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Boiler Inspection and Insurance Company of Canada v. H.A. Simons Ltd.

Issue Discussed: Other

Submitted by Graeme Mew

Date Promulgated: June 23, 2011

Issues Decided: Can a reinsurer sue a third-party wrongdoer in subrogation for amounts the reinsurer paid to the cedent under a reinsurance contract?

On June 23, 2011, Justices Thibault, Rochette and Kasirer rendered their decision on the appeal of a judgment of the Honourable André Denis of the Superior Court, in an area of law rarely considered by the Quebec courts – reinsurance. The Court of Appeal weighed in on the possibility for a reinsurer to sue a third-party wrongdoer for the amount the reinsurer paid to an insurer under a reinsurance policy. This amount corresponded to the indemnity that the insurer paid to its insured for the damages caused by the third party.

The dispute between the parties arose out of the breakdowns of a digester, a type of mixer used in the pulp and paper industry, that occurred at Domtar Inc. (“Domtar”)’s plant in Lebel-sur-Quévillon in 1995 and 1996. American Home Insurance Company (“American Home”) indemnified Domtar for the loss caused by these breakdowns in the amount of $8,508,613 under an all-risks insurance policy. This amount was then fully reimbursed to American Home by the Boiler Inspection and Insurance Company (“Boiler”) pursuant to a reinsurance policy. Boiler then sued the designers, manufacturers and installers of the digester (the “Defendants”) and their respective insurance companies to recover this amount.

In order to justify its right of action against the Defendants, Boiler initially claimed to be legally and conventionally subrogated in the rights of American Home to the same extent that American Home was subrogated in the rights of Domtar. Boiler later modified its claim to present itself as the coinsurer of Domtar rather than the reinsurer of American Home, in order to claim the benefits of legal subrogation in Domtar’s rights vis-à-vis the Defendants. Finally, Boiler presented a motion to amend its claim, alleging that American Home was acting as its representative under a prête-nom agreement, or alternatively, that pursuant to a stipulation for another, Boiler was in fact the real insurer of Domtar and was therefore subrogated in its rights. At first instance, the Defendants argued three motions to dismiss before Justice Denis, who dismissed Boiler’s action with costs due to the absence of any legal connection between Boiler and the Defendants. The Court of Appeal confirmed this decision.

Adopting much of the trial judge’s reasoning, the Court of Appeal began by analyzing the wording of the reinsurance policy, concluding that there was no ambiguity in the policy as to the fact that Boiler was the reinsurer while American Home was the insurer. As such, the Court of Appeal held that there was no legal connection between Boiler and the Defendants. The Court of Appeal cited article 2397 of the Civil Code of Québec, which provides that the contract of reinsurance has effect only between the insurer and the reinsurer, such that the Boiler reinsurance policy did not create any connection between Boiler and Domtar that would cause Boiler to be legally subrogated in Domtar’s rights against the Defendants. Thus, the legal subrogation between an insurer and its insured provided by article 2474 of the Civil Code of Québec does not exist between a reinsurer and the insurers’ insured. Only a conventional subrogation duly disclosed to the alleged wrongdoers could have provided the reinsurer with a right of action against them. In other words, in order for Boiler to have been able to sue the Defendants, American Home would have had to assign its rights to Boiler further to the indemnity paid to Domtar, but this had not been done.

The Court of Appeal also confirmed that the trial judge was well founded in dismissing Boiler’s allegations to the effect that it was acting for Domtar pursuant to a prête-nom agreement or a stipulation for another, since the clear and unambiguous terms of the reinsurance policy could not be interpreted in such a way as to create legal connections where no such connections exist.

The Court then noted that pursuant to the principle that a contract has effect only between the contracting parties, Domtar was a third party in relation to the reinsurance policy. Only Boiler and American Home were parties to the reinsurance policy pursuant to which the amounts at issue had been paid. There was no reason to believe or assume that Domtar had understood from the outset that it would be contractually linked to Boiler.

Finally, the Court of Appeal confirmed the dismissal of Boiler’s motion for permission to amend in order to add American Home as subsidiary plaintiff, as this would equate to changing the legal basis of Boiler’s claim. The substitution of one party for another, other than the correction of a simple clerical error, is not receivable. The Court of Appeal thus confirmed the trial judge’s decision that the action instituted by Boiler, in its capacity as reinsurer, against the Defendants responsible for Domtar’s damages, was not receivable due to the lack of any legal connection between them.