Canada: New Application Of "Prospective Subrogation" Of An Insurer In Quebec

In a recent ruling by the Quebec Superior Court, Justice Martin Bureau rejected a motion to dismiss filed by a defendant-in-warranty, Swiderski Engineering Inc. (Swiderski), in connection with a complex dispute involving several defendants and defendants-in-warranty.1

The City of Sherbrooke, principal plaintiff in the case, is suing Norcan Hydraulic Turbine Inc. (Norcan) and its liability insurer, Lloyd's Underwriters (Lloyd's), and two other defendants in relation to the breakdown and preventive shutdown of two turbines at the Rock Forest hydroelectric plant. The plaintiff contends that Norcan, as the entity that supplied the turbines when they were purchased in the late 1990s, is liable for an alleged breakdown of turbine no. 1 and the preventive shutdown of turbine no. 2 after the breakdown.

Shortly after the proceedings were taken, Norcan filed four motions to institute proceedings against four of its subcontractors and/or suppliers of services for the design and construction of the turbines. Norcan's liability insurer, Lloyd's, also brought four warranty actions against the same parties, despite having filed a defence alleging that the claim against Norcan is not covered by the insurance.

One of the defendants-in-warranty, Swiderski, filed a motion to dismiss Lloyd's warranty action on the grounds that Lloyd's could not sue Norcan's subcontractors because it had no legal relationship to them. Swiderski went on to argue that there was no connection between the suit brought by the principal plaintiff against Lloyd's and the one brought by Lloyd's against Swiderski. Justice Bureau rejected Swiderski's motion to dismiss.

Critical to Swiderski's argument was the question of whether Lloyds had a sufficient legal relationship to Swiderski to take its own proceedings. It submitted that an anticipatory recursory action could not be taken against it because no form of solidarity exists between Lloyd's and Swiderski and no legal subrogation had taken place since Lloyd's was alleging that there was no coverage. However, Lloyd's defence clearly indicated that it had decided to take up Norcan's defence, subject to its right to deny coverage with respect to its obligation to pay any amounts claimed by the City of Sherbrooke.

Justice Bureau saw the payment of Norcan's defence costs by Lloyd's as payment of an "indemnity" within the meaning of article 2474 of the Civil Code of Québec,2 which was sufficient to subrogate Lloyd's to certain rights of Norcan against Swiderski. Justice Bureau rejected Swiderski's argument that payment of Norcan's defence costs did not amount to an indemnity because it would be theoretically impossible for Lloyd's to claim from Swiderski the defence costs that it incurred in the case. Rather, Justice Bureau acknowledged that there was a purpose, and even a necessity, to LIoyd's proceedings, both in regard to the defence costs paid by it and even in anticipation of an award ultimately being issued against it in the principal action brought by the principal plaintiff. In doing so, Justice Bureau reiterated the principles set out in certain decisions of the Quebec Court of Appeal which had characterized the payment of defence costs as indemnities, even though the situation in those cases was not the same as the situation in this case.3

Justice Bureau has now affirmed these principles in a ruling which, to our knowledge, is one of the first to allow an insurer sued directly to call a third party in warranty even before a decision is issued on the applicability of the insurance coverage. It is a decision that, in our view, is entirely consistent with the spirit of articles 4.1 and 4.2 of the Code of Civil Procedure4 and with the principles of prudent case management, proportionality of proceedings and potential legal costs resulting therefrom. There can be no doubt that the possibility for an insurer to commence its own proceedings against third parties who may turn out to be liable will avoid duplication of proceedings and serve the interests of justice better in the long run.

Norton Rose Fulbright Canada is representing Lloyd's in this matter.


1 Sherbrooke (Ville de) c Norcan Hydraulic Turbine Inc., 2013 QCCS 2465.

2 Civil Code of Québec, 1991, c 64.

3 Compagnie d'assurances Temple c. Compagnie d'assurances ING, 2007 QCCA 82; Commerce and Industry Insurance Co. c. Montreal (City of), [1993] R.J.Q 475; Kingsway General Insurance Co. c. Duvernay Plomberie et chauffage inc., 2009 QCCA 926; Promutuel Portneuf-Champlain, société mutuelle d'assurances générales c. Promutuel Lévisienne-Orléans, société mutuelle d'assurances générales, 2009 QCCA 1554.

4 Code of Civil Procedure, CQLR, c C-25.

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