Banque Laurentienne du Canada v. Productions Sky High Courage inc., J.E. 2008-591 (C.S.) (on appeal)

The Superior Court of Québec recently decided that, despite a company assigning two insurance policies as security to a bank, the bank does not have an obligation to act on behalf of the company and exercise the rights resulting from the policies.

In this case, Laurentian Bank of Canada (the "Bank") granted a company a loan, which was solidarily guaranteed by two guarantors. As additional security, the company assigned to the Bank two insurance policies relating to distribution agreements. Due to the company defaulting on the loan, the Bank demanded reimbursement of the loan against the company and the guarantors. In their defence, the guarantors claimed that the Bank had been negligent because it did not exercise its rights to its insurance policies within the prescribed time period. On the other hand, the Bank argued that it did not have any grounds to make a claim according to the insurance policies, since it had never been advised of a loss covered by the insurance policies.

In its judgment, the Court emphasized that the Bank did not have an obligation to act on behalf of the company, since it was the company’s obligation to obtain insurance coverage. The Bank could have acted, but its failure to do so does not constitute a fault, against the company. The company in fact assigned to the bank an obligation for which it was a creditor, and not all of the rights and obligations resulting from the insurance. The Court also dismissed the guarantors’ argument stating that they had a right to be discharged from their respective guarantees. Given that the company was without coverage due to its failure to renew the insurance policies, the Bank is not held liable for the loss, and the guarantors cannot invoke the subrogation exception.

The Court therefore ordered the company to reimburse the Bank the entire amount of the loan, including ordering the guarantors to pay the Bank the amount of the guarantee.