Does Your Insurance Policy Hold a Warranty?
September 29, 2004
Claude M. Jarry
A recent decision of the Québec Superior Court1 (hereinafter "Sico case"), re-iterated the importance of being aware of the consequences of breaching a warranty in your insurance policy. The case was decided under Section 2412 of the Québec Civil Code which provides that the breach of a warranty by the policyholder suspends coverage. The section provides as follows:
"A breach of warranty aggravating the risk suspends the coverage. The suspension ceases upon the acquiescence of the Insurer or the remedy of the breach."
As a result of Section 2412, the policyholder commits to maintain the present situation or promises that this situation will exist in the future. For example, the policyholder commits to maintain a guardian at all times on the assured premises or to allow a manufacturer’s representative to inspect his or her sprinkler system twice a year.
Similarly, in common law provinces throughout Canada, liability policies often contain various warranties and conditions which govern the contractual relationship between the Insurer and the Insured. A typical liability policy will stipulate that coverage is contingent upon the Insured's compliance with the conditions and warranties of the policy. Thus an Insured's breach of a condition or warranty may entitle the Insurer to forfeit coverage. The type of breach will, in large part, determine whether or not the Insurer is entitled to deny coverage. Trivial breaches will not entitle the Insurer to forfeiture. For example, imperfect compliance with a condition with respect to the keeping of books for the purposes of premium adjustments has been held not to entitle the Insurer to forfeiture. The denial of coverage is also subject to the Court's statutory power to relieve against forfeiture. However, a prudent Insured would be well served to make themselves aware of the conditions and warranties in the policy and strictly adhere to them.
The recent decision of the Superior Court in the Sico case interpreted section 2412 of the Québec Civil Code as being related to the failure by the policyholder to adhere to a warranty contained in the policy. This was in line with what the Quebec Court of Appeal had held in an earlier 1994 decision.2 The Sico case demonstrates the potential repercussions for an Insured’s breach of a warranty.
The case involved a claim for $67,881.92 for damages to a building caused by a fire. The defendant had obtained a contract to restore the plaintiff’s building roof. On September 25, 1999, an elastomer membrane was applied to the building roof. To be applied, the membrane required the heat of a blowtorch. Witness testimony established that the work was completed by 3:00 p.m. and that the defendant’s employees had left the building 30 or 40 minutes later. During the evening, a fire broke out on the roof of the building.
The evidence clearly established that the fire was a result of the defendant employees’ work. The Court, therefore, held the defendant liable for the damages claimed. The defendant attempted to rely on its liability policy, however, the policy required the presence of a fire extinguisher for a period of at least 60 minutes while works were being performed with a blowtorch.
The insurance company denied coverage on the basis that the Insured had breached a warranty of the policy. The policyholder contended that the fact that the breach increased the risk was not a sufficient basis upon which to deny coverage. The policyholder argued that the breach had to have either been related to or contributed to the loss.
The Court disagreed and held that the Insurer was entitled to refuse to indemnify the policyholder as a result of the breach. The evidence clearly demonstrated that the policyholder’s employees had not remained for at least 60 minutes and thus had breached the warranty.
Mr. Justice Laurent Guertin of the Québec Superior Court, in his decision, relied on the following passage by Justice Chamberland of the Québec Court of Appeal:
"(...) breach of a warranty suspends the guarantee only against the risk that the engagement is aimed at. In other words, the warranty must be relevant to the risk that the insurance company decides the guarantee is related to. That is how, referring to Professor Didier Lluelles’ example, the policyholder’s breach of a warranty to install sprinklers in the insurance-covered building will suspend the guarantee against fire, but will not do so with the guarantee against theft. So the suspension of the guarantee depends on two elements: failure to respect a warranty and aggravation of the risk that the warranty is aimed at. These two elements are interrelated and, when both of them are present, there will be suspension of the guarantee related to the risk. However, it is not necessary that in fact the incident has been caused, in whole or in part, by the failure to respect the warranty."3 [translation]
Thus the suspension of the guarantee depends on two elements: a breach of a warranty and the aggravation of the risk that the warranty is aimed at.
These two elements were present in the Sico case: by leaving before the 60 minutes required after the last blowtorch was extinguished, the policyholder’s employees breached a warranty of the policy. Moreover, since the warranty was clearly aimed at addressing the risk of fire, there was an aggravation of the risk covered by the insurance company. The Court held that the guarantee was suspended when the fire occurred. This resulted in a loss of coverage for the Insured.
The policyholder’s argument was also rejected because the engagement must be relevant to the risk against which the insurance company claims that the guarantee is suspended. However, it is not necessary that the incident be caused in whole or in part by the failure to respect the engagement. Under the common law, failure to satisfy a condition or warranty may result in a loss of coverage even if the particular instance of default had nothing to do with the loss.
Only three days prior to the Sico case, Mr. Justice André Wery of the Québec Superior Court had held that a policyholder’s breach of a warranty against a risk does not suspend the coverage that is provided to him by his insurance policy against other risks:
"That is how the policyholder who, contrary to his engagement, fails to install a sprinklers system will have his protection against fire removed, but not his protection against theft."4 [translation]
Fortunately, the case law on this point is well established:5 only the risk aimed at by the warranty will not be covered. However, the Sico case demonstrates that a breach of a warranty may have serious consequences for the policyholder.
A careful examination of your insurance policy could prevent such loss of coverage. A breach of a warranty will not suspend your insurance coverage for all the risks covered. However, when there is a breach of warranty and an aggravation of the risk related to the warranty, the suspension of your guarantee will occur against this risk. Does your insurance policy hold warranties? Do you risk a suspension of your guarantee against a risk that you believed to be covered? Check your warranties and don’t get caught offguard.
1Sico inc. v. 9059-1330 Québec inc., J.E. 2004-271 (C.S.), inscription in appeal, 2004-02-11 (C.A.), 200-09-004735-046.
2Auberge Rolande St-Pierre inc. v. Compagnie d’assurance canadienne générale,  R.J.Q. 1213 (C.A.).
3Op.cit. note 2.
4A.Y.K. Socks inc. v. 3096-0124 Québec inc., J.E. 2004-271 (C.S.)
5Auberge Rolande St-Pierre inc. v. Compagnie d’assurance canadienne générale,  R.J.Q. 1213 (C.A.); Entreprises forestières Fournier & Frères inc. v. Compagnie d’assurance Commerce et Industries du Canada,  R.R.A. 524 (C.S.); Réginald Gagnon et al. v. Mark J. Oppenheim,  R.R.A. 705 (C.S.).