The pyrrhotite case: The complications of tower insurance

As part of our series on the Court of Appeal's landmark pyrrhotite ruling [1] in Deguise v. Montminy , Catherine Tyndale and William Plante-Bischoff analyze the coverage issues involving SNC's professional liability insurance.

You can read our primer on the Court of Appeal's conclusions regarding the liability of the various defendants targeted in the lawsuit here.

In upholding the trial judge's ruling regarding SNC Lavalin's liability, the Court of Appeal had to weigh in on a range of coverage issues involving the engineering firm's professional liability insurers. The reader will recall that SNC's geologist André Blanchette had vouched in his reports for the problematic aggregate in the concrete used in the construction of the damaged foundations as fit for the purpose.

SNC's insurers were participants in an insurance tower of multiple layers, providing coverage sequentially as each underlying policy's limits were exhausted. All policies in the tower were issued on a "claims-made" basis triggering coverage, rather than on the basis of the date of the underlying error or omission.

The insurers first tried to limit their liability by arguing that only a single tower applied to the claims arising from Blanchette's errors – the one covering the 2009-2010 period of insurance – independently of when they were filed.  In support of their argument, they pointed to a clause in the reference policy which stated that claims arising from a single error, omission or negligent act were to be considered a single claim.  The Court of Appeal disagreed, holding that this clause's purpose was to aggregate claims made against SNC and reported to the insurers during a single period of insurance, to avoid applying multiple deductibles. The policy, however, did not allow for aggregation beyond that period of insurance.

Second, the insurers argued, relying on another clause of the reference policy, that claims arising from an occurrence that had already been reported should be deemed made during the subsistence of the policy applicable at the time of the notice. Again, the Court of Appeal disagreed, concluding that the purpose of that clause was to protect the insured in the event the insurer did not renew the policy, having received notice of an occurrence that could give rise to additional claims in future years. According to the Court, such clauses are to prevent gaps in coverage by obligating the insurer to cover all claims related to occurrences that have already been reported. In this case, SNC's insurers had renewed the policies after receiving notice of claims related to Mr. Blanchette's errors. There was no foreseeable gap in coverage, and SNC was entitled to receive coverage from the tower for the periods of insurance during which the claims were filed. According to the Court, it would have been different had the policies not been renewed, with a different insurer stepping in with subsequent coverage.

SNC’s insurers also tried to limit coverage to a single period of insurance by invoking a "prior knowledge" clause that excluded occurrences that had already been notified to insurers on any other prior policy, or that were previously known to the insured. The Court of Appeal again rejected the argument, holding that the clause was meant to exclude coverage for claims related to occurrences that had been notified to a different insurer, in order to prevent double indemnity. Since SNC's insurers had renewed their policies, they would have had to use more specific wording stating that the exclusion applied to matters notified under any prior policies, including those of which the current policy was a renewal or replacement, in order for the exclusion to operate as the insurers contended it should.

Retroactivity

One of SNC's excess insurers, Assurance ACE INA, noting that its policies included a retroactive date of March 31, 2006, contended that any claims arising from wrongful acts committed before that date were excluded under its policy. The Court disagreed, finding that all of SNC's excess insurers had issued their policies on a “follow form” basis and had therefore agreed to be bound by the terms of the reference policy of the primary insurer. Although the reference policy allowed the primary insurer to include a retroactive date in its declarations or schedule, it had not done so in this case. The practical effect of ACE's retroactive date would have been to exclude claims otherwise covered by the underlying policies. Because of that discrepancy, the Court held that the terms of the reference policy must prevail, and that ACE's retroactive date was invalid. It also emphasized the testimony of SNC's representative, who said he did not know of the retroactive date in ACE’s policy until after the litigation began, and that he would not have agreed to such a condition had he known about it at the time the policies were issued and renewed.

ACE also asked the Court to apportion payment among the insurers on risk according to article 469 of the Code of Civil Procedure, which requires the trial judge to determine each defendant’s share in the payment of damages, but only if the evidence permits. In this case, the Court of Appeal ruled, the trial judge lacked such evidence, and called for the issue to be resolved by the Superior Court at a later time, if necessary.

Choice of law and jurisdiction

Another of SNC's excess insurers, Zurich compagnie d'assurances SA, invoked a "choice of law" provision stating that its policy was governed by Ontario law. It therefore contended that Quebec law did not apply to its policy. The Court responded that under article 3119 CCQ, Quebec law applies to an insurance policy, notwithstanding any agreement to the contrary, if it covers a property or interest situated in Quebec or if a person residing in Quebec purchases it in Quebec, and if the policyholder applies for the insurance in Quebec or the insurer signs or delivers the policy in Quebec. The Court of Appeal found that SNC undeniably had an interest in the protection of its patrimony, which was located in Quebec since its head office was in Montreal. Zurich's policies, therefore, covered an interest situated in the province. It further found that the policy was delivered in Quebec, since Zurich instructed the Toronto broker to forward the policy to SNC's head office in Montreal, where its risk management operations were located. For these reasons, Zurich's governing law clause was inoperative.

Eroding limits

Finally, the building contractors and their insurers claimed that a portion of SNC's defence costs paid by its insurers in connection with an Alberta dispute during the 2009-2010 period of insurance ought not to be deducted from the limit of liability. Indeed, the trial judge had concluded that Quebec law could not nullify valid Alberta law that would  permit the erosion of the limit through the payment of defence costs. As a result, he reduced the 2009-2010 limit of liability by $11 million paid to defend the Alberta claims. The Court of Appeal overturned the trial judge's ruling on this point on the basis that, under article 3119 CCQ, Quebec law applies to the reference policy. Any derogation from the rules protecting the rights of third-party victims in Quebec is void by virtue of article 2414 CCQ, which allows injured third parties, such as the contractors, to invoke the nullity of any clause granting them fewer rights than does the CCQ. Moreover, under article 2500 CCQ, the proceeds of insurance must be applied exclusively to the payment of injured third parties. Finally, article 2503 CCQ prohibits the insurer from deducting legal costs and other claim related expenses from insurance proceeds available to third parties.

Ultimately, under Quebec law, SNC's insurers could deduct indemnity payments made to the claimants in Alberta from their insurance limit, but they could not deduct other amounts, such as legal costs and expenses paid in connection with those claims, to reduce the amount of insurance available to third-party victims in Quebec.

Interestingly, the Court took note that the reference policy contained a mechanism for eroding limits through payment of legal costs and other claim related expenses, provided it was compatible with Quebec law. This effectively meant that the deduction of such costs and expenses from insurance proceeds under Alberta law could be opposed to claimants in Alberta, but not to claimants in Quebec. In other words, the insurance proceeds available to claimants will vary depending on where the claims are brought.

Applying this line of reasoning, it is conceivable that a primary policy could be exhausted by paying out defence costs in a jurisdiction that allows it. Meanwhile, the full limit would remain available to claimants in Quebec, and the insurer would be compelled to pay defence costs in addition to the limit. That would render the triggering and operation of excess policies problematic.

[1] SNC-Lavalin inc. (Terratech inc. et SNC-Lavalin Environnement inc.) c. Deguise, 2020 QCCA 495