SNC-Lavalin inc. c. Deguise: Insureds’ Omission to Declare All Facts Relevant to the Risk

The “pyrrhotite case” led to numerous disputes in which the plaintiffs alleged the existence of a latent defect affecting the solidity of the foundations of their building due to the presence of pyrrhotite in the concrete.

In fact, pyrrhotite was contained in the aggregates which came from the quarry belonging to Carrière B&B [“B&B”]. The aggregates were used by the concrete suppliers Construction Yvan Boisvert Inc. [“CYB”] or Béton Laurentides inc. [“BL”] [“the concrete suppliers”] who then delivered the concrete. The concrete suppliers were sued, as well as the contractors, the formworkers, the quarry owners and the geologist who analysed the aggregate.

Insurers of concrete suppliers and B&B (Société d’assurance Générale Northbridge [“Northbridge”] and AIG Insurance Company of Canada [“AIG”] argued that their insureds failed to inform them that there was a problem with the use of aggregate and that this resulted in the nullity of insurance coverages.

Northbridge insured BL and B&B’s liability from 2004 to 2009. For the same period, AIG was BL’s excess insurer. Northbridge also insured CYB from April 2009 until March 31, 2010.

In addition, Northbridge had insured Carrière Maskimo inc. [“Maskimo”], a competitor of B&B, for the period from September 2002 to September 2007 and AIG also insured the liability of a laboratory sued with Maskimo.

B&B’s quarry was located near that of Maskimo. However, the latter had sold aggregates in the 1990s for foundations which were built from 1996 to 1998. Thereafter, around thirty actions were brought against Maskimo. The plaintiffs alleged that the deterioration of the concrete in their foundation was linked to the presence of pyrrhotite in the aggregates.

As a result, by the end of 2001, the existence of a problem with concrete swelling appeared to be notorious. In fact, in the cases against Maskimo, the judge recognized that the problems experienced by Maskimo had “definite notoriety” as early as the fall of 2003.

However, in 2003, the concrete suppliers began to use the aggregates sold by B&B. During the following years, analyses on samples of the aggregates were carried out by the defendant geologist who concluded that the aggregates from B&B quarry could be used. In 2005, however, other experts expressed divergent opinions. It was not until November 2007 that the geologist concluded that the aggregate should no longer be used.

The Superior Court Judgment

The judge analysed facts known to the insurers and the insured. The Court concluded that the insurers were aware of the risks associated with the phenomena of swelling of the aggregates at the time of the underwriting of the risk since they had processed the claims for the lawsuits against Maskimo and a laboratory they insured. They also knew that there was a problem with pyrrhotite in the Trois-Rivières area and that experts disagreed on the cause of the swelling. Finally, they were aware of an expert’s analysis report issued in 2002 which concluded that B&B aggregates, which had the same chemical composition as those of Maskimo, could cause the same type of problem.

Thus, the judge found that the insurers were sufficiently informed of the existence of the problem and that they had also discussed the question of adding a pyrite exclusion clause at the time of renewal.

As for the insureds, the judge concluded that in 2002, they did not know that there was a problem arising from the use of B&B aggregates. They had also obtained analyses which had not concluded that the aggregates could not be used.

However, even if the Court believed that the insureds should have communicated the report to the insurers in 2002, it concluded that this reluctance was not significant enough, since the insurers were aware of the problem, given it implication in Maskimo files, and since complications caused by aggregates were notorious.

However, the judge found that the insureds showed reluctance by not disclosing to the insurers the geologist’s report of November 2017, which concluded not to use the aggregates from the B&B’s quarry. Consequently, the judge declared the nullity of the insurance policies from December 1, 2007, for Northbridge and from February 1, 2008, for AIG.

The Court of Appeal’s Judgment

On appeal, the insurers claimed that the Superior Court made three errors: it allegedly had analysed facts subsequent to the underwriting dates; it had wrongly concluded that certain facts were “notorious”; and it had held them to a standard of investigation which exceeded their obligations. AIG also claimed that the judge confused AIG’s knowledge with that of Northbridge, the primary insurer. Finally, the insureds claimed that the Superior Court should not have canceled their coverage in 2007 and 2008.

Error on the Judge’s Method of Analysis

The Court of Appeal dismissed the argument as to the method of analysing the facts. It confirmed that since Northbridge renewed its policy in 2007 without limiting the coverage, whereas it knew the existence of the problem related to the aggregates since 2002, it could not pretend that in 2003, at the time of the delivery of the first policy, the insured had been reluctant. This argument neither applied to the renewal of the 2006 and 2007 policies.

The Facts Known to the Insurer

As for the existence of known facts, the Court of Appeal also confirmed that Norbthridge had a real knowledge of the facts and not simply an alleged knowledge, since, between April 2003 and September 2007, it was the insurer of Maskimo, BL and B&B.

The Insurer’s Duty to Investigate

The insurers claimed that their duty to investigate was minimal and applied only to notorious facts, or facts that concerned only their insureds. The Court of Appeal dismissed this argument and upheld the judge’s conclusion that Northbridge did not follow its own underwriting instructions. The Court also recalled the rule set out by the Supreme Court of Canada in Coronation Insurance Co. v. Taku Air Transport Ltd. to the effect that insureds are not required to provide information which is generally available and that the insurer has an obligation to inquire into the current context of the industry of its insured, which Northbridge had not done.

The Excess Insurer’s Knowledge

AIG, the excess insurer, claimed that its insureds BL and B&B did not provide all of the information relevant to the risk and claimed that it could not be said to have constructive knowledge of facts known to the primary insurer Northbridge.

The Court of Appeal dismissed these arguments. First, the Court found that the trial judge did not confuse what AIG and Northbridge knew. However, it appears that AIG was not concerned with the losses reported by the broker, or with the files for which it had paid its entire guarantee and which included expert reports on the presence of pyrite in the context of Maskimo. The Court of Appeal concluded that the excess insurer had not behaved as a reasonable insurer in assessing the risk of BL and B&B. Its underwriters did not have written guidelines and the risk assessment was subjective. In addition, the Court found that there was no reason for AIG to have contacted the broker only. AIG therefore failed to obtain the most basic information on the operations of its insureds from them and the broker.

Nullity From 2007-2008

The Court of Appeal maintained the trial judge’s decision to cancel, effective December 1, 2007 and February 1, 2008, the insurance policies issued by Northbridge and AIG. In fact, according to the Court of Appeal, the geologist had finally recommended, in his report of November 2007, to completely stop the use of aggregates from B&B. However, the disclosure of this report corresponded to the time when insurers had to carry out their risk assessment to decide on the renewal of policies. Thus, the insureds should have provided them with the report. Failure to do so was a reluctance leading to the nullity of the insurance policies.