On December 14, 2016, the Quebec Superior Court handed down a judgement on a legal issue which has not come up often in Quebec case law, that of determining what legal framework applies to the relationship between two property insurers covering the same risk. In La Coop Fédérée v. La Compagnie d'assurance générale Co-operators et al.1 , the Court ruled on a claim by an insured, Coop Fédérée (Coop), against two of its insurers for a loss caused by a phishing scheme which led to a fraudulent transfer of $4.9 million in August 2014.
The Coop held two property insurance policies which could potentially cover the loss. The first one was issued by Co-operators General Insurance Company (Co-operators) and provided $15 million of coverage subject to a $500,000 deductible. The second one, with Liberty International Underwriters (Liberty), provided $1 million of fraud and embezzlement coverage with a $100,000 deductible. Liberty had agreed to indemnify its insured up to its insurance limit whereas Co-operators had denied coverage for various reasons. The Coop sued Co-operators in the Superior Court. Co-operators forced National Bank of Canada (NBC) to intervene in that case; Co-operators claimed that NBC should bear the $4.9 million loss since the amount fraudulently paid had been borrowed by the Coop from NBC.
On April 21, 2015, Liberty paid the Coop the sum of $1 million corresponding to the amount of its insurance coverage. On February 9, 2016, Liberty sued Co-operators, seeking $726,124.47 which, according to Liberty, corresponded to the amount of the contribution it overpaid for the loss suffered by the Coop. The actions of Liberty and the Coop were joined before the Superior Court in March 2016.
Justice Michel Déziel heard the case. He began by determining whether the loss suffered by the Coop should be borne by the Coop or NBC. The transfer of funds in U.S. dollars by the Coop to the defrauder placed its bank account in overdraft. The Coop therefore had to borrow an equivalent amount from NBC, the bank instructed by the Coop to transfer the funds. Co-operators claimed that NBC should bear the Coop's loss since the $4.9 million belonged to NBC pursuant to the Bills of Exchange Act. Justice Déziel rejected that argument by Co-operators from the outset and held that the Coop became the owner of the $4.9 million NBC advanced to it as soon as NBC advanced the funds to cover the overdraft in its account. The Court also determined that NBC had fulfilled all its obligations to check the signatures and verification codes and that, accordingly, the Coop should bear the entire loss of the embezzled $4.9 million.
Which policy covers the loss?
The Court then conducted an in-depth analysis of both Co-operators' policy and Liberty's policy to determine which applied to the loss. Since Co-operators' policy covered all the Coop's property and operating losses for all risks which could directly affect it without any exclusion that would apply to fraud, the Court held that the loss suffered by the Coop constituted a risk covered by that policy.
As for Liberty's policy, the Court asked whether that insurance policy was "specific" for the risk of phishing fraud since the policy specifically covered fraud and embezzlement. The distinction between a general and a specific policy is important since, according to the Civil Code of Québec, a specific policy applies to a loss as primary insurance where there is plurality of insurance2 . The Court began by pointing out that a policy was not specific merely because of its name. The way Liberty's policy was worded, it covered all the Coop's property as well as all risks which could directly affect it, with a series of exclusions limiting the scope of the policy. According to the Court, the fact that the policy contained those exclusions did not make it a specific risk policy.
In its analysis, the Court considered the six criteria developed in case law3 to determine whether there is plurality of insurance: the presence of two or more insurers, identical purposes, identical risks, identical interests, the simultaneousness of the insurance and the presence of joint coverages which are not subordinate to each other. Justice Déziel held that those six criteria were met in this case.
Determining each insurer's contribution
After ruling that there was a plurality of insurance, the Court analyzed Liberty's action in view of the third paragraph of article 2496 C.C.Q., which provides that the indemnity apportioned among the insurers, in the absence of a specific policy, is calculated "in proportion to the share of each in the total coverage". Since Quebec civil law does not say how the apportioning of the indemnity among the insurers should be calculated, Justice Déziel did not hesitate to turn to the common law authorities. He based himself on a Supreme Court of Canada decision in Family Insurance Corporation v. Lombard Canada Ltd. and Canadian University Reciprocal Insurance Exchange4 to rule that each insurer must share the burden of indemnifying the loss in proportion to its policy limit. More specifically, the judge accepted Liberty's argument that the calculation used by the Quebec Superior Court in 1999 in a similar situation5 should be applied to the Coop's case. According to that calculation, Liberty's contribution for the Coop's loss was $273,000 (i.e. the proportion of its insurance limit ($1 million) out of Co-operators' total insurance limit ($15 million) multiplied by the amount of the loss, less the applicable deductible). Since Liberty had paid the Coop its coverage limit following the loss, its $726,124 claim represented the overpayment owed to it by Co-operators. The Court therefore held that Co-operators had to bear the balance of the loss suffered by the Coop for a total of $5,521,195, which included paying Liberty its entire claim of $726,124.
This decision is very interesting since it provides useful information about the factors which guide the courts in determining whether a policy is specific or general. It also sheds some light on the interrelation between insurance policies covering the same loss.
Note that the deadline to appeal this decision has not expired.
Norton Rose Fulbright Canada (André Legrand and Josée Beaudoin) acted for Liberty in this matter.
1. La Coop Fédérée v. La Compagnie d'assurance générale Co-operators et al. (December 14, 2016), Montreal, 500-17-092055-154 and 500-17-092579-161 (S.C.).
2. Art. 2496(3) C.C.Q.
3. American Home Insurance Co. v. Duret et al., 1989 CanLII 921 (QCCA).
4. Family Insurance Corporation v. Lombard of Canada Ltd. and Canadian University Reciprocal Insurance Exchange,  2 S.C.R. 695.
5. Protection Mutual Insurance Company v. La compagnie d'assurance Guardian du Canada (November 9, 1999), Montreal 500-05-028603-973 (S.C.).
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