Quebec’s principles of insurance claims for latent defects have been firmly established for over a decade. However, insurers frequently receive claims or questions from policyholders about potential claims.
This creates headaches for insurers and policyholders, because of the fine distinction between latent defects and consequential damages. Each and every claim is unique, which means that insurers and policyholders may have different interpretations of the facts in dispute, requiring the courts to intervene.
When does an insurer defend an insured sued for latent defects? Can the insurer request that a claim for latent defects brought directly against them be dismissed at a preliminary stage? Does the insurer have the right of subrogation when the insured discovers a latent defect that affects an insured building?
To help answer these questions, we’ll revisit the principles set out by the Quebec courts, along with some noteworthy decisions.
Principles and article 2465 of the Civil code of Québec
The Civil code of Québec (“C.C.Q.’’) incorporates a statutory exclusion for latent defects in its section on property and damage insurance:
Article 2465. The insurer is not bound to indemnify for injury resulting from shrinkage, diminution or losses sustained by the property arising from an inherent defect in, or the nature of, the property.
On several occasions, the Quebec courts have examined cases where latent defects were alleged and the issue was to determine if insurance coverage would apply.
The decisions Assurances générales des Caisses Desjardins v. Le Groupe Commerce, compagnie d’assurances and Giovanni Riccio[1] and Pageau v. Leblanc[2] are frequently referred to in this context. In the latter case, a Wellington-type claim was filed by the vendors of a property sued for reduction of the sale price on the grounds of latent defects. The Superior Court reiterated that article 2465 C.C.Q. represented a legal exclusion for latent defects, so no coverage was provided for them. With this in mind, each count in the plaintiffs’ claim against the insured sellers was examined before it was determined that there could be no coverage.
Quebec law is clearly defined when it comes to potential insurance coverage for latent defects. The presence of latent defects in a building is not considered a loss, and therefore does not de facto entitle the owner to insurance coverage. However, if latent defects cause any damage to the building, these may be covered, depending on specific exclusions of each insurance policy. Even so, disputes over insurance coverage for latent defects, such as the duty to defend, preliminary claims and the right of subrogation continue to be a hot topic.
The duty to defend and preliminary applications
In September 2024, the Superior Court ruled on an insurer’s motion to dismiss in Thompson v. Moreau[3]. L’Unique insured the sellers against liability on the grounds that the property was riddled with latent defects. The plaintiff claimed that the building had been affected by water infiltration, which required repairs.
The plaintiff sued the sellers of the building, as well as L’Unique directly. In turn, L’Unique filed a motion to dismiss, arguing that the recourse was destined to fail and was even abusive, particularly in light of article 2465 C.C.Q.
The insurer’s claim was dismissed: a file review could not determine, at the preliminary stage, if the latent defects alleged were the cause of any consequential damages. The Superior Court indicated that it was advisable to reach a decision after adversarial debate at a future trial, as some allegations referred to damages caused by latent defects.
In Nizynski v. Martel[4], defendants filed a Wellington-type claim against their insurer, La Capitale assurances générales inc., to compel the insurer to defend them in a latent defect claim arising from the sale of their building. La Capitale contested this claim, arguing that the application did not contain any allegation of events distinct from the alleged defects that would have caused damages likely to trigger its duty to defend.
The Superior Court maintained that the latent defect was not covered by insurance, and that only the resulting loss could be covered, given the exclusion in article 2465 C.C.Q.
However, the Superior Court ruled that the building’s lateral movement was not a latent defect, but the result of foundation deficiencies as alleged by the plaintiffs and constituted consequential damage incurring the duty to defend on the part of La Capitale.
In our view, it’s always best to be cautious when considering coverage potential in latent defect claims, particularly if allegations suggest consequential damage.
Analysis of an insurer’s duty to defend should be based on potential for coverage, in light of claims made in the now-famous decision in Progressive Homes Ltd. v. Cie canadienne d’assurances générales Lombard[5].
In some cases, however, the courts confirmed that the insurer does not have a duty to defend its seller-insureds sued for latent defects.
In Chayer v. Perras[6], Desjardins insured sellers under a home insurance policy. Desjardins refused to defend its insureds, arguing that it was solely a question of latent defects, specifically excluded from the insurance policy and also excluded under article 2465 C.C.Q.
Analysis of allegations in the application revealed that the plaintiff only sought a sum of compensation to correct the defects, not for any damage caused by them.
The Superior Court dismissed the application to compel Desjardins to assume the defence of its insureds, ruling that the presence of latent defects did not constitute an incident causing damage under the policy. The Court cites Bérubé v. Johnston[7] and Johnston v. Chubb Insurance Company of Canada[8] to support its argument.
The obligation to indemnify and future right of subrogation
The Court of Appeal’s decision in Axa Assurances inc. v. Immeuble Saratoga inc.[9], reminds us that, with the right of subrogation, insurers can only claim amounts for consequential damages caused by latent defects, not for those resulting from repairs to the cause of the hidden defects themselves.
It is essential to thoroughly analyze the cause of the damage, the nature of the latent defect and resulting consequential damages.
In Desjardins Assurances générales inc. v. 4068122 Canada inc.[10], the Court made it clear that the plaintiff’s indemnity was adequate, since it did not compensate the insured for the replacement cost of the waste pipe that failed and caused water damage, but solely for the water damage itself. The insured is responsible for rectifying the cause of the loss, and the insurer is responsible for compensating the insured only for consequential damage.
If an insurer is paying compensation to correct a latent defect, the defendant is justified in claiming that this was an ex-gratia payment, and legal “subrogation” would not apply, unless the insurer and the insured agreed to conventional subrogation.
Observations, food for thought and some recommendations
Finally, at the preliminary stage or as part of a Wellington-type claim, it is vital to review allegations of the claim and its exhibits to determine if coverage is possible, in view of allegations against the insureds. If there is any doubt, the courts will likely favour a debate on the merits.
When an insured files a claim for damage possibly resulting from latent defects, it’s in the insurer’s best interest to identify the cause of the damage, and to establish which damages are specifically related to latent defects. This way, the insured is adequately compensated, and only for consequential damages, which means that any subrogatory action can start off on the right foot.
[1] Caisses Desjardins v. Le Groupe Commerce, compagnie d’assurances, [2001] R.R.A. 133.
[2] Pageau v. Leblanc, 2008 QCCS 5621.
[3] Thompson v. Moreau, 2024 QCCS 3346.
[4] Nizynski v. Martel, 2022 QCCS 4456.
[5] Progressive Homes Ltd. v. Cie canadienne d’assurances générales Lombard, 2010 CSC 33.
[6] Chayer v. Perras, 2015 QCCS 3196.
[7] Bérubé v. Johnston, 2008 QCCS 4589.
[8] Johnston v. Chubb Insurance Company of Canada, 2010 QCCA 1066.
[9] Axa Assurances inc. v. Immeuble Saratoga inc., 2007 QCCA 1807.
[10] Desjardins Assurances générales inc. v. 4068122 Canada inc., 2024 QCCQ 4107.