewing the insurance policies for the terms following 2009–2010 despite the fact that they were aware of the existing and reported claims and that they had been informed of the possible additional claims to come in the following months. Not only did they not exclude anything from the application of the policies, but they increased the coverage value twice. The Court considers that such actions are not compatible with the position now put forward by the insurers as to the sole application of the 2009–2010 insurance policy.
Grouping of the Claims
The insurers first argued that clauses 4.1/4.2 of the insurance policies allowed them to group the claims as one, as they arose from the same wrongful act, adding that doing so is beneficial to the insureds, since only one deductible is then payable. The Court of Appeal outlines that this possibility is part of the “Definitions” section of the policy and that the evidence filed in this case does not lead to the conclusion that the claims arose from the same wrongful act. Moreover, even if such a grouping could be made, it would only be possible for the claims reported during a single coverage period.
The Obligation to Declare Elements Affecting Risk and Exclusions
The insurers argued that the declarations made by the insureds as to possible additional claims had to be considered as intrinsic risk exclusions. The Court considered that by doing so, the insurers are mixing up the two different denunciation methods required from the insureds. During the insurance renewal process, the insureds must inform the insurers of all known circumstances they are aware of that could affect the appreciation of the risk by the insurers.
Secondly, when the insureds become aware of elements that could lead to a claim (occurrence), the insureds have to inform the insurer, since those could give rise to a claim, as specified in sections 7.1.1 and 7.1.2 of the policies. By doing so, the insureds rights are safeguarded for claims that could materialize once the policy is no longer in effect, but that would have been reported while it still was effective. The insureds would therefore be protected even if the subsequent insurer was to discard any claim arising from a loss that have been declared prior to the coming into force of the new policy. But this would not apply in the present situation as the policies were renewed without any exclusion or limitation.
The Court of Appeal considers that the insurers are mistaken when they fail to distinguish the two types of declarations when interpreting the clauses restricting the policy’s application to elements having been disclosed. The Court does not agree that the circumstances declared by the insureds at the time of the subscription or the renewal of the policies allow the insurers to deny coverage for any related claim and that sections 7.1.1 and 7.1.2 are only meant for the insurers to be informed of any risk that could become a claim (or not) in order for them to assess the full possible risk.
In this case where successive policies are involved, there could not be any declaration made “to another insurer” under section 6.5.2 as there is no other insurer, all the policies being issued by the same insurers. As there is no specific provision excluding from coverage any claim arising from a previously declared circumstance by the insureds during subscription or renewal, such declaration or previous knowledge cannot result into an automatic exclusion.
Finally, the Court points out that the insurers waited several months after the first claims were filed before raising the arguments related to the sole 2009–2010 insurance period, despite the fact that they were well aware of the situation. The Court concludes that doing so, they were not acting in good faith; and although the tardiness is not enough to reject the arguments, it reduces their strength and value.
The Court of Appeal therefore rejects all of the arguments narrowing all claims to the 2009–2010 insurance period and confirms that the claims filed during 2010–2011 and 2011–2012 insurance periods are covered by the insurance policies applicable for those periods.