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Back to Basics: The Importance of Subrogation Clauses in Releases

On March 2, 2022, the Hon. Lukasz Granosik of the Superior Court dismissed a subrogation claim by Sécurité Nationale compagnie d’assurance based on the absence of legal and conventional subrogation: Sécurité Nationale compagnie d’assurance c. Bel Bro inc., 2022 QCCS 723.

The Context

The plaintiff, Sécurité Nationale, an insurer, was suing a general contractor for $140,000 following the rupture of a plumbing fitting that resulted in water damage to the insureds’ building and property.

Bel-Bro inc., the general contractor, filed an action in warranty against its sub-contractor Plomberie Yves Goulet inc., who had carried out the plumbing work during the construction of the building five years earlier, alleging that this sub-contractor should be held liable for the damage since it had supplied the labour and plumbing supplies, including the fitting that allegedly caused the damage.

Plomberie Yves Goulet inc., claiming to have purchased the fitting from the manufacturer Distribution Sanbec MTL ltée, filed an action in sub-warranty against the latter.

Parties’ Arguments

Plomberie Yves Goulet based its defence on three arguments:

  1. The absence of legal subrogation, as the damages were excluded from the coverage provided in the plaintiff’s policy by an exclusion clause for water damage occurring in a vacant building. As the building had been vacant for over a year prior to the damage, Plomberie Yves Goulet alleged that the plaintiff had paid an indemnity to its insured even though it was under no obligation to do so;
  2. The absence of conventional subrogation, as the release concluded between the plaintiff and the insureds did not contain a clause to that effect;
  3. The absence of fault, since the defective fitting had not been manufactured by Sanbec and, therefore, was not the one installed originally by Plomberie Yves Goulet.

The plaintiff argued that:

  1. It was legally subrogated by the mere fact that it had paid an indemnity to the insured. In support of this argument, it raised the notion of “potential subrogation”, applicable whether or not it had the obligation to indemnify its insured. And, regardless of this notion, the building was not vacant or abandoned, since it was undergoing a conversion with a limited and temporary period of inoccupancy;
  2. It was also conventionally subrogated under the release for subrogation concluded in consideration of the payment of the indemnity to the insured. Although it did not provide so explicitly, the release reflected the insurer and the insureds’ will to create a conventional subrogation;
  3. The general contractor and its subcontractors should be held liable under articles 1726 and 2118 of the Civil Code of Québec [CCQ].

The Court’s Decision

The Court ruled that a legal subrogation can only occur if (1) the insurer indemnifies its insured (either voluntarily, pursuant to a judgment, or on the basis of the possibility of such payment, as per Kingsway General Insurance Co. c. Duvernay Plomberie et chauffage inc., 2009 QCCA 926 and (2) there is an obligation to indemnify. Therefore, a payment made by the insurer absent an obligation cannot trigger the compensation mechanism.

The Court also ruled that the building was vacant at the time of the damage, since nobody had lived in it for over a year and the possibility that there would be occupants, although considered, was not foreseeable in the short term. Therefore, the policy’s exclusion for vacancy applied and the plaintiff, released from the obligation to compensate its insureds, was not legally subrogated to their rights. Consequently, the insurer had no right and no recourse against the parties responsible for the damage.

With regards to conventional subrogation, the Court considered that the plaintiff’s argument that subrogation should be inferred, could not be held, since this would come into conflict with article 1653 CCQ. The Code no longer requires that the payment of the indemnity and the closing of the release be simultaneous. Furthermore, the indemnity had been paid without any admission of fault and, therefore, without an admission of coverage. In the release, the insureds do not declare and do not consent that their rights to claim compensation from third parties be transferred to the insurer, who would then be expressly allowed to exercise this right in its own name, for a precise amount. It was a basic release, devoid of any express will to subrogate. As a result, no conventional subrogation was created.

Finally, even though the Court dismissed the claim on the basis of the absence of subrogation, it expressed an opinion on the parties’ arguments relating to fault. It concluded that Plomberie Yvon Goulet inc. had committed no fault: the evidence revealed that the defective fitting was not the one that it had installed. The defective fitting had not been made by Sanbec, since Plomberie Yves Goulet would only buy and install that manufacturer’s products during the relevant period. The Court added, had subrogation not been ruled out, the general contractor could have been held liable for the damages under the presumptions outlined in articles 1729 and 2118 CCQ. However, the Court abstained from ruling on this last point.

This judgment is therefore a good reminder of the importance for insurers to provide for the signing of releases that include explicit clauses providing for a right of subrogation and/or an assignment of rights from the insured to the insurer.

In this case, Plomberie Yves Goulet was represented by the author.

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