| 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. |
Among the actors involved in this legal saga, is SNC-Lavalin [“SNC”], which was covered by a complex insurance structure involving several insurers, designated as an “insurance tower”. This structure provided that each insurance policy was triggered following a pre-established sequence and applied until the exhaustion of its insurance amount, then triggering the next policy of the tower. This tower was based on a reference policy, which stated the general terms and conditions to be respected by the insurers, creating a system called “follow form”. SNC had subscribed a worldwide coverage, aiming for a protection in all of its business territories.
Law applicable to excess insurance policies
Zurich Insurance Company [“Zurich”], one of the excess insurers of the tower, appealed from the decision rendered by the Superior Court, arguing that its policies were governed by the law of Ontario. Based on this argument, the injured third persons would not have any direct right of action against Zurich and the interest on the proceeds of the insurance could not be deducted from the insurance amount, contrary to articles 2500, 2501 and 2503 of the Civil Code of Québec [CCQ].
While the reference policy provided that any dispute arising out of the policy should be decided based on Quebec law, Zurich’s policy provided that the Ontario law shall apply. The Court of Appeal chose not to comment on the impact of these two contradictory provisions within the same insurance tower. Instead, the Court analyzed Zurich’s argument in light of article 3119 par. 1 CCQ, which states:
| 3119. Notwithstanding any agreement to the contrary, a contract of insurance covering property or an interest situated in Québec, or that is subscribed in Québec by a person resident in Québec, is governed by the law of Québec if the policyholder applies for the insurance in Québec or the insurer signs or delivers the policy in Québec. |
During the hearing, Zurich admitted that its insurance contract was covering an interest situated in Quebec, where SNC’s head office was located.
Moreover, evidence showed that Zurich’s policy was delivered in Quebec. Even though Zurich was generally sending its policies to the broker’s offices in Toronto, the latter was instructed to forward the policies to SNC’s offices, in Montréal. Thus, the broker was acting as Zurich’s mandatary while delivering the policies in Quebec.
The criteria of article 3119 CCQ being filled, the policies are governed by Quebec law and the choice of jurisdiction clause must be excluded. Therefore, Zurich is subject to Quebec’s rules of public order with regard to insurance, which means that the injured third persons had the right to bring an action directly against the insurer and that the interest could not be deducted from the insurance amount.
Defence costs and injured third persons’ rights
Article 2503 CCQ provides that defence costs are borne by the insurer and cannot be deducted from the proceeds of the insurance, which are applied exclusively to the payment of injured third persons.
This provision was discussed in Deguise. The issue was to determine if the costs incurred to defend the insured against a claim in Alberta, where the deduction of the defence costs are allowed, could be deducted from the proceeds of the insurance available for the compensation of the injured third persons in Quebec.
The Court of first instance had concluded that SNC and its insurers had agreed to process each claim in accordance with the law of the place where it was filed. Thus, if Alberta law allowed the deduction of defence costs from the proceeds of insurance, these costs were also deducted from the proceeds of insurance that remained available for third persons in Quebec who filed a claim within the same insurance period.
The Court of Appeal did not agree with this decision and considered that it did not take into consideration the injured third persons’ rights in Quebec.
According to article 3119 CCQ cited above, the tower’s insurance policies are governed by Quebec law. Therefore, they are subject to its insurance rules, including article 2500 CCQ, which provides that “the proceeds of the insurance are applied exclusively to the payment of injured third persons”. The Court confirms that this rule exists to protect the third persons’ rights and falls under absolute public order. In conjunction with article 2503 par. 2 CCQ, this provision prevents the amount of the insurance intended for third persons from being reduced by defence costs of the insured, regardless of where these costs were incurred.
Moreover, the Court notes that the reference policy provides that the resolution of any dispute arising out of the policy shall be decided in accordance with Quebec law.
The Court mentions that in any event, foreign law could not have an extraterritorial application in Quebec towards rules of public order, such as the ones protecting the injured third persons.
However, article 2463 CCQ allows the compensations paid to other claimants to be deducted from the proceeds of insurance intended to Quebec claimants.