Insurance & Reinsurance
In this fifth article of our series on the Court of Appeal's recent judgment in Terratech v. Deguise , Prachi Shah and Laurent Lacas examine the Court's refusal to apply liability insurance policy provisions providing that defence costs can erode limits to the detriment of Quebec claimants.
This matter is nicknamed the "Pyrrhotite Case" after an iron sulphide mineral which can cause undesirable chemical reactions when present in concrete stone aggregate used in building construction. Issues with pyrrhotite in buildings in the area of Trois-Rivières, Quebec gave rise to three waves of litigation involving sellers, general contractors, concrete producers, a company operating a quarry, a geologist, an engineering firm, and of course, various insurance companies that had issued insurance policies to the allegedly liable parties. The first wave of litigation  grouped together over 880 proceedings concerning 832 properties, including 446 single-family homes, 312 semi-detached homes, 56 multi-unit buildings and 18 commercial buildings. In ruling on the proceedings in the first wave, the Superior Court rendered 69 judgments. The Court of Appeal recently rendered its decision on the appeal of the first wave, while the second and third waves remain pending in first instance.
As the author of numerous reports regarding the quality of the concrete stone aggregate used by the quarries, Terratech (now SNC-Lavalin Environnement) ("SNC") was a key actor which was alleged to be liable for the negligent interpretation of data in the reports. The issue of the erosion of SNC's E&O insurance tower arose in light of a previous claim made and managed in Alberta during the 2009-2010 policy year. According to the policy wording, defence costs and claims expenses incurred in defending claims eroded policy limits when those claims were made outside of the province of Quebec in a jurisdiction which permitted erosion of limits by such payments. SNC and its insurers supported the application of the policy language, whereas the co-defendant contractors argued that it was against public order to erode policy limits by the payment of defence costs, even with respect to claims made outside of Quebec.
At trial Judge Michel Richard of the Quebec Superior Court determined that SNC and its insurers did not intend to submit all the claims made under SNC's worldwide insurance policies to Quebec law and the requirements of article 2503 of the Civil Code of Quebec ("CCQ"). Article 2503 CCQ provides that "legal costs and expenses resulting from actions against the insured, including those of the defence, and interest on the proceeds of the insurance are borne by the insurer over and above the proceedings of the insurance."
Since Alberta law allows for the erosion of insurance policies through the payment of defence costs and claims expenses, Judge Richard allowed for these to erode the SNC tower with respect to the Alberta claim, and found that this erosion was opposable to third parties, including the plaintiffs and co-defendants.
The Quebec Court of Appeal reframed the issue in two different ways. First, it analysed the issue through the lens of the plaintiffs' right to the entire policy limits as provided by articles 2500 (which provides that "the proceeds of the insurance are applied exclusively to the payment of injured third persons") and 2503 CCQ. Second, it made a distinction between the law applicable to the claims and the law applicable to the policy itself, as well as between contractual provisions regarding erosion in Quebec matters and erosion in matters outside Quebec.
The Court determined that once the criteria of article 3119 CCQ were met for Quebec law to apply to the insurance policies in the tower, which was the case here, Alberta law could not apply to the policies. As article 3119 CCQ applies "notwithstanding any agreement to the contrary", the policy terms could not circumvent the application of Quebec law to the policies.
The Court then turned to the public order provision of article 2414 CCQ and particularly its 2nd paragraph, which provides that any liability insurance provision which derogates from the CCQ rules protecting the rights of injured third persons is null. The Court noted that the Quebec plaintiffs are injured third persons who benefit from the rights conferred by article 2500 CCQ.
As a result, the plaintiffs were entitled to have the 2009-2010 policy limits eroded only by indemnity payments in the settlement of the Alberta claims. The Court concluded that there could be no erosion of the policy limits available to the plaintiffs by defence costs and claims expenses.
Finally, careful readers will have noted that the Court proposes the interesting possibility of having two calculations of erosion in certain circumstances: one applicable to Quebec claimants and another to claimants from jurisdictions where defence costs or claim expenses can erode limits.
An application for leave to appeal to the Supreme Court of Canada is still a possibility.