March 2022 – Sécurité Nationale compagnie d’assurance c. Bel Bro inc., 2022 QCCS 723 (Granosik, j.)

The Superior Court of Québec was asked to rule upon the validity of the subrogatory proceedings an insurer filed against a third party following the payment of insurance proceeds to insured parties (in the context of an out-of-court settlement involving the latter and the insurer), whereas the insurance policy contained coverage exclusions with respect to a vacant building.

In 2007, a general contractor and real estate promoter by the name of Bel Bro Inc. (hereinafter, « Bro ») oversaw the construction of a series of triplexes during which it retained the services of a subcontractor known as Plomberie Yves Goulet Inc. (hereinafter, « Goulet »). The latter was, among other things, in charge of connecting bathroom facilities to the plumbing network. Throughout the fulfillment of its assignment, Goulet purchased all the plumbing parts it needed from a distributor by the name of Sanbec Canada Inc. (hereinafter, « Sanbec »).

Bro sold a triplex to buyers insured by Sécurité Nationale, compagnie d’assurance (hereinafter, « Sécurité Nationale ») on December 12, 2007. All three (3) units were rented until August 1^st, 2011 (date on which the last remaining tenant vacated the premises). At the time, the insured parties had planned on carrying out renovations aimed at converting the three (3) rental units into three (3) condominium units. Except for the insured parties themselves (who performed customary maintenance work), no one visited the building after August 1^st, 2011.

On August 1^st, 2012, the rupture of a toilet’s connection to its water intake hose caused substantial water damage on the third (3^rd) floor of the triplex. From the outset, Sécurité Nationale refused to indemnify the insured parties on the ground that coverage exclusions prevented the compensation of water damage occurring in a building left « vacant » (within the meaning ascribed to that word in the insurance contract). The insured parties filed legal proceedings which were eventually settled out of court by means of the signature and execution of a « Release, discharge, and transaction » form.

Sécurité Nationale then filed a civil suit of its own against Bro. Faced with subrogatory proceedings, the latter called Goulet (the plumbing subcontractor) in warranty, who, in turn, called Sanbec (the distributor) in warranty.

Absence of legal subrogation

First and foremost, the Superior Court of Québec pondered the validity of a legal subrogation based on the provisions of section 2474 of the Civil code of Québec. On that matter, Sécurité Nationale argued that automatic legal subrogation had been triggered simply because an indemnity had been paid to the insured parties on account of the transaction, regardless of whether or not the insurer was forced to indemnify under the insurance contract. In other words, the insurer pleaded that any payment made wilfully in favor of an insured party triggered legal subrogation notwithstanding the fact that the insurer had no further duty to compensate or that coverage exclusions may apply.

Relying on a combined interpretation of two (2) decisions rendered by the Court of Appeal^[1], Sécurité Nationale argued that it had, based on the mere occurrence of a loss, the right to invoke « acquired subrogation ». According to the case law, the insurer who has accepted its obligation to indemnify in the future may, on that basis alone, file subrogatory proceedings against the third parties it holds responsible up to the amount of compensation it eventually paid.  Even though the insurer being sued by the insured party refuses to compensate them (says the Court of Appeal), it would still be able to exercise potential subrogation against the third party it holds responsible (whether by means of compelled intervention or a call in warranty),

In response to Sécurité Nationale’s arguments, Justice Lukasz Granosik invoked the provisions of section 1657 of the Civil code of Québec which allow the responsible third party to challenge the validity of the subrogation – even though compensation has already been paid. In fact, two (2) conditions must be satisfied in order for legal subrogation to be considered valid, namely (1) the payment of an indemnity to the insured party, and (2) a contractual duty and obligation to indemnify.

Having interpreted the insurance contract, the Court concluded that the triplex was (at least from a legal standpoint) « vacant » at the time the loss occurred, since nobody actually resided in it. The Court added that the conversion of the rental units into condominium units (and the subsequent sale of such condominium units) remained purely hypothetical without any evidence of planned short-term occupancy.

Contractual subrogation was not explicitly stipulated

On another note, Sécurité Nationale relied on the « Release, discharge, and transaction » form signed and executed by the insured parties in order to suggest that it had acquired valid and concrete rights against Bro (the general contractor and promoter) up to the amount of compensation it had wilfully paid to the insured parties.

Although the « Release, discharge, and transaction » form clearly frees the insurer from any further liability, the Court did not find in its wording any explicit intent^[2] from the insured parties to transfer their rights, recourses, and remedies in favor of Sécurité Nationale.

What we must remember

L’assureur n’avait pas à indemniser ses assurés, puisque l’exclusion de l’immeuble vacant s’appliquait.

Since the coverage exclusion pertaining to vacant buildings applied, the insurer did not have to compensate the insured parties on account of the loss, Consequently, the wilful payment of an indemnity to the insured parties did not, in and of itself, operate legal subrogation in favor of the insurer. In any event, the wording of the « Release, discharge, and transaction » form did not allow the Court to conclude that the insurer had been contractually (and explicitly) subrogated in the insured parties’ rights.

Nothing in the evidence submitted to the Superior Court allows one to understand why Sécurité Nationale ended up paying most of the amount claimed by the insured parties after having denied coverage altogether.

This ruling by the Superior Court of Québec will surely help insurers delineate the extent and scope of their subrogation rights.

From a strictly legal standpoint, the insurer who is being sued by an insured party in compensation for a loss, already has a right of « acquired subrogation » against the third party it holds responsible. In the event where the insurer elects to compensate the insured party in the context of a settlement, it would be wise to protect its contractual right to subrogation by inserting into the wording of the release and discharge form a clause according to which the insured party explicitly subrogates the insurer the moment ambiguity arises as to coverage. In fact, one assumes that certain provisions found in claims forms pertaining to partial and complete compensation (that insured parties are required to sign) could benefit from a thorough review based on the ruling made by the Superior Court in this case.

Last but least, keep in mind that contractual subrogation will only be recognized as valid if it was granted by the creditor at the moment they received and accepted payment.^[3]

Should you ever request it, we shall gladly provide additional insight on this decision.

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^[1]Kingsway General Insurance Co. c. Duvernay Plomberie et chauffage inc., 2009 QCCA 926 (Bich, j.); Commerce and Industry Insurance Company c. Montréal (City), 1993 CanLII 3536 (QC CA) (Chevalier, j.)
^[2] Section 1653 of the Civil code of Québec
^[3] Section 1654 of the Civil code of Québec