Theft or Fraud: Insurance policies’ different treatment
In 2017, in its judgment, 6916643 Canada inc. c. Intact, compagnie d’assurances,1 the Court of Appeal reaffirmed the state of law with respect to insurance coverage in fraud cases.
In October 2013, the company Toiles Ste-Monique (“Toiles”) agreed to sell several temporary shelters to Mr. Denis St. Pierre, an individual with whom Toiles had never done business with. Mr. St. Pierre committed to send a deliveryman to retrieve his order once ready and to pay with a certified cheque. On the delivery day, a Mr. Guzman arrived in the early evening to take delivery of the goods and paid with a certified cheque signed by Mr. St-Pierre. The cheque turned out to be fraudulent.
Following this incident, Toiles brought an action against Mr. Guzman for goods sold and delivered, but unpaid. Toiles also sued Intact Insurance (“Intact”), its insurer at the time of the incident, demanding compensation for the herein-mentioned loss.
THE FIRST INSTANCE JUDGMENT
The first instance judgment2 was rendered in March 2017. As of the date of the hearing in January 2017, Toiles had neither recovered its goods nor had been paid.
The first defendant’s liability, Mr. Guzman, was rapidly excluded. The court held that Toiles had not met its burden of proving that Mr. Guzman was the actual purchaser of the goods. Raising the absence of a legal relationship, the Court dismissed this charge.
With respect to the head of damages against Intact, the court had to rule on whether Toiles’s loss was covered by its insurance contract or not. Toiles alleged that its insurance policy covered the loss and that Intact had to compensate it for the lost amount. Toiles claimed to have been a victim of theft, since the concept of fraud is included in the act of theft. Intact, on the other hand, denied coverage, alleging that the insured had voluntarily surrendered the goods.
Toiles’s insurance contract covered, amongst other things, goods linked to its activities and located at specified sites. Subject to exceptions, Toiles’ insurance policy covered all risks of direct loss or damage to insured goods. The contract did not specify any definition of theft or fraud, so the Court relied on the Criminal Code’s definitions, found respectively in sections 322 and 380. By doing so, the Court concluded that the difference between the two offences lays in the victim’s will to surrender the good in question.
Referring back to the facts, in exchange for an NSF cheque, Toiles voluntarily surrendered the merchandise. According to the Court, the company was, therefore, a victim of fraud rather than a victim of theft since Toiles did not lose the goods as such, but rather their unpaid value. Yet, an analysis of the insurance policy showed that losing a sum of money was not a peril directly connected to the insured goods, the money itself being specifically excluded from the insurance policy coverage.
Further, the Court discussed the case-law cited by the two parties. The Court excluded judgments where the demanding party had suffered a theft, judgments that dealt with insurance policies containing substantially different clauses, and judgments where the Court did not agree with the legal classification of theft. Based on the Court of Appeal’s ruling in Commerce & Industry (see below), the Court also dismissed the case against Intact.
THE COURT OF APPEAL’S JUDGMENT
Rejecting the argument that there is a legal controversy over the insured’s right to compensation from the insurer as a result of fraud, the Court of Appeal dismissed Toiles’s request for leave to appeal the judgment at first instance. The Court considered Commerce & Industry to be a leading case. The Court decided that the original trial judge was correct in following this ruling and affirmed that the state of law was that which was set out in the ruling.
THE IMPORTANCE OF PROPERLY ANALYZING THE CLAUSES IN THE CONTRACT
In conclusion, although theft and fraud may be seen as two similar offences due to their consequences, the compensation an insurer is bound to pay may differ substantially. This results particularly from the fact that, in the event of fraud, it is not the goods themselves that constitute the loss—as would be the case when a theft occurs—but rather, their unpaid value. In this context, an in-depth analysis of the insurance policy’s clauses is required to determine whether the loss suffered is covered by the insurance policyand whether it should be compensated.
THE COURT OF APPEAL’S JUDGMENT IN COMMERCE & INDUSTRY3
In this similar case, a company delivered the goods in exchange for a certified cheque that turned out to be fraudulent. Despite the company’s demand to obtain compensation, the insurance company refused, alleging that the loss was not covered by the insurance policy.
The first instance judgment, which ruled in favour of the insured, was overturned by the Court of Appeal. The Court deemed that the insurance policy did not cover the financial loss. The policy covered “all risks of direct physical loss or damage” and protected the company in the event of physical damage caused to property located at a specific site. However, in this case, as in our herebefore-discussed judgment, the company had freely consented to hand the goods over to the purchaser and therefore had not been a victim of theft. The company therefore did not suffer any “direct physical loss or damage”. Considering the loss represented the unpaid value of the goods sold, the loss was not covered under the insurance policy.
1. 6916643 Canada inc. c. Intact, compagnie d’assurances, 2017 QCCA 660.
2. 6916643 Canada inc. c. Santos Guzman, 2017 QCCQ 4242.
3. Commerce & Industry Insurance company of Canada c. Giovanni Management Ltd, AZ-85011108 (C.A.).
By Me Chloé Goutal, Attorney at Law with Gilbert Simard Tremblay LLP