On June 23, 2011, the Court of Appeal, in Boiler Inspection and Insurance Company of Canada v. H.A. Simons Ltd.1, reiterated the principle that there is no legal relationship between the reinsurer and the insured. That decision effectively terminated an action for close to nine million dollars brought in 1997 by The Boiler Inspection and Insurance Company of Canada (hereinafter referred to as "Boiler").

The decision of the Court of Appeal:

The facts in the case are relatively straightforward. The case involved an action for recovery of damages caused by the equipment failure in November 1995 and October 1996 of two pulp and paper digesters in a mill belonging to Domtar Inc. (hereinafter referred to as "Domtar"). At the time of the incidents, American Home was Domtar's insurer and Boiler was American Home's reinsurer. As reinsurer, Boiler claimed the sum of $8,508,613.00, which represented the indemnity that it paid to American Home further to the latter's payment to Domtar for the two losses. Boiler claimed reimbursement of that sum from the Defendants who are the designers, manufacturers and installers of digesters and from their respective insurance companies.

In the original July 28, 1997 Motion to Institute Proceedings, Boiler alleged that it reinsured Domtar's insurers and claimed that [translation:] "is legally and contractually subrogated to the rights of American Home which was legally and contractually subrogated to the rights of Domtar [?]"2.  »

Then, after making numerous amendments to its Motion to Institute Proceedings, Boiler re-amended it on April 13, 2007 and completely modified the basis of its action by presenting itself as Domtar's co-insurer instead of American Home's reinsurer.
The judge of first instance ruled on that issue as follows:

[23] Domtar is insured with American (P-1), which is in turn reinsured with Boiler (P-2). There is no ambiguity in P-1: the insured is Domtar and the insurer is American. There is no ambiguity in P-2: American is the insurer and Boiler is the reinsurer. The Plaintiff made its own bed in clear, simple and unambiguous terms. The Defendants, who are entitled to know who is suing them, have been saying the same from the outset: there is no legal relationship between the parties3.
The Court of Appeal relied basically on articles 2397 and 2474 of the Civil Code of Québec in ruling on the argument concerning legal and conventional subrogation. Those articles provide as follows:
2397. The contract of reinsurance has effect only between the insurer and the reinsurer.
2474. The insurer is subrogated to the rights of the insured against the person responsible for the loss, up to the amount of indemnity paid. The insurer may be fully or partly released from his obligation towards the insured where, owing to any act of the insured, he cannot be so subrogated.
The Court of Appeal held that there is no legal relationship between the reinsurer and the insured and no subrogation by operation of law between the reinsurer and the insured. The Court stated that only if the conventional subrogation were duly disclosed to the wrongdoers would Boiler have a right of action against them.4 Domtar's attorneys cited articles 1637 and 1641 of the Civil Code of Québec (hereinafter referred to as C.C.Q.") in support of their argument:
1637. A creditor may assign to a third person all or part of a claim or a right of action which he has against his debtor. He may not, however, make an assignment that is injurious to the rights of the debtor or that renders his obligation more onerous.
1641. An assignment may be set up against the debtor and the third person as soon as the debtor has acquiesced in it or received a copy or a pertinent extract of the deed of assignment or any other evidence of the assignment which may be set up against the assignor.
The judge of first instance, after examining the evidence on record, held that there was no deed of assignment drafted and served on the Defendants, as required by article 1641 C.C.Q. That omission was applied by the judge of first instance who held that it adversely affected Boiler's right of action against the Defendants. The Court of Appeal was of the same view and noted [translation:] "There was no validly disclosed assignment, hence Boiler could not act in the rights of American Home who personally could act in the rights of the insured Domtar. 5"

A further argument was raised by Boiler's attorneys to the effect that Boiler could act for Domtar pursuant to a nominee agreement. The Court of Appeal, like the judge of first instance, rejected that argument. The Court of Appeal quoted the judge of first instance on the issue:

[54] The counter letter or nominee agreement cannot be set up against the Defendants, a third party in good faith, who learned of their existence in 2010 through the proposed amendment. Boiler's attorneys also argued, for the first time before the Court of Appeal6, an exception based on stipulation for a third party. The Court of Appeal held that the terms used in the contract of reinsurance7 do not indicate a stipulation for a third party and that in any event, that is not the legal situation of the parties under a contract of reinsurance8.

Lastly, Boiler's attorneys also appealed the decision of the judge of first instance in dismissing the motion to re-amend the Motion to Institute Proceedings. In the motion to dismiss, Boiler's attorneys specifically seek the addition of American Home (now Chartis) as co-plaintiff. It must be borne in mind that the action was initially brought in 1997. The judge of first instance held that application to be inadmissible on the grounds that it was well and truly prescribed and that Boiler's filing of the Motion to Institute Proceedings did not in any way interrupt prescription in favour of American Home. The Court of Appeal did not intervene in that decision and stated that the judge of first instance correctly held that naming American Home as additional co-plaintiff [translation:] "was neither legally admissible nor relevant.9"

Comments on the decision:

While at first glance they appear similar, conventional subrogation and assignment of debt have notable differences. The judgment of first instance did not however distinguish the two concepts. Nor did the Court of Appeal make such a distinction because it held that "only if the conventional subrogation were duly disclosed to the wrongdoers would confer on Boiler have a right of action against them", on the basis of article 1641 C.C.Q., which pertains to assignment of debt.

With all due deference, in our view, the Civil Code of Québec does not require that conventional subrogation be duly disclosed in order to be valid. There is no provision similar to article 1641 C.C.Q. in the chapter on subrogation in the Civil Code of Québec, from which we conclude that notice to the debtor is not an essential condition for conventional subrogation to apply.

This leads us to query why the judge of first instance and the Court of Appeal ruled as they did in this case. The relevant clause in the contract of reinsurance reads as follows:

In the event of a settlement by the Reinsurer of a claim or loss arising under coverage hereby reinsured, the Cedant will, pursuant to said settlement, make payment directly to the Insured under the coverage hereby reinsured. Upon making such payment, and when requested by the Insurer, the Cedant will secure its subrogation rights under the terms of the coverage hereby reinsured and will the assign such subrogation rights to the Reinsurer.

That clause is confusing because it deals simultaneously with the assignment of rights in using the terms "Cedant" and "assign", and subrogation in using the term "subrogation rights". According to the judge of first instance, the clause must be interpreted as follows: American must have made the payment to Domtar in order to secure its subrogation rights under the reinsurance contract and to assign such subrogation rights to the plaintiffs10.

However, in our view, such an interpretation collides with other articles of the Civil Code of Québec that deal with assignment of claims. For example, in connection with the assignment of a claim by onerous title, article 1639 C.C.Q. provides that the assignor guarantees that the claim exists and is owed to it. However, we are doubtful as to whether American Home can assign its claim to Boiler and guarantee the latter recourse against the third-party wrongdoer. In our view, the relationship between the insurer and the reinsurer is more in the nature of conventional subrogation than assignment of claim. In our opinion, it would have been more in keeping with the general scheme of the contract of reinsurance to hold that the common and genuine intention of the parties was to create conventional subrogation. Thus, Boiler, conventionally subrogated to the rights of American Home, would have been entitled, according to such an interpretation, to sue the Defendants and the absence of notice would not have been an obstacle to the action.

Boiler has until August 23, 2011 to apply for leave to appeal to the Supreme Court. It would be interesting to have a ruling from the Supreme Court on the issue. However, for the time being, the decision of the Court of Appeal closes all avenues to Boiler. We also note that the interpretation applied by the judge of first instance and by the Court of Appeal is based on their analysis of the specific clause in the aforementioned contract of reinsurance and on the specific facts of this dispute. Their interpretation cannot therefore be generalized and apply to all contracts of reinsurance. As reinsurers are often required to pay significant indemnities further to major losses, contracts of reinsurance should probably be revised to ensure that the reinsurer has a potential recourse against the third-party wrongdoer.

To be continued?
2011 QCCA 1194

2 - Motion to Institute Proceedings of July 28, 1997, para 30
3 - Supra, note 1, para 5
4 - Supra, note 1, para 9
5 - Supra, note 1, para 10
6 - That exception was not contained in the notice of appeal
7 - Supra, note 1, para 14
8 - Supra, note 1, para 16
9 - Supra, note 1, para 23
10 - Judgment of first instance: The Boiler Inspection and Insurance Company of Canada v. H.A. Simons Ltd, EYB 2010-182351 (S.C.)