The Insured Is Not Always Whom You Think

March 2023 – The concept of insurable interest[1] provides an answer to the two (2) essential questions that an insurer must answer before settling a claim: 1) determining the object of the insurance coverage and 2) identifying the insured. The answers to these two (2) questions do not always automatically come to light but are intimately linked together to the point of being often intertwined. The answer to the first often leads to answering the second. However, the person indemnified by the insurer is not necessarily the insured and may be a third party having no ownership of the damaged goods.

Expansion of the Notion of Insurable Interest

In 1987, the Supreme Court of Canada, in the Kosmopoulos[2] case, extended the limits governing the notion of insurable interest in common law by deciding that it is to be construed broadly and liberally. According to the highest Court, the existence of a link between a property and a person can make it possible to conclude that his interest is insurable, suffice it to demonstrate the existence of an economic link based on the “moral certainty”[3] of an advantage the existence of the property and prejudice from its destruction.

Application of Insurable Interest in Quebec

In Quebec, since the Kosmopoulos judgment, examples on the interpretation of insurable interest have multiplied, always in the backdrop, the relationship, in the broader sense, between the damaged property and the prejudice caused to the insured or to the person claiming the status of insured.

Recently, the Superior Court[4] ruled on the concept of insurable interest in the Clickimprimerie case. A fire had partially destroyed the building belonging to 9208-9499 Québec Inc. (“9208”) and content belonging to 9228-4280 Québec Inc. (“9228”) who operated a printing business. The two (2) entities were held by a single shareholder.

The insurer had issued property insurance coverage to 9208 for the building and its content. The insurer’s refusal to indemnify 9208 was based on the absence of insurable interest of its insured. The content belonged to a third party, in this case 9228, whereas the building had been paid for, maintained and used only by 9228.

Regarding the building, the title deed created a simple presumption of insurable interest in favour of 9208. Such a presumption that the insurer was unable to reject, according to the Court. The fact that all the expenses of the insured’s building were paid for by a third party, 9228, does not cause the insured 9208 to lose its economic and insurable interests conferred by the title deed and the hypothec, even if, in fact, it is 9228 who behaved like the true “owner” of the building.

Regarding the content, the Court held that 9228 was the owner of the equipment and inventory intended for the operation of its business, which made it possible to generate the income necessary for the expenses of the building. For the Court, 9208, without being the owner, had a clear economic interest in the property of 9228. The relationship between the two (2) entities was marked by economic interdependence.

Here are some other examples taken from the most recent case law on the notion of insurable interest:

  • The purchaser of goods in instalment sales has an insurable interest in the goods, even if he never owned them, because he remains liable to pay the balance of the sale price of the destroyed goods[5].
  • The co-debtor of a hypothec obligation has an insurable interest in the encumbered immovable, which is not owned by him and in which he no longer lives[6].
  • The undivided co-owner of an immovable has an insurable interest in the entirety of the property at its full value and not only in its undivided share, since his damage results from the loss of the property, as a whole, and not from a portion of it[7].
  • On the other hand, a building owner, in its capacity as nominee, has no insurable interest in the building, even if he is the named insured under the insurance policy and the debtor of the hypothecary loan. In fact, he suffered no financial loss from the disaster, because he could not really exercise his right of ownership under the counter-letter and the reimbursement of the hypothec was made by a third party[8].
  • The undivided co-owner of a boat, which is neither the lessee nor the insured named in the insurance policy, has no insurable interest, therefore no legal interest to bring an action for insurance compensation against the property insurer[9].

The Insurable Interest in Construction Insurance

The field of construction insurance has not benefited from much judicial clarifications on the extent of the notion of insurable interest. The importance of exploring the notion in greater details, to define its scope and limits, is particularly significant for builder’s risk policies, since this is an industry where complex disputes are numerous, involving several stakeholders and often generating very high claims. This is all the more relevant, because the purpose of a builder’s risk insurance is to quickly compensate the insured, to promote the completion of the construction project in a timely manner and to avoid legal proceedings.

In 2014, the Quebec Court of Appeal rendered its judgment in the Théberge & Belley[10] case on an insurance guarantee covering the contractor’s equipment. Through the decision penned by the Honourable Alicia Soldevila (ad hoc judge), the Court applied the interpretation criteria specific to builder’s risk policies, mutatis mutandis, to the insurance guarantee covering the contractors’ equipment. The criteria are: 1) the role of this type of insurance product in the construction industry, 2) the purpose of coverage for property in connection with the construction project, 3) the benefit of coverage applicable to third parties and 4) the implicit waiver by the insurer of its right of subrogation against those working on the site.

More specifically, the notion of insurable interest revealed all its usefulness in the Théberge & Belley decision, in order to determine whether the insured named in the guarantee covering the contractors’ equipment should receive an indemnity for the damage to property which he did not own, but over which he exercised “power of direction or management”. Pursuing its reasoning, the Court recognized that the subcontractors, then owners of the damaged goods, were unnamed insured parties to this guarantee.

Ultimately, the notion of insurable interest enabled the Court to conclude that the insurer had waived its subrogation right against the subcontractors, even without express mention of this waiver of the construction and subcontracting contracts.

In 2015, the Court of Appeal, having to decide on an Exception to Dismiss, analyzed again the concept of insurable interest in the proceedings instituted following the fire at the Palais Montcalm in Quebec City[11]. The notion proved useful to determine whether the pre-existing building was covered by the insurance coverage or only that portion forming part of the renovation project. The Court refused to apply the only decision on the subject at the time, Medicine Hat, from the Alberta Court of Appeal[12], preferring to refer the case in order to benefit from a complete trial and hearing. Following the Medicine Hat case, two (2) Ontario Superior Court decisions and one (1) Newfoundland and Labrador Court of Appeal decision were rendered, contradicting the solution developed in Medicine Hat.

First, in the Osler Health case, the Ontario Superior Court determined that the pre-existing structure was not covered by a builder’s risk insurance[13]. The Court pointed out that if the builder’s risk insurance was really intended to cover the pre-existing building, in addition to that portion of the building being worked on, the costs associated with this type of insurance would have been higher[14]. Also, the Court indicated that the fact of having an insurable interest in a property could not be used to determine the scope of coverage of the insurance policy[15]. It is rather necessary to refer to the text of the insurance contract itself to determine the scope of coverage[16].

Then, in the Viking Fire decision, the Newfoundland and Labrador Court of Appeal determined that limiting the scope of a builder’s risk insurance is more consistent with the common intention of the parties and their reasonable expectations in relation to the content and coverage of the insurance contract[17]. The Court considered that the interpretation of the builder’s risk policy made in Osler Health was better suited for this type of insurance and, thus, rejected the interpretation made in Medicine Hat[18]

Finally, in the Pre-Eng case, the Ontario Superior Court upheld the limited scope of the builder’s risk insurance by rejecting the conclusions established in Medicine Hat and adopted the principles established in Osler Health[19].

In Conclusion

The beneficiary of a property insurance indemnity is not automatically the insured, whether named or unnamed. It is the analysis of the notion of insurable interest in the damaged property that must guide the identification of the beneficiary. Situations of economic interdependence between companies or a complex corporate structure should alert insurance law practitioners to this issue. As the decisions summarized above demonstrate, the concept of insurable interest does not prevent a third party, suffering “direct and immediate”[20] damage caused by the loss of property, from being the true creditor of the obligation to indemnify.

One thing is certain, the notion of insurable interest will continue to be a topic of discussion and receive considerable attention, since insurers could find themselves compensating third parties based on property insurance or denying coverage to the named insured without insurable interest.

[1] Art. 2481 and 2484 C.c.Q.
[2] Kosmopoulos v. Constitution Insurance Co., [1987] 1 R.C.S. 2. (en appel de la Cour d’appel de l’Ontario).
[3] Kosmopoulos v. Constitution Insurance Co., [1987] 1 R.C.S. 2, paras 42-43.
[4] 9208-9499 Québec inc. c. Royal & Sun Alliance du Canada, 2023 QCCS 62.
[5] 9111-1963 Québec Inc. c. Compagnie D’Assurance Temple Inc., 2010 CanLII 100748 (QC CS).
[6] St-Laurent c. Promutuel de l’Est, société mutuelle d’assurances générales, 2012 QCCS 1353.
[7] Cohen c. Lloyd’s Underwriters, 2019 QCCS 826.
[8] El-Ferekh c. Intact, compagnie d’assurances, 2017 QCCS 4077.
[9] Larochelle c. Royal & Sun Alliance du Canada, société d’assurances, 2020 QCCQ 2786.
[10] Intact, compagnie d’assurances c. Théberge & Belley (1985) inc., 2014 QCCA 787 (Rochette, Dutil, jj.c.a, Soldevila, ad hoc).
[11] Québec (Ville de) c. CFG Construction inc., 2015 QCCA 362.
[12] Medicine Hat College v. Starks Plumbing & Heating Ltd., 2007 ABQB 691.
[13] William Osler Health Center v. Compass Construction Resources Ltd., 2015 ONSC 3959, par. 38.
[14] Idem, par. 39.
[15] Idem, par. 34 et 43.
[16] Idem, par. 38 à 44.
[17] The Dominion of Canada General Insurance Company v. Viking Fire Protection Inc., 2019 NLCA 13, par. 169.
[18] Idem, par. 168 et 193.
[19] Pre-Eng v. Intact, 2019 ONSC 1700, par. 23.
[20] Art. 2481 C.C.Q.