This summary does not constitute a legal opinion. The information it contains may not reflect the current state of the law.
By Me Caroline Tremblay, Gilbert Simard Tremblay, s.e.n.c.r.l.
In a judgment rendered in August 2012, the Court of Appeal reiterated the definition that should be given to “property damages” in accordance with a
Comprehensive General Liability (CGL).
Appellants, Velan inc. and Velan-Proquip inc. (hereinafter referred to as “ Proquip ”), appealed from a judgment rendered by the Superior Court which dismissed their action taken against their insurer GCAN Insurance Company (hereinafter referred to as “ GCAN ”) in which they were claiming an amount of $2 000 000.
Said amount was Appellants’ contribution to a settlement that put an end to an action that was instituted by Shell. Furthermore, Velan and Proquip were asking for the reimbursement of their legal fees incurred because of GCAN’s refusal to take on their defence.
Athabaska Oil Sands’ project, Shell retained the services of Proquip to provide high pressure clamps. As to Velan, it was in charge of providing the expertise for the manufacturing of said clamps. Following the installation of the high pressure clamps, Shell noticed that they were defective. In fact, they were not in conformity with the established specifications. Shell decided to replace most of the clamps because of the potential dangers caused by the defective equipment. It then claimed from Velan, Proquip and other parties the amount of $ 43,272,905.18, which represents the replacement costs.
Following the filing of Shell’s action, GCAN informed its insured that Shell’s claim was not covered by the terms of the insurance policy. Velan and Proquip retained, at their fees, the services of a legal counsel, who represented them until the file was settled out of court because of GCAN’s refusal,. As previously mentioned, it is following the settlement that Velan and Proquip claimed from their insurer GCAN the amount of $2 000 000 plus the legal fees they had to pay to their legal counsel.
Judgment of the Superior Court
Firstly, it is important to underline that during the course of the trial before the Superior Court, Velan and Proquip’s Attorney admitted that the latter did not benefit from GCAN’s insurance policy. Based on this admission, the only question remaining was whether Velan could benefit from the coverage of the insurance policy.
In her decision, Justice Mayrand concluded that the only purpose for Shell’s action was to be reimbursed for the replacement of the defective clamps. Therefore, she was of the opinion that the action taken against Velan and Proquip was based on contractual obligations and that there are no property damages as per the terms of the insurance policy. The damages claimed were solely based on the faulty execution of the contract, and that they could only be reimbursed through a performance bound.
Based on a previous judgment1, Justice Mayrand decided that the faulty manufacturing of a good is not an accident according to the terms of the policy and that the failure to respect norms or other specifications is a continuous factual state and not an accident.
Consequently, Justice Mayrand accepted GCAN’s defence that it had no obligation to defend nor indemnify its insured.
Decision of the Court of Appeal
The Court of Appeal reiterated that the obligation to defend is different than the obligation to indemnify, because of the burden placed on the insured. The slightest possibility, based on the allegations of the statement of claim and taken at face value to be truthful that the insurance policy is applicable, is enough to oblige the insurance company to defend its insured2.
As to the actual nature of Shell’s recourse, the Court of Appeal is of the opinion that Justice Mayrand erroneously concluded that there was no distinct cause of action between Velan and Proquip:
« À mon avis, les allégations de l’action font certes voir des fautes qui relèvent de la garantie du vendeur, mais il est également question, pour Velan, d’engagements contractuels d’une autre nature (fournir l’expertise appropriée), voire même de fautes extracontractuelles. Il me semble qu’à ce stade de l’analyse la « nature véritable » du recours envers Velan est d’avoir manqué à son devoir de fournir l’expertise technique appropriée. »
After having identified the nature of Shell’s recourse, the Court of Appeal had to decide if the
CGL policy was applicable. Justice Dutil reiterated the principle put forward by the Supreme Court in the matter
Progressive Homes Ltd. vs. Lombard General Insurance Company3, that the ordinary meaning of “property damages” should be retained in order to include all damages to a property.
The Court of Appeal therefore concluded, based on the allegations contained in Shell’s action, that its claim concerns only the replacement of the defective clamps. Consequently, said clamps did not cause any damages to Shell’s installation and that in fact, their replacement was mandatory to avoid damages. The Court of Appeal confirmed the judgment of the Superior Court. Therefore, the CGL policy was not applicable and GCAN had no obligation to defend its insured.
With this decision, the Court of Appeal confirms the previous case law to the effect that a defect of fabrication, manufacturing or installation does not constitute property damages according to the terms of a
CGL policy. Consequently, an insurance company has no obligation to defend its insured when an action is taken only to be reimbursed for the replacement costs of the damaged good.
1.Géodex inc. vs. Zurich, Insurance Company, 2006 QCCA 558.
2. Nichols vs. American Home Assurance Co.,  1 R.C.S. 801; see also
Boréal Assurances inc. vs. Réno-Dépôt inc.,  R.J.Q. 46 (C.A.);
Wellington Insurance Company vs. M.E.C. Technologie inc.,  R.J.Q. 443 (C.A.).
3.  2 R.C.S. 245, 2010 CSC 33.