A little over a year ago, we discussed the Supreme Court of Canada's judgment in Progressive Homes Ltd. v. Lombard General Insurance Co. of Canada.¹ We now wish to examine two recent decisions that have discussed this case and confirmed its applicability in Quebec civil law.

Lombard du Canada c. Mont-Tremblant (City)²
Facts and Judgment in the first instance

Exploitation agricole et forestière des Laurentides inc. ("Exploitation") owned a number of lots located on both sides of Route 117 in St-Jovite, a municipality that now forms part of the City of Mont-Tremblant (the "City"). In January 1995, the City notified Exploitation of its intention to rezone the lots for commercial and industrial. Despite Exploitation's opposition, the by-law effecting it was adopted on April 26, 1999. Exploitation responded by filing a motion against the City in October 1999 in an attempt to nullify the by-law.
The City informed its then insurer, Lombard du Canada Ltée ("Lombard"), who took no action since the municipality had purchased a claims-made policy and no damages were being claimed by Exploitation at that point. In June 2004, Exploitation failed in its attempt to amend its motion to include a claim for damages, but proceeded, on November 28, 2008, to file a separate motion for damages against the City. On August 25, 2009, the City served a motion to its insurers Lombard and Lloyds seeking to compel one or other of them to take up its defence, Lloyds having issued a policy similar to Lombard's starting in May 2003.
The motions judge granted the motion in part and ordered Lombard to assume the City's defence. The Judge considered that the exclusions for intentional acts in the policies issued by Lombard and Lloyds were not operative for purposes of the motion and that it was up to the judge on the merits to decide whether they came into play for purposes of the duty to indemnify. The motions judge also rejected the insurers' argument that Exploitation would need to prove succeed (which would of course trigger a coverage exclusion), as it was not clear from the proceedings and exhibits that the City had necessarily acted in bad faith. Lastly, the judge found that defence since the action commenced in 1999 contained an allegation indicating that a damage claim would be forthcoming and since the City had notified Lombard of the action at the time.

Judgment of the Quebec Court of Appeal

The Quebec Court of Appeal, in the first ruling applying the Supreme Court of Canada's reasoning in Progressive Homes, confirmed the applicability in Quebec civil law of the principles established in this decision emanating from British Columbia. Justice Dufresne refers to the passages setting forth the general principles applicable to an insurer's duty to defend and confirms that the mere possibility that a claim may be covered by a liability policy gives rise to a duty to defend, but that the wording of the policy had to be carefully examined to ascertain its true scope.
The main interest of this ruling lies in the Court's analysis of the interaction between the liability insurance policies subscribed by municipalities and the principles of immunity that apply to them. Ever since Laurentides Motels Ltd c. Beauport (City)³, it has been acknowledged that, when dealing with executory or operational decisions (e.g.: enforcement of zoning by-laws), a municipality may be held liable for damages caused to another person through its negligence, unless the law expressly excludes such liability. However, in the context of policy or legislative decisions(e.g. making of zoning by-laws), a municipality enjoys relative immunity, i.e., a policy decision cannot render a municipality civilly liable except in the event of its intentional wrongdoing or bad faith.
Thus, according to the Court of Appeal, the trial judge erred by setting aside the allegations of constructive expropriation on the grounds that they remained unproven and by omitting to recognize, for purposes of assessing the duty to defend, that a duty to could not possibly arise given the intentional wrongdoing or bad faith exclusion. In this regard, Justice Dufresne reminds us that in the context of a motion to compel an insurer to take up its insured's defence, the examination should be confined to the proceedings and supporting exhibits and the allegations should be taken as if proven for purposes of determining whether a possibility exists that a claim may be covered by the policy. In the circumstances of the case before it, the Court considered that there was no possibility of the claim being covered. Indeed, if Exploitation alleged and proved bad faith, the exclusion applied and the insurer would have no obligation to indemnify. If, on the other hand, bad faith could not be proved, there would be no obligation to indemnify as the City could not be made to pay compensatory damages.

Université de Montréal c. Desnoyers Mercure et Associés⁴
Facts

In October 2010, Université de Montréal (the "University") brought an action against all parties who had been involved in designing and building one of its pavilions between 1992 and 1994 following the abnormal deterioration of its outer surface. The deterioration was only noticed in the spring of 2008. Placements Lemay Nadon inc. had supplied the clay bricks incorporated into the outside walls of the building. The judgment was rendered further to a motion by Placements Lemay Nadon inc. to compel its insurer, Intact Insurance Company ("Intact"), to take up its defence. Intact had issued a primary CGL policy to Placements Lemay Nadon inc. from 1996 to 2008 and excess policies from 2003 to 2005, and had chosen to deny coverage, alleging that there had been no property damage or accident.

Applicable Law

In his decision, Justice Payette reviews the passages of Progressive Homes summarizing the principles governing an insurer's duty to defend, confirming their relevance to Quebec. He stresses the importance of analyzing CGL policies methodically by first determining the coverage offered, then looking at the applicable exclusions and, finally, considering the relevant exceptions.

Definitions of "Property Damage" and "Loss"

Justice Payette begins by discussing the argument that a pure economic loss does not constitute property damage as the term is commonly understood in CGL policies. Intact drew on the Manitoba Court of Appeal's ruling in Bird Construction Co. v. Allstate Insurance Co. of Canada&sup5; to plead that the replacement cost of the defective bricks was not the result of property damage, but was rather a pure economic loss. The court rejects this idea and insists on the importance of adhering to the text of the applicable insurance policy, emphasizing that this approach was followed in Progressive Homes. In this instance, since the University alleged that the bricks had damaged the walls they were incorporated into and had therefore been a factor in their deterioration, it was a case of property damage. The fact that the University alleges perceptible damage to the building that renders it defective therefore meets the Progressive Homes test whereby it is sufficient for pleadings to allege a possibility of property damage for the insurer to have a duty to defend.
The court then analyzes the definition of an accident in response to Intact pleading that the damages alleged by the University did not result from a loss but rather from the inadequate performance of the bricks supplied by Placements Lemay Nadon inc.. Once again, citing Progressive Homes, Justice Payette dismisses Intact's argument and concludes that the term "accident" used in the definition of "loss" must also include events causing property damage that are unexpected or unwanted, whether sudden or not.

"Your Products" Exclusion

Intact invoked the application of the "Your Products" exclusion clauses but failed to satisfy the Court that the exclusion in question applied clearly and unequivocally since the University was not only claiming the replacement cost of the bricks but all costs involved in demolishing and rebuilding the damaged walls. While such clauses usually allow for the exclusion of the replacement cost of the insured's product, they do not necessarily exclude coverage for consequential damages to other property.

Allocation of Defence Costs

In his findings, Justice Payette states that there are no grounds for allocating defence costs, although part of the claim against Placements Lemay Nadon inc. may be excluded. In keeping with applicable doctrine and case law on the matter, the Court emphasizes that even if a claim contains allegations covered by the policy but also others that are not, there is no automatic allocation of defence costs. Allocating defence costs is appropriate only when the insurer successfully demonstrates that the defence of uncovered allegations results in separate, quantifiable costs, failing which the insurer is required to assume the entirety of the defence costs.


Mtre Caroline Tremblay

Pasquin Viens Lawyers, s.e.n.c.r.l.

¹ [2010] 2 S.C.R. 245, jj. McLachlin, Binnie, LeBel, Deschamps, Fish, Abella, Charron, Rothstein and Cromwell [Progressive Homes].

² 2010 QCCA 1910, jj. Pelletier, Dufresne and Kasirer.

³ [1989] 1 S.C.R. 705, jj. Beetz, McIntyre, Lamer, Wilson, Le Dain, La Forest and L'Heureux-Dubé.

⁴ 2011 QCCS 3564, j. Payette.

⁵ [1996] 7 W.W.R. 609 (Man. C.A.).