The pyrrhotite case: be sure to raise coverage issues at the first opportunity

We wish to highlight the recent judgments of the Superior Court and the Court of Appeal in SNC-Lavalin inc. v. Souscripteurs du Lloyds

The pyrrhotite case continues to garner much attention in Quebec. Readers will recall that in the “main judgment”, the Court of Appeal confirmed the “main trial judgment” in large part and found SNC-Lavalin Inc. and Alain Blanchette liable for 70% of the damages caused by the pyrrhotite (an iron sulphide prone to cause undesirable chemical reactions) in hundreds of buildings. It should be noted that in the “main judgment”, the Court of Appeal reversed the trial judgment on the issue of the erosion of the insurance limits by defence costs incurred in a jurisdiction where that is permitted. This was discussed in our previous articles in this series.

We wish to highlight the recent judgments of the Superior Court and the Court of Appeal in SNC-Lavalin inc. v. Souscripteurs du Lloyds concerning an application presented to the Court by SNC to facilitate the execution of an order rendered in the main trial judgment. Order [2295] required the professional liability insurers to apportion the damages in connection with the liability of SNC. The insurers opposed SNC’s application seeking reimbursement of approximately CAN$140 million.

In May 2021, the Court of Appeal confirmed the reasoning applied by the Superior Court in its judgment rendered on October 16, 2020, by Éric Hardy, J. in favour of SNC.

Res judicata

On appeal, the insurers argued that the trial judge erred in concluding that there was res judicata on the insurance issues. The Court of Appeal reminded the insurers, as the trial judge had done, that they should have raised the grounds in support of a denial of coverage for certain claims during the trial on the merits in 2012–2013. The argument should have been made earlier, and the presumption of res judicata therefore applied. The Court noted that the interpretation of the insurance policy advanced by the insurers was inconsistent with the interpretation of the policy in the main trial judgment and the Court of Appeal’s main judgment.

The Court of Appeal found that the principle of res judicata was indeed applicable. However, for the same reasons as the trial judge, the Court also addressed the second issue – the subsidiary ground submitted by the insurers.

“Claims made and reported” policy

The insurers were unsuccessful before the Court of Appeal in arguing that the trial judge erred in his interpretation of the reference policy by failing to make the necessary distinctions between the concepts of claims made and claims reported.

At trial, the Court interpreted the insurance policy. Based on the principles of policy interpretation recognized in the case law, Hardy, J. found that the parties had agreed in their insurance contract that to be covered, the claim of an injured third person had to be made to SNC and reported to the insurers within the same policy period. The policy provisions in question stated that claims had to be reported to the Claim Officer, an SNC employee and the mandatary of both parties. The report to the Claim Officer constituted the report to the insurers, as the Claim Officer was under the obligation to subsequently report it to the insurers within the required time. The Court rejected the argument submitted by the insurers that claims had to be made to SNC and reported directly to the insurers within the same policy period. The Court did not accept the proposition that the fact that a claim was made in one policy period but reported in the subsequent period was sufficient on its own to deprive the insured of its right to indemnification. It is important to note, however, that the wording of the policy in question was “manuscript” and contained specific terms concerning the handling of claims by the insured. Accordingly, the Court’s interpretation cannot be applied generally to all “claims made and reported” policies.

The Court of Appeal explained that the trial judge identified an ambiguity in the reference policy, that is, an inconsistency between the terms used in clause 1.1 and in clauses 7 and 8. It noted that certain terms were used interchangeably in the policy, which added to the inconsistency. The Court of Appeal was of the view that the trial judge’s interpretation of the policy was both rational and consistent with its terms.

Terms of execution of the order

Certain issues that the Superior Court addressed in its judgment in first instance were not appealed. Recall that the court of first instance refused to subject the insurers’ payment to conditions despite the pending applications for leave to appeal to the Supreme Court. Hardy, J. also noted that the Superior Court does not have jurisdiction to stay the execution of a judgment of the Court of Appeal, and because its judgment is accessory to the main trial judgment, it is also executory notwithstanding appeal.

Key takeaway

This judgment highlights the importance for insurers to raise coverage issues, even subsidiary issues, at the first opportunity. Indeed, both the Court of Appeal and the Superior Court were of the view that there was res judicata, as the main judgment had decided the insurance coverage issues in the pyrrhotite case. The insurers were therefore barred from raising coverage issues at the stage of a debate on execution.