Every so often over the past several decades, the Quebec Court of Appeal has reminded insurers that the omission to invoke a reason for denial of coverage in a timely manner can be fatal to the insurer. However, past decisions of the Court left some doubt as to how harshly an insurer would be judged for such an omission.
A recent decision of the Court of Appeal, Lombard du Canada ltée c. Ezeflow inc.,1(available in French only) should convince insurers to be much more careful. In that decision the Court refused to allow an insurer to invoke an exclusion which had not been specified in its notice of denial of coverage or in its initial plea to the insured’s action.
REVIEW OF “FIN DE NON-RECEVOIR” AND “ESTOPPEL” PRINCIPLES
Under common law, the doctrine of estoppel can prevent an insurer from invoking a policy term barring coverage which was not originally raised with the insured. An “estoppel” is created when an insurer, by its representations or conduct, has led the insured to believe in a certain state of affairs upon which the insured then acts. If the insured suffers prejudice as a result of relying on the belief that was induced, the insurer will be prevented from later modifying its position.
In Quebec, the courts have refused to apply the doctrine of estoppel, but have recognized a similar concept in civil law, the “fin de non-recevoir” which bars an insurer from adding to its reasons for denial of coverage on the basis that it is deemed to have waived the right to do so. According to the case law, such a waiver does not need to have been expressly stated in writing, but may be tacit, provided it is unequivocal, i.e., there is no doubt as to the insurer’s intention to waive a clause in the policy. Some writers have observed that it is harder to prove a “fin de non-recevoir” than to prove estoppel because the civil law concept requires proof that, by its representations, the insurer indicated its intention to modify its rights.
That is why, when the duty to defend is triggered, insurers have adopted the practice of issuing a letter reserving their right to invoke any clause in the insurance policy in support of a denial of coverage in case it subsequently turns out that the claim is excluded for a reason as yet unknown to them.
In Lapointe Boucher c. La Mutuelle-Vie des Fonctionnaires,2 the Court of Appeal ruled by a majority that an insurer that had elected not to invoke a specific reason in its denial of coverage was barred from doing so subsequently. The Court observed that the situation would have been different if the insurer had discovered the reason for denial of coverage after completing its initial investigation and issuing its letter denying coverage. The insurer’s conduct was equivalent to a tacit waiver of the exclusion. Since insurance policies are founded on good faith, the insured was justified in believing that the only reason for denial of coverage was the one invoked by the insurer. In that case, Beauregard J. expressed his strong disagreement with the majority and was very critical of the opinion of his fellow judges, pointing out that a party cannot be deprived of its rights or grounds of defence lightly, that the insurer had not abused of its rights and that the fact that the insurer had not mentioned a reason for denial of coverage in its letter was irrelevant since there was no obligation for the insurer to deny coverage in writing. He remarked: [Translation]“I find it overly technical to suggest that a life insurance company should be constrained by the exact terms of a letter in which it notifies the beneficiary or the policyholder that it does not intend to cover the claim.”
A few years later, the Court of Appeal, in a unanimous decision, appears to have been influenced by Beauregard J.’s dissent when it expressed considerable doubt about the utility of the letters of reservation issued by insurers. In Zurich du Canada, compagnie d’indemnité c. Renaud & Jacob,3 the Court remarked obiter dictum on the requirement traditionally imposed on insurers to express their reservations with respect to the duty to indemnify before taking up the insured’s defence, failing which they are barred from denying coverage by the civil law doctrine of “fin de non-recevoir” or the common law doctrine of estoppel. The Court of Appeal suggested, however, that: [Translation]“redefinition of the relationship between the duty to defend and the duty to indemnify […] and the modernization of the wording of insurance policies may require this traditional rule to be reviewed; but that is impossible in the present case, as the issue has not been raised. Until now, however, the insurer has been required to take this longstanding doctrine into consideration.” The Court of Appeal went so far as to suggest that the letter of reservation which had been sent on behalf of the insurer merely restated what should have been clear from the insurance policy, namely, that the insurer agreed to defend the insured on the basis of the allegations made, some of which referred to situations not covered by the insurance policy.
In 2003, the Court of Appeal, in another unanimous decision, again remarked in obiter on the relevance of letters of reservation and the traditional stream of authority as to how the doctrine of “fin de non-recevoir” should be applied.4 Consequently, it was to be expected that Quebec courts might be less demanding of insurers who take a position with respect to the admissibility of a claim and later wish to add to that position.
THE EZEFLOW CASE
In Ezeflow, the Court of Appeal, in reasons written by the Chief Justice, who also wrote the majority opinion in Lapointe-Boucher, stated laconically that the insurer’s delay in invoking a defence to refuse payment of the claim was simply fatal to the insurer. Meanwhile, Beauregard J., who had expressed his strong disagreement with the majority in Lapointe-Boucher, again delivered a dissenting opinion, stating that when an insurer omits to mention a ground of defence, there is a presumption that the insurer has waived the defence, but it is a rebuttable presumption. According to Beauregard J., it was clear that in taking the position that no part of the claim was covered pursuant to certain clauses in the insurance policy, the insurer was not waiving the right to argue that the claim was also excluded by other clauses in the policy. In Beauregard J.’s opinion, a court cannot find against an insurer if it is clear from the policy that the claim is not covered.
This recent decision, rather than responding to the previous invitation of the Court of Appeal to reexamine the traditional rule which prevents insurers from invoking additional reasons for denial of coverage, instead provides an incentive for insurers to be extra careful in applying the insurance policy, both in situations where the insurer denies coverage from the outset and in those where the insurer assumes the defence of the insured subject to certain reservations.
Meanwhile, insureds would be well advised to require their insurer to state its position precisely as soon as it is apprised of a situation that could trigger a claim, thereby forcing the insurer, so to speak, “to make its bed and lie in it”.