Does Kingsway General Co. c. Duvernay Plomberie et Chauffage inc., [2009] QCCA 926 (C.A.) (“Kingsway”) set a precedent or is it a unique case?

The facts in Kingsway are quite straightforward: Sanum Knit Fabrics Ltd. filed a claim with its insurers for water damage that occurred on Sanum’s premises the day after it had some plumbing work done by Duvernay Plomberie et Chauffage inc. When the insurers refused to pay on the ground that Sanum had misrepresented the circumstances of the loss and the extent of the damage, Sanum sued. However, these deceptively simple facts conceal a legal problem that is far from easy for the courts to resolve.

In its action against the insurers, Sanum argued that the water damage was caused by deficiencies in the work performed by Duvernay. Accordingly, the insurers filed a motion to institute an action in warranty and in forced intervention against Duvernay. The Quebec Superior Court dismissed the motion on the ground that the principal action concerned the interpretation of an insurance policy to which Duvernay was not a party and, in any event, the insurers could not be subrogated to the insured’s rights against Duvernay, since they were refusing to pay compensation under the policy. That decision was appealed.

The question at issue before the Quebec Court of Appeal was whether the appellant insurers could obtain Duvernay’s forced intervention.

According to the insurers, Duvernay’s presence was necessary to permit a complete solution of the question, in that it would allow the true cause and circumstances of the loss to be determined. The insurers also argued that Duvernay’s intervention was required to interrupt prescription of Sanum’s right to sue Duvernay, which, if prescribed, would prevent the appellant insurers from instituting a subrogatory action to recover any compensation they might have paid to Sanum.

The Court of Appeal ruled out the possibility of an action in warranty because no legal relationship existed between the insurers and Duvernay. However, it agreed to allow Duvernay’s forced intervention on the basis of Article 216 of the Code of Civil Procedure (the presence of a third party being necessary to permit a complete solution of the question). In so doing, the Court recognized that it was deviating somewhat from previously established legal principles in order to fashion a solution to the unusual problem posed by this case. The Court conceded that the principal action concerned the performance of a contract of insurance, while the forced intervention pertained to Duvernay’s civil liability, but concluded that, in this specific case, the word “necessary” should be interpreted broadly. Indeed, the dispute between Sanum and the appellant insurers turned on the question of Duvernay’s liability. If Sanum could prove that Duvernay had committed a fault which led to the water damage, Sanum could defend itself against the insurers’ allegation that it had misrepresented the circumstances of the loss.

The Court acknowledged that forced intervention raised questions as to the exact conclusions sought against Duvernay, since the subrogation provided for in Article 2474 of the Civil Code of Québec operates once the insurer has paid the insured and is thus subrogated to the insured’s rights against the person responsible for the damage. Therefore, until the insurer makes a payment under the policy, it has in theory no standing to sue the third party. To circumvent this difficulty, the Court of Appeal reasoned that the actual occurrence of the loss creates “a potential” for subrogation. The insurer’s refusal to pay the claim cannot of itself preclude such potential subrogation. Regardless of whether the insurer eventually compensates the insured of its own volition or as a result of litigation, Article 2474 applies, since its purpose is to have the third party that is responsible for the loss bear the cost of compensation. Potential or in futurum subrogation, as the Court of Appeal called it, thus creates standing to sue. Moreover, in the Court’s opinion, this solution does away with the risk that the insurer’s subrogatory action against the person responsible for the loss may be prescribed.

The decision in Kingsway is an innovative one which offers insurers a practical solution. It highlights the importance for insurers of obtaining the immediate involvement in litigation of any third party that may be responsible for a loss, rather than waiting for a decision on insurance coverage. Such involvement should be obtained by means of a motion in forced intervention that includes conclusions seeking an anticipatory subrogatory action.

Will such a strategy work every time? Will an insurer who is sued because it has denied coverage for reasons unrelated to a third party’s fault be able to satisfy the court that the presence of such third party is necessary for a complete solution of the question (the test of necessity pursuant to Article 216 C.C.P.)? The Court of Appeal itself said that the Kingsway case is an unusual one. It remains to be seen whether our courts will accept this break with the conventional interpretation of the test of necessity and replace it with a test of utility in order to permit insurers to make real and practical use of the subrogatory action offered by Article 2474 C.C.Q. The alternative is the risk of prescription for insurers, given that the action against a third party that may be responsible must be taken within three years from the occurrence of the loss.