In 2016, Canadian courts issued a number of decisions that will have an impact on the landscape of insurance litigation.With the beginning of a new year, we take this opportunity to reflect on some of those key decisions, and the lessons insurers can draw from them.

1. False representations by the insured

The Quebec Court of Appeal held that an insurer may cancel an insurance policy based on false representations made by the insured even when the policy is required by law. As a result, an injured third party could see its claim against the insurer rejected. The case involved the retirement planning of a couple who entrusted their money, through their holding companies, with brokerage firm Triglobal Capital Management. A portion of these funds was inadequately used by Triglobal's president in running a Ponzi scheme through the firm using offshore funds in the Bahamas and the Cayman Islands. Triglobal's liability insurer, Axa Insurance Company, considered the policy to be nullified by that fraud. The Court of Appeal upheld the trial court’s decision to recognize Axa’s right in voiding the insurance policy on the basis of misrepresentation and concealment of material facts by the insured confirming therewith that an insurer, ultimately, must be able to rely on the insured's representations. The Supreme Court rejected the leave to appeal on January 12, 2017.

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2. Liability exclusion clauses

In a somewhat unusual case, the Québec Court of Appeal ruled that a claim brought by the Aldo Group against Moneris Solutions Corporation did not trigger a duty to defend in the presence of a clause in the policy excluding coverage for any liability contractually assumed by Aldo. Aldo and Moneris, an agent of BMO, had signed a contract to allow MasterCard payments in Aldo’s shops. The agreement provided that Aldo would pay a penalty should any data breach due to the failure to meet security standards arise. Aldo's systems were hacked in 2011 and MasterCard imposed a $4.9M penalty on Moneris, which in turn charged Aldo for contribution. Considering the penalty unjustified, Aldo sued Moneris and MasterCard. Aldo’s insurer refused to cover its legal fees arguing that there was no coverage under the policy wording. The Québec Court of Appeal took the view that Aldo assumed liability contractually with a third party and therefore the policy excluded the insurer’s duty to defend its client.

3. Liability to third party for brokers providing inaccurate information

In recommending an insurance product, a broker may have a duty to accurately inform a third party of possible risks and to act in good faith. That’s what the Quebec Court of Appeal ruled in Roy v. Lefevbre, a case involving the 1992 sale of a house in which a broker, trying to help bridge the gap between offer and counter-offer, advised the buyer to finance the operation through a “fully prepaid” insurance policy on the seller's life. Understanding that the premiums were to be "prepaid for life", the seller agreed to the arrangement and did not secure in any other way the payment of premiums. Years later, the accumulation fund used to pay the premiums ran dry. As the broker and buyer refused to pay the premiums, the seller, having to take it upon himself to keep the policy in force, disbursed the premiums and took legal action against the buyer, the broker and his brokerage firm to recover these amounts. The Court ruled that, knowing the details of the whole arrangement, the broker had the duty to accurately inform both the buyer and the seller of the risks associated with this kind of financial product. The Court held that the broker had an extracontractual duty of good faith and a duty to inform towards the seller. Since the buyer’s obligation towards the seller was contractual and the broker’s was extracontractual, they were both held liable in solidum. In short, brokers could now be held liable towards third parties with whom they have no contractual relationship.

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4. The insurance broker and the duty to defend

The Superior Court of Quebec ruled in Lamontagne v. Intact that the insurer’s duty to defend its insured is not imposed upon the insurance broker. In 2007, a couple bought a house equipped with a fuel oil heating system. When the couple contacted their insurance broker to get coverage for oil leaks, the broker wrongfully noted that the house had a solid fuel heating system — information that was passed on to the insurer who then delivered a policy with a standard exclusion for oil leaks. Two years later, the house's oil tank leaked coverage was denied. They sued their insurer and settled the matter in 2012. However, during the 2013 cleanup, it was discovered that the contamination might have spread to their neighbour's property. After they notified their neighbors and the environment ministry, they received an official demand letter from their neighbours and an administrative sanction from the ministry. Turning to their insurer, they were once again told there was no coverage. Unusually, they also wanted to force their insurance broker to take up their defence. The Court decided that the broker did not undertook under any agreement to take up the case of the insureds and to assume their defense in the event of an action being brought against them. As such, the only recourse afforded to the insureds was to file a claim in negligence against the broker.

5. Payment of pre-tender defense costs

Last August, the Court of Appeal for British Columbia in Lloyd's Underwriters v. Blue Mountain Log concluded that, under a commercial general liability policy, the insurer's right and duty to defend is triggered only once it has received a notice of a claim against the insured, as there was a clause in the CGL policy stipulating the insured must not incur expenses related to the claim without the insurer’s consent. Overturning the trial court ruling the BC Court of Appeal held that any pre-tender legal costs remain the insureds' responsibility. In doing so, it accepted Lloyd’s argument that giving notice is a “logical … precondition to assuming the duty to defend as the insurer cannot defend or control a claim it does not know about.”

6. Flooding: presumption against municipalities

Quebec’s Court of Appeal confirmed, in Ville de Québec c. Équipements E.M.U., the application of the presumption holding the municipalities liable for flooding caused by the backup of a city’s storm sewer network. The case involved litigation between the City of Québec and several insurers and a forklift dealer that suffered damages to its buildings due to flooding caused by several incidents of heavy rainfall causing the backup and overflow of the city’s storm sewer network. Over years of caselaw, the courts have established that a municipality is responsible for its aqueduct, sewer networks and collection and drainage systems. This decision confirms that a municipality must take all reasonable measures to ensure that its infrastructures are adequate, all the more so when it agrees to allow construction in areas that it knows are vulnerable to flooding.

7. "Faulty workmanship" exclusions

In one of the major insurance rulings of the year, the Supreme Court of Canada held that a "faulty workmanship" exclusion in a "Builder's Risk" insurance policy precludes from coverage the cost of recleaning the windows of an office building under construction, but not the cost of replacing those windows which were damaged due to use of inappropriate tools and cleaning methods. Importantly, in Ledcor Construction Limited et al. v. Northbridge Indemnity Insurance Company et al, the top Court rejected the Court of Appeal's test of physical or systemic connectedness to determine whether property damage is excluded as the cost of making good faulty workmanship or covered as resulting damage. The Ledcor ruling sheds light on the boundary between "making good faulty workmanship" and "resulting damage" in situations where faulty work causes damage to the very object of the work.

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8. Insured's obligation to collaborate

The Supreme Court of Canada recently declined to hear an appeal from Quebec where an insured was denied indemnity because of his refusal to be examined by his insurer on the circumstances surrounding the theft of his car. The case, 9221-2133 Québec inc. (Centre Mécatech) c. Intact Assurances inc., has handed insurers a strong argument they can use to get their insureds to cooperate during post-loss investigations. The Court found that “it is not up to the insured to decide whether his or her statement is necessary, nor to decide the manner in which the insurer should conduct its investigation.”

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