April 16, 2013 by Carolena Gordon and Vincent Locas
On November 20, 2012, the Quebec Court of Appeal rendered a judgment on the continuity of coverage under 3D policies in Groupe SNC-Lavalin Inc. v. St. Paul Guarantee Insurance Company. The Court of Appeal provided clarification as to when an insured may be covered for prior acts where a new policy is issued after the expiration of a policy issued by a previous insurer. It also commented on an insurer’s duty to inform when dealing with a sophisticated insured.
SNC-Lavalin Inc. (“SNC”), was insured under a “3D” (comprehensive dishonesty, disappearance and destruction bond) property insurance policy protecting it against fraud committed by its employees. In November 2004, SNC learned that it had been the victim of fraud committed by one of its employees between October 2000 and March 2004. SNC reported the fraud to its insurer, St. Paul Guarantee Insurance Company (“St. Paul”), which agreed to indemnify it, but only for losses incurred from August 13, 2003, i.e. the date of issuance of its first insurance policy, which was renewed in 2004. It denied coverage for the period prior to the inception of its policy.
When the fraudulent acts began, SNC was insured by another insurer, American Home Insurance (hereinafter “AIG”), under a similar policy which expired on June 30, 2003, and was not renewed. The St. Paul policy contained a clause addressing “loss under prior bond or policy” and continuity of coverage. SNC maintained that there was continuity in coverage from one policy to the next and that St. Paul had a duty to indemnify it. St. Paul’s position was that there was no continuity of coverage.
Mind the Gap
At trial, Justice Jeannine M. Rousseau of the Quebec Superior Court ruled in favour of the insurer, concluding that the losses sustained by SNC as a result of acts committed prior to the inception of the St. Paul policy were not covered due to the interruption of insurance coverage.
The discovery period after the expiry of the policy only serves to cover a loss resulting from a wrongful act committed while the policy was in force and not a fraudulent act that occurred during the discovery period.”
Moreover, Justice Rousseau found that the consequences of such interruption were known to SNC, that it had assumed the risk and that the insurer had properly fulfilled its duty to inform.
The Court of Appeal dismissed the appeal, upholding the trial court’s decision. In his analysis, Justice Jacques Dufresne reiterated the factual findings of Justice Rousseau. The Court emphasized that the investigation required to determine if there is indeed continuity of coverage essentially turns on the facts, which necessitates a case by case approach. The circumstances surrounding the change from one policy to the next, as well as the parties’ actual intent with respect to continuity of coverage from the preceding policy, must be examined.
The Court of Appeal noted that in the present case it was only on July 21, 2003, three weeks after the expiry of the AIG policy, that SNC commenced discussions with St. Paul regarding a new insurance policy. In the Court’s view, this fact supported the conclusion that the termination of coverage against the fraud was on June 30, 2003, upon expiry of the policy.
According to SNC, however, the AIG policy continued to remain in effect during the discovery period, i.e. the two-month period following the expiry date contractually provided. SNC maintained that on August 13, 2003, it was still within the discovery period for acts that occurred prior to June 30 and that consequently, coverage was not interrupted.
The Court of Appeal did not accept this argument and indicated that [TRANSLATION] “the discovery period after the expiry of the policy only serves to cover a loss resulting from a wrongful act committed while the 3D policy was in force and not a fraudulent act that occurred during the discovery period.” In other words, the discovery period provided in the AIG policy only applied to fraud committed before the expiry but discovered in the course of the following two months.
Further, according to the Court of Appeal, as SNC had allowed the AIG policy to expire without attempting to secure an extension or acquire temporary coverage, it could not claim that the policy had been replaced by the St. Paul policy.
SNC also asserted that the clause in the St. Paul policy covering losses that occurred during the term of the previous policy should be broadly construed in favour of the insured in accordance with the contra proferentem principle (i.e. ambiguous terms in a contract will be construed against the party that imposed their inclusion). The Court of Appeal noted that the principles applicable to interpretation of insurance policies only come into play when a clause lacks clarity and lends itself to a number of interpretations. The Court held that the clause at issue in this case gave rise to no such ambiguity.
SNC a Sophisticated Insured
Further, the Court of Appeal endorsed the trial court’s factual finding that at a meeting on July 21, 2003, SNC’s insurance representative was informed by St. Paul that it no longer had continuity of coverage and therefore, as of June 30, 2003, it was no longer covered for prior acts. SNC’s representative indicated that he was aware of the risk, but it was of little concern as he considered it to be low and was therefore prepared to assume it.
On the basis of this finding, the Court of Appeal not only found additional evidence to support St. Paul’s coverage denial, but also concluded that the insurer had fulfilled its obligation to inform SNC. The Court of Appeal endorsed Justice Rousseau’s characterization of SNC as knowledgeable and well informed on insurance matters. As a corollary, the weight of St. Paul’s obligation to inform was less onerous in this case. The Court noted certain factors suggesting that SNC had a certain level of sophistication, such as the fact that for some time it had had its own internal insurance and risk management departments, and that it employed an experienced team.
In short, not only was SNC aware of the consequences of the interruption of insurance coverage, but the weight of St. Paul’s obligation to inform was lessened in the circumstances.
In summary, the Court of Appeal ruled in this case that in order to benefit from continuity of coverage, the insured had to show that there was [TRANSLATION] “simultaneous succession” of its policies. In the words of Justice Dufresne, [TRANSLATION] “the termination, cancellation or expiration of the policy must coincide with the effective date of the new policy.” With respect to the insurer’s duty to inform, the weight of the obligation will vary according to the type of insured involved, in that the weight of the obligation will be inversely proportional to the level of sophistication of the insured.
Carolena Gordon is a partner and Vincent Locas is an associate with the law firm, Clyde & Co Canada LLP.
Copyright 2013 Rogers Publishing Ltd. This article first appeared in the March 2013 edition of Canadian Insurance Top Broker magazine.
This story was originally published by Canadian Insurance Top Broker.