February 2011
PFD | Insurance


By Frédéric Savard-Scott

On October 25, 2010, the Québec Court of Appeal confirmed a Superior Court ruling that insurance policyholders must meet the commitments to which they subscribe in their contracts (LML Paysagiste & Frère inc. v. Union canadienne (L'), insurance company, 2010 QCCA 1905, J.E. 2010-1924, EYB 2010-180962).

In this particular case, the owners of an excavation and landscaping company were claiming the compensation they believed to be owed by their insurance company after one of their power shovels was stolen. The insurance company claimed that the warranty was suspended when the theft occurred because the excavation company had not met one of the warranty clauses stipulated in the insurance contract.

The contract included a clause requiring that the excavation company install a vehicle tracking system on every piece of equipment listed in the contract and maintain these systems at all times. One of the company owners knew that the systems were required and had installed them on the equipment. However, the device on the power shovel soon became defective. The tracking service provider sent several letters to the excavation company to inform the owners of the problem, but the excavation company never took action.

When the shovel in question was stolen, the insurance company refused to compensate the landscapers since they had not respected the warranty clause in the contract. The Superior Court and Court of Appeal judges ruled in favour of the insurance company. Article 2412 of the Civil Code of Québec states that a breach of warranty aggravating the risk suspends the coverage and that suspension ceases upon the acquiescence of the insurer or the remedy of the breach. In this case, it was clear to the courts that the fact that a properly functioning tracking system had not been installed on the equipment increased the risk of theft, especially since it had been proven that the installation of such systems made it possible to recover the stolen goods in 80% of cases. The courts concluded that the policyholder defaulted, increasing the risk of theft. As a result, at the time the shovel was stolen, the warranty had actually been suspended.

It is therefore important that policyholders comply with contract warranties. Though non-compliance does not void the insurance contract, it suspends the warranty pertaining to the insured risk and bars the policyholder from receiving any eventual compensation.