The Limits on the Insurer’s Duty to Advise
Me Jonathan Lacoste-Jobin, Lavery, de Billy
This summary does not constitute a legal opinion. The information it contains may not reflect the current state of the law.
On July 2, 2014, the Court of Appeal of Quebec rendered an interesting decision regarding property insurance1. The Court dealt with the limits on the duty of an insurer to advise its insured and the obligation of the insured to mitigate his damages.
On September 11, 2007, a significant water infiltration occurred in the building of the insureds, caused by defective work carried out by the defendant a roofing contractor. The insurer was immediately notified of the event. On the following day, a representative of the insurer confirmed to the insureds that they were not covered for the damages caused by water infiltration.
On the same day, the insureds contacted a restoration contractor to obtain an assessment of the damages. The contractor’s representative advised the insureds that emergency work had to be carried out quickly. The insureds did not give the required authorization and nothing was done.
On September 13, 2007, the insureds sent a formal letter of demand to the roofing contractor, who finally repaired the roof but not the damages caused by the infiltration.
On October 15, 2007, the insurer confirmed to the insureds that it did not cover their claim.
On October 31, 2007, the restoration contractor prepared an estimate assessing the damages at $137,027.46.
On November 9, 2007, a second letter of demand was sent to the roofing contractor, requiring it to carry out the work recommended in the restoration contractor’s assessment report within 20 days.
On December 18, 2007, counsel for the insureds sent a formal notice to the insurer, which confirmed its refusal to indemnify on January 15, 2008.
The repair work to the building was planned as of January 19, 2008, but began only in March 2008. The insureds finally paid an amount exceeding $500,000.
The judgment of the Superior Court
In the first instance2, the liability of the roofing contractor was admitted. Mrs. Justice Bergeron dismissed the insurer’s defence and concluded that it was required to cover the damages.
Most of the hearing was devoted to the assessment of the damages. Essentially, the judge blamed the insureds for failing to minimize their damages as soon as they learned that the insurer refused to cover their claim, even if such refusal proved unjustified. In the judge’s opinion, a reasonable person would have acted. Moreover, the restoration firm’s representatives had advised the insureds of the necessity of quickly carrying out the work.
After an in depth analysis of the evidence, the trial judge finally awarded to the insureds an amount of $139,112.29 despite the fact that the claim totaled $558,034.71.
The judgment of the Court of Appeal
On appeal, the insureds alleged that the judge had erred in law on the issue of the duty to minimize damages.
The insureds argued that they acted prudently and diligently within 72 hours following the disaster by retaining the services of counsel, hiring the restoration firm, contacting both their insurer and the roofing contractor and sending the appropriate formal notices.
The Court of Appeal summarized the characteristics of this duty to minimize damages3 as follows:
- it is an obligation of means;
- it is assessed according to an objective test: that of the diligent and reasonable person placed in the same circumstances;
- it applies both in a contractual and extra contractual context;
- failure to discharge that duty constitutes a fault (separate from a fault leading to shared liability);
- this fault precludes the resulting damages (increase of injury) from being classified as “direct” or “foreseeable”.
The Court noted that the insureds received a refusal from their insurer on the day following the loss and that they immediately contacted a specialized restoration firm. Nevertheless, no emergency measure was taken. The following excerpt is relevant in this respect:
“ The obligation to minimize one’s damage cannot be diminished or eliminated by the decision of the insurer to deny coverage. The appellants were required to act quickly and then claim the costs of the emergency work. This is what a reasonable person would have done in the presence of water infiltration of this magnitude. The lack of financial means cannot explain such failure to act. [The insured] acknowledged that this was not a problem for them.”
The insureds further claimed that the insurer had failed to discharge its duty to provide them with the necessary advice. The Court first confirmed the existence of an insurer’s duty to advise its insured and that the scope of such duty was proportional to the experience of the professional and the inexperience of the client. In the present file, the insurer provided no advice to the insured.
However, the Court of Appeal was of the view that in this matter the insurer had no such since, in good faith, it refused at the outset to indemnify the damages suffered. The Court wrote the following in this respect:
“ It is difficult to imagine that an insurer would have a duty to advise even where it believes in good faith that the loss is not covered under the contract. By denying coverage, its incidental duty to advise in respect of the loss, which stems from its insurance policy, no longer exists.”
The decision under review confirms that an insurer which in good faith denies coverage to its insured no longer has a duty to advise its insured. The insured is then required to minimize his damages and carry out emergency work.
This decision emphasizes the fact that it is important for an insurer to make its position in respect of coverage known to the insured as soon as possible. Indeed, until the insurer advises its insured of its decision in this respect, the duty to advise remains in effect.
1. Lebel v. 9067-1959 Québec Inc., 2014 QCCA 1309.
2. Lebel v. Groupe Ledor, société mutuelle d’assurances,2012 QCCS 4504
3. Provided for under article 1479 C.c.Q.