On October 25, 2010, the Quebec Court of Appeal handed down a ruling on an insurer's duty to defend its insured under a liability policy issued for the benefit of a municipality. In Lombard du Canada Ltée c. Mont-Tremblant (Ville de),[i] Justice Dufresne, writing for the Court, applied the recent Supreme Court of Canada decision in Progressive Homes Ltd. v. Lombard General Insurance Company of Canada("Progressive Homes")[ii] for the first time in a Quebec civil law context, affirmed the principles of interpretation applicable in connection with the distinction between claims-made and occurrence-based policies, and discussed the duty to defend a claim involving the exercise of a legislative power by a municipality.


Exploitation agricole et forestière des Laurentides inc. ("Exploitation") owned a number of lots located on both sides of Route 117 in St-Jovite, a municipality that is now part of the Ville de Mont-Tremblant (the "City"). In January 1995, the City notified Exploitation of its intention to rezone the lots in question for commercial and industrial use. Exploitation opposed the rezoning, but the by-law effecting it was nevertheless passed on April 26, 1999.

On September 8, 1999, Exploitation brought an action against the City seeking to have the by-law annulled. The City notified its insurer at the time, Lombard Canada Ltd. ("Lombard"), but Lombard took no action in the matter, since the coverage the City had purchased was a claims-made policy and no damages were being claimed by Exploitation at that point.

In June 2004, Exploitation tried unsuccessfully to amend its proceedings to include a claim for damages, and on November 28, 2008, it filed a separate action in damages against the City. On August 25, 2009, the City served a motion on its insurers Lombard and Lloyds seeking to compel one or other of them to take up its defence, Lloyds having issued a policy similar to Lombard's starting in May 2003.

The motions judge granted the motion in part and ordered Lombard to assume the City's defence,[iii] finding that the action in damages, which reproduced a number of paragraphs from the action to have the by-law annulled, alleged negligence on the part of the City that was not excluded from the insurance coverage. Setting aside the allegations in the action to the effect that the adoption of the by-law amounted to constructive expropriation, the judge considered that the exclusions for intentional acts in the policies issued by Lombard and Lloyds were not operative for purposes of the motion and that it was up to the judge on the merits to decide whether they came into play for purposes of the duty to indemnify. The motions judge also rejected the insurers' argument that Exploitation would need to prove bad faith by the City in order for its action in damages to succeed (which would of course trigger a coverage exclusion), as it was not clear from the proceedings and exhibits that the City had necessarily acted in bad faith. Lastly, the judge found that it was up to Lombard rather than Lloyds to take up the City's defence since the action commenced in 1999 contained an allegation indicating that a damage claim would be forthcoming and since the City had notified Lombard of the action at the time.


The duty to defend in light of Progressive Homes Ltd. v. Lombard General Insurance Company of Canada

The Quebec Court of Appeal, in its first ruling applying the Supreme Court of Canada's recent decision in Progressive Homes, has now affirmed that the principles laid down in that case, which originated in British Columbia, apply in the context of Quebec civil law. Justice Dufresne refers to the passages setting forth the general principles applicable to an insurer's duty to defend and confirms that the mere possibility that a claim may be covered by a liability policy gives rise to a duty to defend, but that particular attention must also be paid to the policy language in order to determine its true scope.

Interpreting claims-made insurance policies

Justice Dufresne alludes to another principle laid down by the Supreme Court of Canada, in Reid Crowther & Partner Ltd. v. Simcoe & Erie General Insurance Co.,[iv] namely, that the labels "occurrence-based" and "claims-made" given to insurance policies are not characterizations that in themselves lead to a certain legal result, the issue being always to determine what the particular policy dictates, regardless of what it is called. It is recalled that an occurrence-based policy covers events occurring during the coverage period while a claims-made policy covers claims submitted during the coverage period.

Justice Dufresne goes on to examine the language of the policy issued by Lombard and the definition of the word "claim". Finding no palpable and overriding error in his appraisal of the facts, Justice Dufresne accepts the original determination by the motions judge that the City had submitted a valid claim to Lombard. Even though the action in damages was only commenced in November 2008, the City had clearly notified its insurer of the situation at the time of the action taken in 1999. The Court also concludes that Lloyds does not have a duty to defend the City, since the policy that it issued to the City did not cover events, whether or not disclosed, that were previously known to the insured.

The duty to defend a claim where a municipality was exercising a legislative power

The main interest of this ruling nevertheless lies in the Appeal Court's analysis of the interaction between liability insurance policies purchased by municipalities and the principles of immunity that apply to them. Ever since Laurentide Motels Ltd v. Beauport (City),[v] it has been acknowledged that the public law principles derived from the common law should be applied in Quebec civil law so as to distinguish two categories of decisions by municipalities: (1) executory or operational decisions, such as those that relate to the enforcement of zoning by-laws, and (2) legislative or policy decisions, such as those that relate to the making of zoning by-laws. In the first case, a municipality can be held liable for any damage caused to another through its negligence, unless the law expressly excludes such liability. In the second case, the municipality enjoys relative immunity, i.e., a policy decision cannot render a municipality civilly liable except in the event of its intentional wrongdoing or bad faith.

Accordingly, in the case under discussion here, Exploitation's only hope of obtaining compensation from the City lay in its ability to prove that the City was in bad faith, in which case coverage under Lombard's policy was explicitly excluded. The Court of Appeal was thus of the view that the motions judge had erred in setting aside the allegations of constructive expropriation on the basis that they were unproven, and in failing to recognize, for purposes of assessing the duty to defend, that a duty to indemnify could not possibly arise for the insurer, owing to the intentional wrongdoing or bad faith exclusion. In this regard, Justice Dufresne reminds us that in the context of a motion to compel an insurer to take up its insured's defence, the examination should be confined to the proceedings and supporting exhibits and the allegations should be taken as if proven for purposes of determining whether a possibility exists that a claim may be covered by the policy. In the circumstances of the case before it, the Court considered that there was no possibility of the claim being covered. Indeed, if Exploitation alleged and proved bad faith, the exclusion applied and the insurer would have no obligation to indemnify. If, on the other hand, bad faith could not be proved, there would be no obligation to indemnify as the City could not be made to pay compensatory damages.