On January 12th, 2011, the Court of Appeal of the district of Montreal rendered a judgment in the case of Promutuel Bagot c. Lévesque (published at EYB 2011-184931 (C.A.)), regarding the scope of a clause included in a residential insurance policy which excluded constructions used in whole or in part for criminal activities. The three judges analyzed the factual circumstances of the case, but did not conclude in the same manner. Further, the conclusions in law also differ with regard to the burden of proof incumbent to the insurer who invokes the application of the exclusion.

  1. THE FACTS

Ms. Lévesque (« the insured ») obtained a residential insurance policy with Promutuel Bagot (« the insurer”). On October 13th, 2005, during the coverage period, the building caught fire, and the insured property sustained important damages. Among others, the insured’s residence had to eventually be demolished. An electrical defect was identified as the cause of the fire.  

The Insurer denied coverage, mainly for the following reasons:

  • The use of the basement of the residence for possession of drugs for the purpose of trafficking, which was the subject of a specific exclusion included in the policy;
  • The material change in the risk prior to the loss because of the insured’s activities, without notification to the Insurer who would have terminated the policy had it been notified of such activities;  

The factual circumstances are further detailed as follows.

As she was walking in the woods in search of fern, the insured accidently discovered marijuana plants while crossing a corn field.

Seeing an opportunity to earn some money and being careful not to be seen, the insured took 10 or 12 plants and brought them to the basement of her house. Notwithstanding her spouse’s disapproval, and after having tried unsuccessfully to sell them to four or five friends or relatives, she kept the plants and dried them out while waiting for someone to purchase them. The plants were suspended from cords installed by the insured and her spouse in the basement. The insured worked many hours cutting the plants’ heads and putting them in bags. According to the majority of the judges, the most probative element of evidence establishes that the value of the marijuana exceeded 20 000.00$.

As for the exclusion clause, it reads as follows:

There are certain properties that WE DO NOT INSURE IN ANY CASE:

a) Constructions:

i) […]

ii) occupied by the Insured, used in whole or in part, for illegal or criminal activities.

[Our translation]  

  1. THE SUPERIOR COURT DECISION

From the outset, the judge concludes that, based on the expertise reports submitted by the parties, the cause of the fire was not related to the presence of marijuana. He also holds that the insured had no prior criminal record or any solvency problems.

As he analyses the scope and application of the exclusion, the judge concludes that the evidence is not convincing as to the insured’s definite intention of trafficking drugs, nor whether she had actually engaged in drug trafficking.

This conclusion leads him to consider that the focal point of the insurer’s position is based upon the undisclosed material change in risk, both material and moral, during the coverage period. After examining the evidence and applicable principles, the judge does not draw a conclusion on this argument under the circumstances, and rather relies upon article 2477 C.C.Q. and the necessity for the insurer to give a written notice 15 days prior to the termination of the policy.

He concludes that the evidence establishes that the insured only had possession of the marijuana since the beginning of October, and as such, on the day of the fire, October 13th, 2005, the 15 day period has not yet expired. He therefore dismisses the insurer’s defence and allows the insured’s action, granting the latter 71,300.00$ for the building and 51,682.00$ for the moveable property, including indirect damages of 6,575.92$.

  1. THE COURT OF APPEAL DECISION
  1. The Decision of the Majority of the Court

On January 12th, 2011, the Court of Appeal quashed the Superior Court judgment. Justices Marc Beauregard and Benoît Morin conclude that the first instance judge committed a manifest error in his appreciation of the facts when he concluded that the evidence did not establish, on a balance of probabilities, that the insured had the intention of drug trafficking, or that she had actually engaged in drug trafficking.

Following a review of the insured’s testimony, the majority of the Court concludes that, not only was the insured in possession of marijuana with the intention of selling it, but also, that she had, indeed, proceeded with trafficking it.

Justice Beauregard cited excerpts of the insured’s testimony which demonstrate that when she brought the marijuana plants to her house, the insured had the intention of earning some money. According to the majority of the Court, by bringing home the marijuana plants, the insured henceforth committed a criminal act, being possession of marijuana with the intention of trafficking it.

Further, the insured’s testimony demonstrates that she kept the plants and dried them for a few days, always with the intention of selling the drugs, thereby establishing possession for the purpose of trafficking.

Moreover, not only was the insured in possession of marijuana for the purpose of trafficking, she had actually trafficked this drug, since she admitted having tried to sell it to four or five friends and relatives.

On the other hand, the majority of the Court concludes that the first instance judge erred in law by concluding there was an absence of “definite” intention by the insured because the fire occurred before she succeeded in actually selling the drug. In their opinion, the nature of the use of the house at the time of the fire is relevant, rather than what would have happened had the fire not occurred.

In thus concluding that the insured was involved in a criminal activity, the Court of Appeal then pronounces upon the applicability of the exclusion in the circumstances of this case.

The Court bases its analysis upon the following considerations:

  • The wording of the clause does not exclude coverage solely if the loss is caused by a criminal activity. It is therefore not relevant to determine whether or not the fire resulted from the possession of marijuana.
  • The clause does not require that a construction be used in whole for a criminal activity, as long as it is used in part for such purposes. In this case, the basement was used to dry the plants and the insured had worked in the basement many hours to put them into bags.
  • The insurer’s burden is to demonstrate, on a balance of probabilities, a criminal activity, regardless of the nature or outcome of the criminal proceedings.
  • The insurer’s defence cannot be dismissed due to a disproportion between the seriousness of the crime and the prejudice sustained by the insured.  

In light of this analysis, the majority of the Court concludes that the exclusion must be applied.

The majority of the Court does not believe it was necessary to examine the argument regarding the material change in risk, in light of their conclusion with regard to the applicability of the exclusion. The majority of the Court added, however, that it is clear that an insurer informed of such material change in risk could have resiliated the policy immediately, without being bound by the 15 days period foreseen at article 2477 C.c.Q.

  1. The Dissent

Justice Nicole Duval-Hesler specifies from the outset that the case did not involve the cultivation of marijuana in the insured’s residence and that the fire was in no way imputable to such cultivation.

She maintains the version of the facts as adopted by the first instance judge, insisting that the role of the Court of Appeal is not to replace the analysis of the evidence by the first instance judge with the Court of Appeal’s own analysis, and that, no manifest errors were established in this analysis of this case.

She therefore maintains that the first instance judge accepted the insured’s testimony to the effect that she never reached a final decision regarding the marijuana, that is, whether she would keep it for herself or possibly get rid of it for a fee, if she found a buyer. She recounts the insured’s testimony according to which the insured pleaded guilty to the charge of simple possession, which is an offence punishable on summary conviction, and that she very candidly declared to have been “stupid” and do not knowing what went through her mind.

Rather than considering the insured’s actions as criminal, the dissenting judge qualified them as careless. According to her, invalidating the policy the insured had held for many years would be a costly consequence considering that the fire is not related to the insured’s carelessness.

Further, the dissenting judge refuses to consider that there was a material change in risk, upholding the reasons advanced by the first instance judge to the effect that the aggravation of the material risk must target elements concerning the object of the insurance itself, such as the state and the situation of the building with respect to fire insurance.

The judge continues her reasoning by drawing an analogy with certain decisions regarding the application of exclusionary clauses, sometimes analogous, other times different, and seems to conclude as to the necessity of a causal link between the insured’s participation in a crime and the loss in order for the insurer to be liberated from its contractual obligation.

She finally concludes that the exclusionary clause is not applicable and proposes the dismissal of the appeal.

  1. THE AUTHOR’S COMMENT

The decision discussed above is based largely upon two major questions:

  • the interpretation and application of the wording of the exclusionary clause;
  • the qualification of the insured’s activities.  

As for the first question, the Court underlines that the wording of the exclusion does not exclude coverage solely if the loss is caused by a criminal activity. In the Court’s opinion, the exclusion does not concern the risk, but rather the residence itself when used for criminal activities.

It is for that reason, and in view of the wording of the clause, that the Court of Appeal states that it is not relevant to determine whether or not the fire resulted from the possession of marijuana.

The Court’s conclusion concerning the absence of the necessity of a causality between the fire and the criminal activity engaged in by the insured will not necessarily be applicable to every other exclusionary clause of the same type. The wording of each exclusionary clause must be the subject of a specific analysis allowing to conclude as to the burden of proof incumbent to the insurer.

For example, the expression “following the” has been interpreted as indicating the necessity that the loss result from the criminal act referred to in the exclusion. On the contrary, where the expression “in the course of” has been used, it has been concluded that the insurer did not need to establish a causal relation. As such, an insurer who wishes to plead the application of an exclusionary clause of this type will therefore have to focus on the wording of the clause, and refer to the Courts’ decisions in which similar clauses have been interpreted and applied.

As for the second question, according to the factual scenario wherein the insured possessed marijuana with the intention of reselling it and used the basement of her residence in order to practice this activity, the majority of the Court has chosen a literal application of the exclusion.

Further, it appears from the judgment that the value of the marijuana was one of the elements considered by the majority of the judges in their reasoning, which led them to conclude that the insured’s residence was used for the practice of a criminal activity:

“[…], the Respondent, with the help of her spouse, installed cords to which she had suspended the plants in order to dry them, and she worked many hours to cut the heads of the plants and put them into bags. Incidentally, it is not a case where the Respondent is in possession of a rather negligible amount of marijuana for her personal use. According to the most probative element of evidence, the value of the marijuana exceeded 20 000$.

It is therefore rather difficult to conclude that the Appellant was wrong to plead that the Respondent’s house was literally and actually used for a criminal activity.” [Our translation]

As for the dissenting judge, the quantity of marijuana was overvalued:

[…] However, one must take into account the fact that the plants, though dried before the fire, were soaked in water following the intervention of the firefighters in order to fight the fire. It is therefore obvious that the weight of the drug when dry would have given an inferior result. Nevertheless, the Appellant bases itself partially on this weight to argue that the Respondent used the insured premises for criminal purposes.

In light of the facts introduced in evidence, we will refrain from making comments.“ [Our translation]

We must bear in mind the fact that the dissenting judge qualified the insured’s behavior as carelessness, rather than as criminal.

We can arguably wonder what the outcome of this case would have been, had the value and quantity of the drug been substantially less.

CONCLUSION

This decision is more of a factual case, and does not necessary establish new principles of law. However, it may guide insurers in their interpretation and application of exclusions with similar wording.

We also note that this decision discards any notion of equity and subjective consideration regarding the prejudice sustained by the insured in the application of the exclusion. In fact, even though exclusion clauses must be interpreted strictly rather than liberally, the Court concluded that the disproportion between the seriousness of the crime and the vast prejudice sustained by the insured could not be considered as a reason to set aside the application of the exclusion. This extract of the judgment of the Court of Appeal will likely be cited many times by insurers in contexts likely to resort to considerations of equity.