Can an Insured Have Their Cake and Be Indemnified for It Too?

The Sainte-Rose-du-Nord1 decision rendered by the Superior Court presents an interesting scenario that arose in the context of a Wellington motion.

The Facts

The Municipality of Sainte-Rose-du-Nord (the “Insured“) held two civil liability policies issued by the Fonds d’assurance des municipalités du Québec (the “Insurer“), one for general liability and the other for errors and omissions.

The Insurer’s intervention was sought in the context of proceedings brought against the Insured by Aurel Harvey et Fils Inc (the “Plaintiff“). The Plaintiff alleged that it had entered into a non-exclusive quarry lease with the Fjord-du-Saguenay MRC (the “MRC“). The Plaintiff contended that it had processed certain aggregates and stored them at a specific location in the quarry for its own use, only to later find that 3,878.28 metric tons had disappeared from its pile. According to the Plaintiff, the removal of the materials was carried out, at least partly, by the Insured with the authorization of the MRC to “dip into its reserves”.

The Plaintiff sought from the Insured and the MRC the cost of replacing the materials, totalling $152,527.90 including taxes, and $25,000 in punitive damages.

The Insurer denied its duty to defend the Insured, essentially arguing (i) that there was no accidental, unintentional or uncertain occurrence and (ii) that the Insured’s civil liability could not be covered for property that it has misappropriated and whose value it still retains.

The Insured responded that the “misappropriation” was merely a legal qualification of the allegations contained in the proceedings and added that given the MRC’s authorization, the appropriation was neither wrongful nor intentional. Insisting on the existence of a mere possibility of coverage, the Insured urged the Court to proceed with caution at this stage.

The Ruling

The Court first found that the alleged authorization granted to the Insured by the MRC raised the possibility that the misappropriation may have been made inadvertently, without any malicious intent. It therefore concluded that the act triggering the Insured’s liability was accidental or unintentional, at least at this stage.

The Court then pointed out that the Insurer’s second argument was attractive, yet not conclusive at this stage. The Court agreed that it could not allow an insured to retain the value of goods it acquired without compensation. However, the Court noted (i) that the exhibits filed in support of the proceedings referred to several different quantities of metric tons that had allegedly disappeared, (ii) that it was unaware of the proportion of materials acquired for the sole benefit of the Insured, (iii) that it was unaware of the modalities set between the Insured and the MRC for these acquisitions (with or without consideration) and (iv) that it was unaware of the terms of the lease. Essentially, the Court concluded that it was possible that the hearing on the merits would establish a discrepancy between the value of the damages claimed by the Plaintiff and the value of the benefit gained by the Insured’s appropriation of the materials. Although this rationale is not explicitly addressed in the ruling, it is possible to infer from the reasons set forth that, should the Insured have paid an amount to the MRC for the acquisition of the materials, it might not have benefited from the full value claimed by the Plaintiff. What the latter is claiming is not the restitution of the materials, but rather damages corresponding to their replacement value.

The Court deferred this question to the merits and concluded that there was a possibility of coverage at this stage. It therefore granted the Wellington motion.

We remind you that we have a team specialized in insurance coverage of which Nathan is a member. The contact partners are Nick Krnjevic, Hugues Duguay and Vikki Andrighetti.

1Aurel Harvey et Fils inc. c. Municipalité de Sainte-Rose-du-Nord, 2023 QCCS 2837.



Nathan Hassan Omar

Lawyer, Associate

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