In this first article of our series on the Court of Appeal's recent judgment in Deguise c. Montminy, which ruled in favour of pyrrhotite victims, Laurent Lacas looks at the lessons to be drawn from the insurer's underwriting process, which risks overlooking "notorious" facts.
This case, named after an iron sulfide, which when present in concrete stone aggregate is likely to cause highly undesirable chemical reactions, gave rise to three waves of litigation involving sellers, general contractors, concrete producers, a company operating a quarry, a geologist, an engineering firm, and of course, various insurance companies that had contracted with one or another of the parties alleged to be liable. The first wave grouped together over 880 proceedings concerning 832 immovables, including 446 single-family homes, 312 semi-detached homes, 56 multi-unit buildings and 18 commercial buildings. In ruling on the proceedings in the first wave, the Superior Court rendered 69 judgments. The Court of Appeal recently rendered its decision on the appeal of the first wave, while the second and third waves remain pending in first instance.
On appeal, some of the insurers of the quarries and concrete producers took the position that the liability insurance policies were void ab initio. Their insureds had failed to disclose at the relevant time the known facts material to the risk related to the presence of pyrrhotite in the aggregate from the quarries and the concrete producers.
At the trial in the Superior Court, Judge Michel Richard noted that the insured is bound to represent to the insurer all the facts known to it that could materially influence the appraisal of the risk. The insurer cannot remain passive, however, and must take reasonable steps to inform itself of certain "notorious" risks. The concept of "notoriety" is to be assessed from the perspective of the reasonably competent underwriter.
Richard J. criticized the insurers of some of the quarries and concrete producers for not meeting that standard. First, the primary insurer did not follow its guidelines requiring consideration of the location of the risk (that is, the place where the quarries were located) and did not have sufficient discussions with its claims department, which had, however, encountered certain problems with pyrrhotite before underwriting the risk. Second, according to Richard J., the insurers should have referred their questions concerning the presence of pyrrhotite in the aggregate to their internal experts, which was not done. He therefore found that the impact of the insureds' concealment was considerably lower once the insurers' conduct was taken into account.
On appeal, the same insurers submitted that Richard J. had imposed an obligation on them that was more onerous than that imposed by law and that he had confused the primary and excess insurers' knowledge of the facts. The Court of Appeal again sided with the insureds.
With respect to the insurer's duty to investigate, the Court of Appeal rejected the proposition that the trial judge had imposed an "undue" duty to investigate on the insurers. The Court reiterated that the insurer's duty to investigate consists of taking note of the notorious information available to a reasonably competent underwriter operating in its area of expertise. It was the primary insurer's failure to follow its own underwriting guidelines (that is, investigation into the location of the risk and contact with the claims department) that led the trial judge to conclude that it had not sufficiently investigated the risk. The excess insurer did not conduct itself in a reasonable manner in its assessment of the risk given that its underwriters had no written directives or information bulletins. Although the excess insurer had no contact with the primary insurer - a situation considered acceptable because of the competition between them - it failed to obtain [translation] "the most basic information on the insured's operations" from the policyholder or the broker.
Next, the Court of Appeal acknowledged that the trial judge had not necessarily identified the evidence relating to the primary insurer and to the excess insurer. After reviewing the evidence, however, the Court indicated that all the evidence required had been gathered to establish the separate knowledge of the primary and excess insurers.
Although the Court of Appeal suggested that the insurer's duty was not modified by the trial judgment, some of the comments made warrant further consideration.
- First, guidelines (including written directives or information bulletins) now appear central to the analysis of the reasonableness of an insurer's investigation. If such guidelines are available, underwriters must comply with them or face negative inferences by the court. On the other hand, if an insurer does not have any such guidelines, that will also be viewed negatively by the court.
- Second, the excess insurer's duty to investigate is no less onerous than that of the primary insurer. Despite the competition between them, the excess insurer must communicate with the policyholder (the insured) or its broker to obtain the relevant information concerning the insured's operations and previous claims.
Among the many lessons to be drawn from this judgment is the importance of an underwriting process that includes clear expectations regarding acceptable risks and the measures that should be taken to investigate such risks. The corollary of this principle, however, is that equal attention must be given to the application of such guidelines.
Article orignally published on 27 April 2020
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