Caisse populaire des Deux Rives v. Société mutuelle d'assurance contre l'incendie de la Vallée du Richelieu, [1990] 2 S.C.R. 995
Le Groupe Estrie‑Richelieu,
Compagnie d'assurance, in continuance
of suit from Vallée du Richelieu, Compagnie
mutuelle d'assurance de dommages Appellant
v.
Caisse populaire des Deux Rives Respondent
indexed as: caisse populaire des deux rives v. société mutuelle d'assurance contre l'incendie de la vallée du richelieu
File No.: 21205.
1990: March 20; 1990: October 4.
Present: La Forest, L'Heureux‑Dubé, Gonthier, Cory and McLachlin JJ.
on appeal from the court of appeal for quebec
Insurance -- Fire insurance -- Nature and effect of hypothecary clause -- Intentional fault of insured -- Insurance policy purchased by hypothecary debtor -- Debtor deliberately burning insured property -- Whether intentional fault of debtor can be invoked against hypothecary creditor ‑‑ Legality of hypothecary clause -- Civil Code of Lower Canada, art. 2563.
A farmer obtained a loan from respondent Caisse and hypothecated his property to secure its repayment. The deed of loan provided that the debtor undertook to insure the hypothecated property in respondent's favour, and in fulfilment of this obligation the debtor purchased an insurance policy with appellant. The standard hypothecary clause included in the policy provided that, in the event of loss, the indemnity was payable to respondent and that the acts, neglect, omissions or misrepresentations of owners of the insured property could not be invoked against hypothecary creditors. The insured property was subsequently burnt by the intentional fault of the debtor and appellant, relying on art. 2563 C.C.L.C., refused to indemnify respondent. This article of public order provides that an insurer "is not liable, notwithstanding any agreement to the contrary, for prejudice arising from the insured's intentional fault". In response to this refusal, respondent brought an action against appellant in the Superior Court. The court allowed the action and its judgment was affirmed by the Court of Appeal. This appeal is to determine whether the intentional fault of a hypothecary debtor can be invoked against his hypothecary creditor under an insurance contract containing a hypothecary clause.
Held: The appeal should be dismissed.
The insurance clause in the hypothecary loan contract contains all the elements of a contract of mandate, under which the hypothecary debtor has undertaken to keep the property subject to the hypothec insured. In accordance with that mandate, the hypothecary debtor took out an insurance policy containing a hypothecary clause. The wording of this clause indicates the existence of a second insurance contract between the hypothecary creditor and the insurer, a contract separate from the one purchased by the hypothecary debtor personally. Since the hypothecary creditor and not the debtor is the insured under this second insurance contract, indemnification of the hypothecary creditor for the loss caused by its debtor's intentional fault is not contrary to the prohibition of public order contained in art. 2563 C.C.L.C. Fault by the hypothecary debtor must be treated as fault by a third party.
Cases Cited
Referred to: Madill v. Lirette, [1987] R.J.Q. 993; Guérin v. Manchester Fire Assurance Co. (1898), 29 S.C.R. 139; Syndicate Ins. Co. v. Bohn, 65 F. 165 (1894); Hallé v. Canadian Indemnity Co., [1937] S.C.R. 368; Aetna Insurance Co. v. Kennedy, 301 U.S. 389 (1937); Federal National Mortgage Association v. Prudential Property and Casualty Insurance Co., 517 So.2d 201 (1987); Liverpool and London and Globe Insurance Co. v. Agricultural Savings and Loan Co. (1903), 33 S.C.R. 94, rev'g (1901), 3 O.L.R. 127 (C.A. Ont.); London and Midland General Insurance Co. v. Bonser, [1973] S.C.R. 10; Hastings v. Westchester Fire Ins. Co., 73 N.Y. 141 (1878); London Loan and Savings Co. of Canada v. Union Insurance Co. of Canton Ltd. (1925), 56 O.L.R. 590, aff'd (1925), 57 O.L.R. 651; Royal Insurance Co. of Canada v. Trans Canada Credit Corp. (1983), 1 C.C.L.I. 300; Royal Bank of Canada v. Red River Valley Mutual Insurance Co., [1986] 5 W.W.R. 236; National Bank of Canada v. Co‑Operators General Insurance Co. (1988), 90 A.R. 295; Commerce & Industry Insurance Co. v. West End Investment Co., [1977] 2 S.C.R. 1036; Agen, December 8, 1964, Parfait v. Assurances générales et Nationale incendie (1965), 36 Rev. gén. ass. terr. 333; Cass. civ., February 28, 1939, La Confiance v. Le Phénix (1939), 10 Rev. gén. ass. terr. 469; Cass. civ., December 4, 1946, Consorts Poudenx v. Cie d'assurance La France, D.1947.25.
Statutes and Regulations Cited
Civil Code of Lower Canada, arts. 13, 17(24), 984, 1173, 1174, 1701, 1702, 2468 [repl. 1974, c. 70, s. 2], 2499 [repl. idem], 2500 [repl. idem; am. 1979, c. 33, s. 47], 2563 [repl. 1974, c. 70, s. 2], 2572 [repl. idem], 2573 [repl. idem], 2578 (old), 2582 [repl. 1974, c. 70, s. 2], 2586 [repl. idem].
Insurance Act, R.S.Q. 1964, c. 295, s. 238.
Loi du 13 juillet 1930 relative au contrat d'assurance, J.O., July 18, 1930, ss. 12, 37.
Authors Cited
American Jurisprudence, vol. 43, 2nd ed. Rochester, N.Y.: Lawyers Co‑operative Publishing Co., 1982.
Appleman, John Alan and Jean Appleman. Insurance Law and Practice, rev. vol. 5A. St. Paul, Minn.: West Publishing Co., 1970.
Bergeron, Jean‑Guy. "L'opposabilité des exceptions à différents intéressés dans un contract d'assurance" (1987), 47 R. du B. 933.
Bigot, Jean. "Assurances de responsabilité: les limites du risque assurable" (1978), 49 Rev. gén. ass. terr. 169.
Civil Code of Lower Canada: Sixth and Seventh Reports and Supplementary Report. Québec: George E. Desbarats, 1865.
Comerford Jr., W. Thompson. "When Is Money Paid the Mortgagee Recoverable? ‑‑ Is the Counterclaim Compulsory?" (1986), 22 Tort & Ins. L.J. 113.
Côté, Pierre‑André. The Interpretation of Legislation in Canada. Cowansville, Qué.: Éditions Yvon Blais Inc., 1984.
Couch, George J. Cyclopedia of Insurance Law, vol. 10A, 2nd ed. By Ronald A. Anderson. Revised volume by Mark S. Rhodes. Rochester, N.Y.: Lawyers Co‑operative Publishing Co., 1982.
Dwyer, James R. and Carey S. Barney. "Analysis of Standard Mortgage Clause and Selected Provisions of the New York Standard Fire Policy" (1984), 19 Forum 639.
Encyclopédie juridique Dalloz: Répertoire de droit civil, t. I, 2e éd., "Assurances terrestres" par Georges Durry.
Fabien, Claude. "Les règles du mandat". Dans Répertoire de droit: Mandat. Montréal: Chambre des notaires du Québec, 1982.
Faribault, Bernard. "Du papillon à la chrysalide ou l'étrange métamorphose de l'assurance de responsabilité" (1987), 55 Assurances 300.
Lambert‑Faivre, Yvonne. Droit des assurances, 6e éd. Paris: Dalloz, 1988.
Ledru‑Rollin. "Coup d'{oe}il sur les praticiens, les arrêtistes et la jurisprudence". Dans Journal du Palais, t. 1, 3e éd. Par Ledru‑Rollin. Paris: F.‑F. Patris, 1842.
Louisiana Civil Law Treatise, vol. 15. By William Shelby McKenzie and H. Alston Johnson. St. Paul, Minn.: West Publishing Co., 1986.
Picard, Maurice et André Besson, Les assurances terrestres, t. I, 5e éd. Par André Besson. Paris: L.G.D.J., 1982.
Picard, Maurice et André Besson. Traité général des assurances terrestres en droit français, t. 2. Paris: L.G.D.J., 1940.
Québec. Assemblée nationale. Journal des débats, vol. 15, no 82, le 19 novembre 1974, p. 2873.
Québec. Ministère des Institutions financières, Compagnies et Coopératives. Service des assurances. Rapport Faribault, 1957‑60.
Sicot, Lucien et Henri Margeat. Précis de la loi sur le contrat d'assurance, 4e éd. Paris: L.G.D.J., 1962.
Simard Jr., François‑Xavier. "La faute intentionnelle de l'assuré et la clause de garantie hypothécaire" (1987), 21 R.J.T. 335.
Sumien, Paul. Traité théorique et pratique des assurances terrestres des opérations de capitalisation, d'épargne et de crédit différé, 7e éd. Paris: Dalloz, 1957.
Thisdale, Louise. "Quelques innovations législatives en assurance de dommages", [1978] C.P. du N. 1.
APPEAL from a judgment of the Quebec Court of Appeal, [1988] R.J.Q. 2355, [1988] R.D.I. 556, 18 Q.A.C. 44, affirming a judgment of the Superior Court, [1984] C.S. 1180. Appeal dismissed.
François‑Xavier Simard, Jr. and André Desgagné, for the appellant.
Louis Gagné, for the respondent.
//L'Heureux-Dubé J.//
English version of the judgment of the Court delivered by
L'HEUREUX‑DUBÉ J. -- This appeal concerns the appellant insurer and the respondent hypothecary creditor of the purchaser of an insurance policy. The issue is whether the intentional fault of a hypothecary debtor can be invoked against his hypothecary creditor under an insurance contract containing a hypothecary clause.
Facts
The relevant facts are not in dispute and may be summarized as follows:
As security for a loan obtained from the respondent by one Leclerc, a hypothec was placed on certain immovable property. One of the conditions of the deed of loan was that the hypothecary debtor undertake to insure this property. In accordance with this clause, the latter purchased an insurance contract with the appellant. The immovable property insured by the appellant was subsequently burned by the intentional fault of Leclerc, its owner. The insurance contract provided that in the event of loss the indemnity was payable to the respondent, under the hypothecary clause. It was a standard form providing that the acts, neglect, omissions or misrepresentations of owners or occupants of the insured property could not be invoked against hypothecary creditors. The respondent brought an action against the appellant, claiming from it $112,359.50, the amount which it alleged was owed to it on the date of the fire. The Quebec Superior Court ordered the appellant to pay the respondent $62,726.50 with interest and costs, in view of the value of the insured property and the limit of the insurance contract. This judgment was affirmed in all respects by the Quebec Court of Appeal.
Judgments
Superior Court, [1984] C.S. 1180
As the issue raised by the action was whether the insured's intentional fault could be invoked against the hypothecary creditor, Biron J. noted the difficulty arising from the presence of a hypothecary clause in view of the public order provisions of the Civil Code of Lower Canada, following the 1974 amendments (at p. 1182):
[TRANSLATION] There can be no dispute that it [intentional fault of the insured] can be invoked against an ordinary hypothecary creditor who does not have the benefit of the standard hypothecary clause. The question becomes more difficult when, as here, under a clause contained in the policy the insurer has waived the right to rely on the acts of the insured against the hypothecary creditor. The difficulty arises from the second paragraph of art. 2563 of the Civil Code, which provides that the insurer is not liable, notwithstanding any agreement to the contrary, for prejudice arising from the insured's intentional fault, and from art. 2500 of the Civil Code, which declares any stipulation which derogates from the "prescriptions of . . . the second paragraph of article 2563" C.C. to be without effect.
The court was of the view that the standard hypothecary clause is an integral part of daily practice in insurance matters, and that the interpretation it has always been given by the Quebec courts cannot be set aside without clear wording, and accordingly concluded that arts. 2563 and 2500 C.C.L.C. have not changed the state of the law with respect to the intentional fault of the insured, since they make no specific provision to that effect. Even before the 1974 amendments to the Civil Code of Lower Canada, intentional fault by the insured could be invoked against him by the insurer under the provisions of the Insurance Act, R.S.Q. 1964, c. 295.
The trial judge stated that in his opinion an insurance policy containing a hypothecary clause of the type used in the case at bar sets forth two contracts: one between the purchaser and the insurer, the other between the insurer and the hypothecary creditor. The latter contract is entered into by the hypothecary debtor as a mandatary of his hypothecary creditor. The judge said (at p. 1188):
[TRANSLATION] The Court concludes that the [insurance policy] sets forth a valid insurance contract between the insurer and the Caisse populaire des Deux‑Rives, as there was consent by both parties, that of the Caisse being given by its mandatary, as to the subject‑matter of the contract, namely a guarantee against the risk of fire affecting certain property, and consideration, namely for the insurer, the premium paid and for the insured the guarantee against the risk of fire provided by the insurer.
If there is thus an insurance contract between the Caisse populaire des Deux‑Rives and [the appellant], in this second contract, it is the Caisse which is the insured and not Leclerc.
In the circumstances the fire did not result from the intentional fault of the insured, the Caisse, and as a consequence [the appellant] cannot rely on art. 2563 C.C. to deny liability for the loss to the latter.
The Court accordingly arrives at the same conclusion as if two separate insurance policies had been issued: one in which the insured was the owner of the property and the other in which it was the hypothecary creditor.
On the question of the amount of the indemnity owed to the hypothecary creditor by the insurer, the trial judge noted that the immovable property was hypothecated for an amount well above its insured value, but that clearly the indemnity could not exceed the insurance limit or the amount of damage caused to the burned property, if below the insurance limit. He accordingly allowed the respondent's action for a total of $62,726.50.
Court of Appeal, [1988] R.J.Q. 2355
(Tyndale and Gendreau JJ.A. and Chevalier J. (ad hoc))
Chevalier J. (ad hoc)
Chevalier J., who wrote the main opinion for the court, in which his colleagues concurred with certain qualifications, adopted the Superior Court's analysis regarding the effect of the introduction of art. 2563 C.C.L.C. and arrived at a similar result, that it had not altered the state of the law on whether the intentional fault of the insured could be set up against him. Article 2578 (old) of the C.C.L.C. and s. 238 of the Insurance Act prohibited indemnification for damage caused by the intentional fault of the insured.
Referring to the sources of the present art. 2563 C.C.L.C., namely French civil law, he noted that Quebec insurance law is the product of an intermingling of French law and North American practice, and so there could be no question of blindly following the principles of either one. In his opinion, a choice had to be made between two characterizations of an insurance policy, as a stipulation for a third party in favour of the hypothecary creditor or as an independent second insurance contract between the hypothecary creditor and the insurer. The court adopted the second solution, for four separate reasons:
1. The text of art. 2468 C.C.L.C., which defines a contract of insurance, is not in any way incompatible with the existence of a separate second contract;
2. The general scheme of the Civil Code of Lower Canada and insurance law is not disrupted if the hypothecary creditor, as an insured, benefits from the fault of his debtor: though it is contrary to public policy for the insured to benefit from his own fault, it is quite acceptable for a third party to do so;
3. Under arts. 2468 and 2563 C.C.L.C., the policyholder is not necessarily the insured, who himself will not necessarily be the purchaser, but may simply be the holder of an insurable interest; the policyholder may accordingly purchase a policy evidencing two insurance contracts with two separate insured parties;
4. The wording of the hypothecary guarantee suggests the creation of a separate insurance contract rather than the mere stipulation for a third party, in view of the mutual rights and obligations it contains between the insurer and the hypothecary creditor.
Moving on to an analysis of Quebec decisions on point, the judge cited the following passage from the reasons of Vallerand J.A., dissenting but not on this point, in Madill v. Lirette, [1987] R.J.Q. 993, at p. 1006 (at pp. 2364‑65):
[TRANSLATION] I do not think anyone will dispute that the hypothecary creditor may, by a separate policy, insure his debt and insure it against any intentional fault, whether by the owner or a third party. No one will argue either that in such a case it is not possible to invoke against someone who is unquestionably an insured, but not the person who committed the intentional fault, such intentional fault committed by another insured covered by another policy. This means that regardless of the public order prohibition in art. 2563 the hypothecary creditor can legitimately shield his interest from the owner's intentional fault and thus, by a circuitous man{oe}uvre, defeat a provision of public order. That being the case, the outcome can hardly be different depending on whether he is insured in the same policy or in a separate policy. There is absolutely no authority for such a conclusion apart from a finicky interpretation and application of art. 2563.
Finally, Chevalier J. concluded this lengthy analysis as follows (at pp. 2365‑66):
[TRANSLATION] In discussing scholarly analysis, the trial judge cited three writers, two of whom were of the opinion that the owner's intentional fault could not be invoked against the hypothecary creditor, while the third "tended", to use the term from the judgment a quo, to the contrary view . . . . I readily recognize that there is no unanimity among those who have examined in depth a matter which is likely to arise again frequently in our courts of law.
For these reasons, I consider that the judgment a quo is well founded and I would dismiss the appeal with costs.
Gendreau J.A.
Gendreau J.A. added certain qualifications, in particular regarding Madill v. Lirette, supra, where he was among those hearing the case (at pp. 2356‑57):
[TRANSLATION] My colleague very properly observed that the majority in Madill did not reject the argument that the insurance policy "(. . .) as it contains a hypothecary guarantee clause, may actually be two policies, one in which the insured is the beneficiary and the other in which the hypothecary creditor is the beneficiary" [Bisson J.A., at p. 1003] . . .
. . .
Like my colleague, for the reasons given by him and in particular the fact that the insurer has separately and formally undertaken an obligation to the hypothecary creditor, I would give full effect to the hypothecary guarantee clause in the insurance contract, subject to the reservation already mentioned of the formation of a contract between the policyholder and the insurer.
Analysis
In matters of insurance, as in other areas of the civil law, the principle of freedom of contract applies, and in general therefore it is for the parties to an insurance contract to define the limits of the risk covered and the conditions under which the indemnity is payable. However, this freedom of contract is not unlimited and will be subject to the public order provisions of the Civil Code of Lower Canada.
Bearing in mind this general principle, a two‑step approach should be adopted in analyzing the problem raised in this appeal, namely the examination of first the insurance contract, and second its compliance with the public order provisions of the Civil Code of Lower Canada, and in particular art. 2563.
1. Preliminary Observations
Before proceeding with the analysis as such, some general observations should be made regarding the supplementary sources of law in Quebec insurance law, especially as the parties raised this point both in their oral argument and in their factums, one pointing to the French origin of art. 2563 C.C.L.C. and the other to the American origin of the hypothecary clause in question.
In the past, writers and courts have tended to look to foreign insurance law for answers to questions for which Quebec civil law did not seem to provide a solution. This broader view of the sources of law is partly a result of the nature of insurance law, which the codifiers noted in their Seventh Report, is a body of fundamental rules found in several countries:
Indeed, notwithstanding the difficulty arising from certain questions, most of the great fundamental rules are well settled, and they are nearly uniform in all commercial states. The chief embarrassment therefore felt in dealing with the subject, lies, not in the statement of principles, but the task of arrangement, and in that of selecting amid conflicting opinions in matters of detail.
(Civil Code of Lower Canada: Sixth and Seventh Reports and Supplementary Report (1865), at p. 240.)
However, this apparent similarity of the fundamental rules should not cause us to forget that the courts have a duty to ensure that insurance law develops in a manner consistent with the rest of Quebec civil law, of which it forms a part. Accordingly, while the judgments of foreign jurisdictions, in particular Britain, the United States and France, may be of interest when the law there is based on similar principles, the fact remains that Quebec civil law is rooted in concepts peculiar to it, and while it may be necessary to refer to foreign law in some cases, the courts should only adopt what is consistent with the general scheme of Quebec law.
However, the development of insurance law must necessarily take place within its own particular socio‑economic context, namely North American insurance practice. In this regard Faribault notes ("Du papillon à la chrysalide ou l'étrange métamorphose de l'assurance de responsabilité" (1987), 55 Assurances 300, at p. 308):
[TRANSLATION] Without arguing for the introduction into our law of North American solutions to insurance problems, it is worth bearing in mind that our legislature has drawn inspiration from the "genius of the French language" and "North American practice" in the matter, so that Quebec insurers may develop a competitive industry in the North American context.
In short, as Ledru‑Rollin writes, the problem is [TRANSLATION] "to narrow if possible the connection between theory and practice, two sides of an indivisible entity, the law" ("Coup d'{oe}il sur les praticiens, les arrêtistes et la jurisprudence", Journal du Palais (3rd ed. 1842), vol. 1, at p. xix).
2. Interpretation of the Hypothecary Clause
The appellant and the respondent put forward two different interpretations of the hypothecary clause. In the appellant's submission, the hypothecary clause is part of the insurance contract purchased by the hypothecary creditor's debtor. The clause is thus a stipulation for a third party of the right to the insurance indemnity, under which all defenses the insurer can invoke against the hypothecary debtor may be set up against the hypothecary creditor. In the respondent's submission, the hypothecary clause is actually a second contract between the insurer and the hypothecary creditor, a contract which is separate and apart from that purchased by the hypothecary debtor. This second contract would then have been purchased from the insurer by the hypothecary debtor as mandatary for his hypothecary creditor. It follows, the respondent argues, that the completely independent contractual link means that the fault of the hypothecary debtor cannot be invoked against his creditor. I am of the view, for the reasons which follow, that we have to recognize that the latter interpretation more adequately reflects the intent expressed by the parties to the insurance contract and is consistent with the general scheme of insurance law as it is practised in North America, as well as being in keeping with the rules of Quebec civil law as a whole.
A. The Insurance Clause: a Contract of Mandate
Under the loan contract made between the respondent and Leclerc, the latter undertook to maintain insurance on the property which was the subject of the collateral guarantee, consisting primarily of a hypothec on his property. The insurance clause in the contract reads as follows:
[TRANSLATION] 9 -- INSURANCE
For the duration of this loan the borrower undertakes to insure the hypothecated buildings against loss and damage resulting from fire and the other risks mentioned in the supplementary coverage rider, to the satisfaction of the Office and for the benefit of the lender, and to transfer to the latter and deliver to him without delay all policies and certificates of insurance issued to this effect and receipts certifying renewal fifteen days before each policy or certificate expires.
In the event that the borrower does not perform the foregoing obligations, the lender may have the said buildings insured to its satisfaction and at the borrower's expense. Any premiums paid by the lender for this purpose shall be immediately payable, without prejudice to its right to add it to its next semi‑annual instalment.
Notwithstanding the second paragraph, in the event of default by the borrower, the Office may to its satisfaction and at the request of the lender cause the said property to be insured at the borrower's expense. Any premiums paid by the Office for this purpose shall be payable by the lender and, after payment of the premium to the Office, the lender may forthwith claim reimbursement, without prejudice to its right to add the premium to the next semi‑annual instalment.
In the event of loss the lender shall collect the indemnity directly from the insurers up to the amount of what is owed to it, such indemnity being deposited with the lender, which with the permission of the Office shall be entitled to allocate it in whole or in part either in accordance with s. 33 of the regulations or to the payment, in whole or in part, of the cost of rebuilding or repairing the hypothecated buildings, without in the latter case the privileges, hypothecs or other rights of the lender being reduced or affected in any way as a consequence of receipt of the indemnity.
The borrower shall report any loss to the lender and the Office forthwith and shall not undertake any rebuilding or repair of destroyed or damaged buildings without the prior written consent of the lender and the Office. [Emphasis added.]
The reference to the "Office" in this clause is to the Office du crédit agricole du Québec, and the "regulations" mentioned are, under clause 3 of the hypothecary loan deed, the regulations respecting the Farm Credit Act, R.S.Q. 1964, c. 108.
Mandate is governed by Title Eight of the Civil Code of Lower Canada, "Of Mandate", which contains inter alia its definition in art. 1701:
1701. Mandate is a contract by which a person, called the mandator, commits a lawful business to the management of another, called the mandatary, who by his acceptance obliges himself to perform it.
The acceptance may be implied from the acts of the mandatary, and in some cases from his silence.
The substantive and formal requirements of a mandate are minimal. Where there are two adults capable of consenting who agree that one of them, the mandatary, shall perform a legal act with a third party on the mandator's behalf, it can be concluded that there is an implied contract of mandate. As Professor Fabien observes, [TRANSLATION] "The keynote in the contract of mandate is freedom: freedom of use, freedom of stipulation and freedom of form" ("Les règles du mandat", in R.D. ‑‑ Mandat ‑‑ Doctrine ‑‑ Document 1, at p. 103, No. 64). Further, unless there is an agreement or usage to the contrary, mandate will be presumed to be gratuitous (art. 1702 C.C.L.C.).
On reviewing the insurance clause cited above, we find that it is an undertaking between two different persons with capacity to contract. One party, the borrower, undertakes to perform a legal act, a contract of insurance, with a separate third party, the insurer. This legal act is to be performed by the borrower [TRANSLATION] "for the benefit of the lender" (paragraph 1 of the insurance clause), so that it is clear that it is the lender's interests which the insurance contract is designed to protect, and therefore that the borrower must act as a representative of the latter's interests. We thus have the basic elements of the contract of mandate, complemented by other elements of the hypothecary clause, providing in detail for certain aspects of the performance of the mandate: first, the insurance clause imposes two specific additional obligations on the borrower, that of informing the lender and the Office promptly of any loss, an obligation that would have little meaning if the borrower has a unilateral obligation to insure himself personally, and that of delivering the policies and renewals to the hypothecary creditor without delay, which once again seems entirely consistent with a contract of mandate. Finally, the insurance clause provides a penalty for non‑performance of the mandate, namely the purchase of an insurance policy by the lender or the Office at the borrower's expense: Bergeron, "L'opposabilité des exceptions à différents intéressés dans un contrat d'assurance" (1987), 47 R. du B. 933, at p. 982.
Though the insurance clause provides the basis for a mandate, it does not by itself establish that the latter exists. The borrower could comply with it by means other than a hypothecary clause, which, as it contains a separate contract between the insurer and the hypothecary creditor, implies or presupposes the latter's consent and thus a mandate to conclude this separate contract given to the borrower by the lender. It does not necessarily follow, however, that the hypothecary clause contains a contract of insurance between the hypothecary creditor and the insurer. The hypothecary debtor must still have purchased this insurance in accordance with his mandate, that is, by means of a separate insurance contract in which he was acting only as a representative of the hypothecary creditor.
B. The Hypothecary Clause: a Separate Insurance Contract
The hypothecary clause in the insurance policy obtained by the hypothecary debtor, and in which the respondent contended there was a second insurance contract, repeats the standard formula approved by the Insurance Bureau of Canada and used in a great many insurance policies both in Quebec and in other Canadian provinces. This clause reads as follows:
[TRANSLATION] 8. STANDARD MORTGAGE CLAUSE (approved by The Insurance Bureau of Canada)
(a) Breach of conditions by mortgagor, owner or occupant
It is hereby provided and agreed that:
This insurance and every documented renewal thereof ‑- AS TO THE INTEREST OF THE MORTGAGEE ONLY THEREIN -‑ is and shall be in force notwithstanding any act, neglect, omission or misrepresentation attributable to the mortgagor, owner or occupant of the property insured, transfer of interest, any vacancy or non‑occupancy, or the aggravation of the declared risks.
PROVIDED ALWAYS that the Mortgagee shall notify forthwith the Insurer of any vacancy or non‑occupancy extending beyond thirty (30) consecutive days, or of any transfer of interest or increased hazard THAT SHALL COME TO HIS KNOWLEDGE, and that every increase of hazard (not permitted by the policy) shall be paid for by the Mortgagee -‑ on reasonable demand -‑ from the date such hazard existed, according to the established scale of rates for the acceptance of such increased hazard, during the continuance of this insurance.
(b) Right of subrogation
Whenever the Insurer pays the Mortgagee any loss award under this policy and claims that -‑ as to the Mortgagor or Owner ‑- no liability therefor existed, it shall be legally subrogated to all rights of the Mortgagee against the Insured, but any subrogation shall be limited to the amount of such loss payment and shall be subordinate and subject to the basic right of the Mortgagee to recover the full amount of its mortgage equity in priority to the Insurer, or the Insurer may at its option pay the Mortgagee all amounts due or to become due under the Mortgage or on the security thereof, and shall thereupon receive a full assignment and transfer of the mortgage together with all securities held as collateral to the mortgage debt.
(c) Other insurance
If there be other valid and collectible insurance upon the property with loss payable to the Mortgagee -‑ at law or in equity ‑- then any amount payable thereunder shall be taken into account in determining the amount payable to the Mortgagee.
(d) Who may give proof of loss
The Mortgagee may give notice of loss or deliver the required Proof of Loss under the policy upon becoming aware of the loss.
(e) Termination
The term of this Mortgage Clause coincides with the term of the policy;
PROVIDED ALWAYS that the Insurer reserves the right to cancel the policy, but agrees that the Insurer will neither terminate nor alter the policy to the prejudice of the Mortgagee without 15 days' notice to the Mortgagee by registered letter.
(f) Foreclosure
Should title or ownership to said property become vested in the Mortgagee and/or assigns as owner or purchaser under foreclosure or otherwise, this insurance shall continue until expiry or cancellation for the benefit of the said Mortgagee and/or assigns.
SUBJECT TO THE TERMS OF THIS MORTGAGE CLAUSE (and these shall supersede any policy provisions in conflict therewith BUT ONLY AS TO THE INTEREST OF THE MORTGAGEE), loss under this policy is made payable to the Mortgagee and/or assigns. [Emphasis added.]
This clause is derived from the standard or "New York Union" mortgage clause, which appeared in the State of New York around the mid‑1870s: Guérin v. Manchester Fire Assurance Co. (1898), 29 S.C.R. 139, at p. 162, per Gwynne J., and Syndicate Ins. Co. v. Bohn, 65 F. 165 (8th Cir. 1894), at pp. 174-75, per Sanborn Cir. J. for the court. This clause was necessary since without it the hypothecary creditor had no right to the proceeds of the insurance covering the property protected by it: Thisdale, "Quelques innovations législatives en assurance de dommages", [1978] C.P. du N. 1, at pp. 29, No. 101. It should be noted that the Quebec legislature corrected this deficiency in the 1974 insurance law amendments, with the introduction of art. 2586 C.C.L.C., the first paragraph of which gives preferred creditors priority over the proceeds of insurance policies:
2586. The indemnities exigible are apportioned among the creditors having hypothecs or privileges on the property damaged, according to their rank and without express delegation, upon mere notice and proof by them.
However, this provision confers a right to indemnification on the hypothecary creditor only to the extent the insured, here the hypothecary debtor in a purely personal insurance contract, is himself entitled to it: Madill v. Lirette, supra, at p. 1003, per Bisson J.A. for the majority. Under this legal subrogation, therefore, the hypothecary debtor's intentional fault may be invoked against the hypothecary creditor. As fault can be opposed in this way, the protection given the hypothecary creditor by art. 2586 C.C.L.C. remains incomplete, and the hypothecary clause may thus have an important effect in protecting the rights of the hypothecary creditor. This clause must accordingly be analyzed to determine its nature and effects.
The nature of the hypothecary clause must be examined in light of the constituent elements of an insurance contract. These elements are set out in art. 984 C.C.L.C., dealing with the formation of contracts in general, and art. 2468 C.C.L.C., defining the insurance contract:
984. There are four requisites to the validity of a contract:
Parties legally capable of contracting;
Their consent legally given;
Something which forms the object of the contract;
A lawful cause or consideration.
2468. A contract of insurance is that whereby the insurer undertakes, for a premium or assessment, to make a payment to a policyholder or a third person if an event that is the object of a risk occurs.
It is only if the hypothecary clause can be interpreted as including all these elements that it may be characterized as an insurance contract between the hypothecary creditor and the insurer. It should be noted at the outset that the fact that the hypothecary debtor took out the policy and paid the insurance premiums is in no way a bar to such a characterization. As Rinfret J. observed for the Court in Hallé v. Canadian Indemnity Co., [1937] S.C.R. 368, at p. 375, after citing the text of art. 2468 C.C.L.C.:
There is nothing in the definition of the code to the effect that the person "called the insured" must be the person who applies for the policy or who pays the premium.
In the article just quoted, we see nothing to prevent a person requesting the issue of an insurance policy for the benefit of another person. And there is nothing to that effect in any other article of the code.
It is thus necessary to examine the actual wording of the hypothecary clause to determine whether it contains the components of a separate contract. In the event of ambiguity, this clause, like any insurance contract, must be interpreted in the insured's favour (art. 2499 C.C.L.C.).
(i) Separate Object
Upon examination of the hypothecary clause, it can be seen that several distinct rights and obligations are assigned to both the hypothecary creditor and the insurer. First, one should note that under the second paragraph of subclause (a) of the clause, the hypothecary creditor is required to inform the insurer of any increased risk. This specific obligation imposed on the hypothecary creditor may be contrasted with the simple right of any interested person to inform the insurer, set out in arts. 2572, para. 2, and 2573 in fine C.C.L.C.:
2572. The insured must notify the insurer of any loss of such a nature as to involve coverage, as soon as he becomes aware of it.
Any interested person may give such notification.
2573. At the request of the insurer, the insured must notify the insurer as soon as possible of all the circumstances surrounding the loss, including its probable cause, the nature and extent of the damage, the site of the property, the rights of third persons affecting it, and any concurrent insurance.
. . .
If the insured fails to comply with the obligations of this article, any interested person may do so in his place. [Emphasis added.]
Further, the coverage provided by the hypothecary clause takes in a broader range of risks than the coverage contained in the insurance contract with the hypothecary debtor. The hypothecary creditor is entitled to the insurance indemnity whenever his debtor would have been entitled to it, but the indemnity may also be claimed in cases where the latter has lost this right on account of his "acts, neglect, omissions or misrepresentations". This extended coverage is also illustrated by the subrogation of the insurer in the rights of the hypothecary creditor against the hypothecary debtor, applicable in situations where the indemnity would not have been due to the debtor under his contract. Professor Bergeron quite properly observes that it necessarily follows from this greater protection that the hypothecary clause is a separate contract (at pp. 979-80):
[TRANSLATION] There can be no doubt that the hypothecary creditor has different rights than the debtor: under this clause, these rights are separate and go beyond those of the debtor; the creditor may be paid in certain circumstances in which the insured debtor would not be entitled to receive the indemnity; this is so true that the clause goes on to confer on the insurer the right to be subrogated in the rights of the creditor against the debtor, in so far as the clause requires it to pay, when its insured, the debtor, has lost his right to the indemnity. Needless to say, as the creditor has different coverage he is a separate insured. It therefore logically follows that there are two contracts in one and this duality must be respected. [Emphasis added -- italics in original.]
While it is possible in a single contract to divert certain rights from one party to a third party by means of a stipulation for that third party, this division of the effects of the contract cannot lead to the creation for the third party of rights which the stipulating party could not have. The fact that the hypothecary creditor has greater rights than the hypothecary debtor indicates that there is a separate contract between the insurer and the hypothecary creditor.
The hypothecary creditor's rights are also independent of those conferred on the debtor in the first insurance contract. Thus, under subclause (f) of the hypothecary clause, though the hypothecary creditor acquires the property which is the subject of the hypothec and the insurance, leading to confusion of the insurance interests of the hypothecary debtor and creditor in his person, he still continues to enjoy the benefit of his insurance contract, even though the first contract between the insurer and the hypothecary debtor is invalidated under art. 2582 C.C.L.C. by the extinction of the debtor's insurance interest:
2582. The insurance of a property in which the insured has no insurable interest is without effect.
It must also be noted in this connection that to argue, as the appellant does, that there is only one contract and a single insured -‑ in this case the hypothecary debtor -‑ in the insurance policy would nullify subclause (f) of the hypothecary clause, as a result of confusion of the insurance interests in the person of the hypothecary creditor, since art. 2582 C.C.L.C. is a provision of absolute public order (art. 2500, para. 1 C.C.L.C.).
The conclusion on this point must therefore be that the agreement between the hypothecary creditor and the insurer under the hypothecary clause has a separate object of its own.
(ii) Cause or Consideration
In a recently published article (Simard, "La faute intentionnelle de l'assuré et la clause de garantie hypothécaire" (1987), 21 R.J.T. 335), counsel for the appellant rejected the interpretation that treats the policy as two contracts on the ground that there was no consideration given by the hypothecary creditor in return for the entitlement to the indemnity given by the insurer. He wrote the following (at p. 364):
[TRANSLATION]
(1)In exchange for possible indemnity the hypothecary creditor undertakes nothing with respect to the insurer;
(2)the insurer, in exchange for nothing, undertakes to possibly pay him an indemnity. [Italics in original.]
He thus concluded that the second contract could not exist for want of consideration.
In my view, this argument does not seem well founded, since there is indeed a pecuniary consideration in the second insurance contract between the hypothecary creditor and the insurer. The consideration given to the insurer for the increased risk is included in the premium as determined by the policy and paid by the hypothecary debtor. The latter pays not only the premium for his insurance contract but also that payable under the hypothecary creditor's insurance contract, by an imperfect delegation of payment. This delegation may be implicitly deduced from the clauses of the loan contract, according to which the hypothecary debtor undertakes to keep the immovable property insured, otherwise premiums paid by the hypothecary creditor will be payable by the debtor. The rules for imperfect delegation of payment are set out in arts. 1173 and 1174 C.C.L.C.:
1173. The delegation by which a debtor gives to his creditor a new debtor who obliges himself toward the creditor does not effect novation, unless it is evident that the creditor intends to discharge the debtor who makes the delegation.
1174. The simple indication by the debtor of a person who is to pay in his place, or the simple indication by the creditor of a person who is to receive in his place, or the transfer of a debt with or without the acceptance of the debtor, does not effect novation.
The hypothecary debtor thus pays all the premiums, covering both that applicable to his insurance interest, covered by his insurance contract, and that applicable to the hypothecary creditor's insurance interest, covered by the second insurance contract. The respective insurance interests of the hypothecary creditor and the hypothecary debtor, the sum of which is always equal to the total value of the insurance policy, vary in a manner inversely proportional to the rate of repayment by the hypothecary debtor of the capital loaned, and are finally entirely absorbed by that of the hypothecary debtor when the hypothecary loan is repaid in full.
Consideration thus exists for the separate insurance contract evidenced by the hypothecary clause.
(iii) Consent Legally Given
Having extracted the elements of a mandate from the terms of the insurance clause in the hypothecary loan contract, the hypothecary creditor could consent to this separate insurance contract through his debtor in the performance of his mandate. It is clearly stated in the hypothecary clause that this clause exists in the interests of the hypothecary creditor, not those of the debtor. The clause itself thus constitutes sufficient warning of the existence of the mandate so that the insurer should reasonably have known that the hypothecary debtor was acting on behalf of his creditor. Consent was thus legally given by both parties to this second contract.
As the capacity of the parties is not at issue here, the Court must necessarily conclude that the wording of the hypothecary clause indicates the existence of a common intent to purchase a second insurance contract between the hypothecary creditor and the insurer, a contract separate from the one purchased by the hypothecary debtor personally. The policy records these two contracts in a single document signed by the hypothecary debtor, acting both for himself and as mandatary for his hypothecary creditor.
C. Comparative Analysis
As mentioned earlier, the hypothecary clause originates from the insurance contracts developed in the State of New York in the second half of the 19th century. These clauses spread throughout North America, with the result that virtually identical clauses (apart from a few words) have been interpreted by courts in other jurisdictions. Without giving these interpretations the force of precedent, it is nonetheless worthwhile to examine the solutions adopted by the courts in those jurisdictions, in particular in France, in the U.S. and in the common law provinces of Canada, if only as an exercise in comparative law.
(i) France
As Picard and Besson observe (Traité général des assurances terrestres en droit français, vol. 2, Assurances de dommages ‑‑ Règles générales (1940)), a hypothecary clause of the type at issue in the present appeal is not often used in France. They suggest, however, that its effect would be to give the hypothecary creditor increased protection (at pp. 471‑73):
[TRANSLATION] This clause ‑‑ known as the standard hypothecary or mortgage clause ‑‑ has been in widespread use in America since the late 19th century. It is however quite rare in French practice. The guarantee it provides creditors of course varies according to the policy. The following is an example of the standard hypothecary clause:
"At the request of the insured, the Company agrees not to take advantage of (but only as to hypothecary creditors registered against the immovable pursuant to a deed recorded by Mr. X . . ., a notary) the failure to make the declarations prescribed by the general conditions of the policy, but only to the extent that their debts fall in the correct order on the indemnity to which the insured would have been entitled if his position had been in order. . . ."
With a clause of this kind, hypothecary creditors whose names are given to the insurer cannot be affected by nullities or disqualifications incurred by the insured, in particular as the result of an incorrect declaration of risk, even if they knew of such irregularities before the loss. [Emphasis added.]
The specific problem of whether a hypothecary debtor's intentional fault can be invoked against the hypothecary creditor is not discussed by the authors. There also do not seem to have been any cases in which the courts have ruled on the validity of an interpretation finding that two separate insurance contracts exist in the same policy. French law therefore cannot assist us in this regard.
(ii) United States
The United States Supreme Court has had occasion to discuss the relationship between mortgagee and insurer in Aetna Insurance Co. v. Kennedy, 301 U.S. 385 (1937). Considering a clause, the wording of which was very similar to that at issue here, the Supreme Court adopted the interpretation that the mortgage clause created two separate contracts in the same policy (Butler J., for the court, at p. 395):
Kennedy [the mortgagee] was not merely a designated beneficiary to whom was payable, as specified, insurance obtained by the bank. The mortgage clause created a contract of insurance between him and the company and effected separate insurance upon his interest. [Emphasis added.]
With a few rare exceptions, U.S. decisions have unanimously adopted the same approach to this question. Couch (Couch on Insurance (2nd ed. 1982), vol. 10A, {SS} 42:728) summarizes these decisions as follows:
42:728. Mortgagee and insurer: Concept of independent contract.
Under the standard or union mortgage clause, an independent or separate contract or undertaking exists between the mortgagee and the insurer, which contract is measured by the terms of the mortgage clause itself. There are accordingly in substance two contracts of insurance, the one with the mortgagee, and the other with the mortgagor. The mortgagee does not have the status of a beneficiary, and the effect is the same as though the mortgagee had procured a separate policy naming himself as the insured.
The consideration for the insurer's undertaking with respect to the mortgagee under the standard clause is the consideration for which the policy was itself issued to the mortgagor, and a standard mortgage clause creates a separate contract between the insurer and the mortgagee, and is enforceable by the mortgagee, even though it is merely engrafted onto the policy delivered to the mortgagor. [Emphasis added -‑ footnotes omitted.]
(See also: 43 Am. Jur. 2d Insurance {SS} 1045 (1982); Appleman, Insurance Law and Practice (1970), vol. 5A, {SS} 3401; Dwyer and Barney, "Analysis of Standard Mortgage Clause and Selected Provisions of the New York Standard Fire Policy" (1984), 19 Forum 639, at p. 646; Comerford, "When Is Money Paid the Mortgagee Recoverable? ‑‑ Is the Counterclaim Compulsory?" (1986), 22 Tort & Ins. L.J. 113, at p. 115.) It is interesting to note that the courts of Louisiana, a civil law jurisdiction, have arrived at an identical result: Louisiana Civil Law Treatise, vol. 15, Insurance Law and Practice (1986), {SS} 332: Federal National Mortgage Association v. Prudential Property and Casualty Insurance Co., 517 So.2d 201 (La. Ct. App. 1987).
(iii) Canada (Common Law)
This Court has examined this question on two occasions in appeals from common law provinces. First, in Liverpool and London and Globe Insurance Co. v. Agricultural Savings and Loan Co. (1903), 33 S.C.R. 94, Davies J., writing for the majority, specifically stated that the question of the existence of a separate contractual relationship had not been decided (at p. 110):
I have already stated that it is not necessary on this appeal for us to determine, and we do not determine, whether such a mortgage clause as was inserted in this policy gave the mortgagees such a beneficial right and interest or constituted such a direct contract between the mortgagees and the insurance company as would enable the former to sue in their own name alone and irrespective of [the mortgagor]. [Emphasis added.]
In that case, however, the Ontario Court of Appeal had clearly stated that a second contract existed between the mortgagee and the insurer:
. . . the policy of insurance contained what is known as the subrogation or mortgage clause ‑‑ which is a contract by the company directly with the mortgagees, and in terms expressly renounces the right of the company to set up, as a defence against the mortgagees, any act or neglect on the part of the mortgagor. [Emphasis added.]
((1901), 3 O.L.R. 127, at p. 141, per Osler J.A.)
The question did not come before this Court again until more than seventy years later, in London and Midland General Insurance Co. v. Bonser, [1973] S.C.R. 10. In that case, where the mortgage clause at issue greatly resembled the one under consideration here, Ritchie J. undertook an analysis of the cases which had concluded that there was a separate contractual relationship, referring with approval inter alia to the decision of the Ontario Court of Appeal in Liverpool and London and Globe Insurance Co., supra, Hastings v. Westchester Fire Ins. Co., 73 N.Y. 141 (1878), and London Loan and Savings Co. of Canada v. Union Insurance Co. of Canton Ltd. (1925), 56 O.L.R. 590, aff'd (1925), 57 O.L.R. 651. Ritchie J. also cited the passage reproduced above from Couch, op. cit. The reasons of Ritchie J. seem to indicate that he viewed this position as correct.
Shortly after this decision, many Canadian appellate courts unequivocally adopted the interpretation recognizing that two contracts exist in the same policy where there is a mortgage clause. Thus, the Appeal Division of the Nova Scotia Supreme Court wrote in Royal Insurance Co. of Canada v. Trans Canada Credit Corp. (1983), 1 C.C.L.I. 300, at p. 305 (Jones J.A. for the court):
It is now clear from the decision of the Supreme Court of Canada in Bonser v. London and Midland Gen. Ins. Co., supra, that the standard mortgage clause constitutes a separate agreement between the insurer and the mortgagee. [Emphasis added.]
Similarly, the Manitoba Court of Appeal adopted this interpretation in Royal Bank of Canada v. Red River Valley Mutual Insurance Co., [1986] 5 W.W.R. 236, at pp. 244‑45, per Twaddle J.A. for the court. Finally, a very recent decision of the Alberta Court of Appeal, National Bank of Canada v. Co‑Operators General Insurance Co. (1988), 90 A.R. 295, explains the formation of the second contract by the existence of a contract of agency between the mortgagee and the mortgagor. Discussing the same mortgage clause as the one in question here, Laycraft C.J. wrote for the court (at p. 302):
In my opinion, this mortgage clause contains the terms of a separate, independent contract of insurance between mortgagee and insurer engrafted on to the policy delivered to the mortgagor. It incorporates other terms of the policy (as, for example, the property description or amount of coverage) to the extent they are applicable.
. . .
The agency of the borrower to effect the insurance on behalf of the lender seems to me to be necessarily implicit in the borrower's covenant to insure universally seen in debentures and mortgages. All parties to the transaction, including the insurer who is eventually approached, know that the borrower must obtain a mortgage clause in favour of the lender if it is to proceed. That seems to me to be virtually a definition of the role of the borrower as an agent for that limited purpose. His role is so obvious to insurers that the industry has a "standard mortgage clause" ready to meet the request. [Emphasis added.]
This then is how the law appears to be settled in the Canadian common law provinces.
This brief foray into comparative law enables us to see that the interpretation of the hypothecary clause to which we are led by the principles of civil law in Quebec is consistent with the results arrived at by courts in other jurisdictions dealing with similar contractual clauses.
In view of this second separate insurance contract between the hypothecary creditor and the insurer, under the terms of the hypothecary clause contained in the insurance policy purchased by the hypothecary debtor, we must now consider whether such a contract is in keeping with the public order provisions of the Civil Code of Lower Canada.
3.Whether the Hypothecary Clause is Consistent with the Civil Code of Lower Canada
According to the wording of the hypothecary clause under consideration, the insurer undertakes not to invoke against the hypothecary creditor any "act, neglect, omission or misrepresentation attributable to the . . . owner". In the present case the act of the owner which the insurer wishes to invoke against the hypothecary creditor is an intentional fault by the latter. The appellant argues that legally, the hypothecary clause cannot make it impossible to invoke the debtor‑owner's intentional fault against the hypothecary creditor, in view of the second paragraph of art. 2563 C.C.L.C., which is declared to be of public order both by its own wording and by the first paragraph of art. 2500 C.C.L.C.:
2563. The exclusion of the prejudice caused by a fortuitous event or the fault of the insured is not valid unless it is expressly and restrictively set out in a stipulation in the contract.
However, the insurer is not liable, notwithstanding any agreement to the contrary, for prejudice arising from the insured's intentional fault.
2500. Any stipulation which derogates from the prescriptions of articles 2474, 2478 to 2484, 2486, 2490 to 2492, 2494 to 2506, 2508, 2510 to 2515, 2518, 2529, 2530, the second paragraph of article 2533, articles 2536, 2538, 2539, 2541, 2546 to 2549, 2557, 2559, 2560, 2561, 2562, the second paragraph of article 2563, article 2564, the third paragraph of article 2566, articles 2574, 2577 to 2582, 2585, the first two paragraphs of article 2586, articles 2587, 2598, 2599 and 2601 to 2605 is without effect. [Emphasis added.]
The appellant argues that, despite the existence of the hypothecary clause, the hypothecary debtor is still the "insured" within the meaning of art. 2563 C.C.L.C.
As the appellant relies in large measure on French decisions in support of its argument that the hypothecary debtor's intentional fault can be invoked against the hypothecary creditor, I shall briefly examine their relevance in interpreting art. 2563 C.C.L.C., before going on to analyze the effect of this provision.
A. French Legislation
From the evident similarity between art. 2563 C.C.L.C. and art. 12 of the Loi du 13 juillet 1930 relative au contrat d'assurance, J.O., July 18, 1930 (hereinafter referred to as the "Law of July 13, 1930"); article 12 later became art. 113‑1 of the Code des assurances), the appellant deduces a clear intent on the part of the legislature to import into Quebec civil law the law on this point as it stood in France at that time.
As the Superior Court and the Court of Appeal observed, the relationship between these two pieces of legislation seems quite clear. To emphasize this similarity, I reproduce below art. 12 of the Law of July 13, 1930, as it read in 1974, and art. 2563 C.C.L.C.:
Law of July 13, 1930
[TRANSLATION] Art. 12. The insurer is liable for loss and damage caused by a fortuitous event or the fault of the insured unless there is a formal and limited exclusion in the policy.
However, the insurer is not liable, notwithstanding any agreement to the contrary, for loss and damage arising from the insured's intentional or fraudulent fault.
C.C.L.C.
2563. The exclusion of the prejudice caused by a fortuitous event or the fault of the insured is not valid unless it is expressly and restrictively set out in a stipulation in the contract.
However, the insurer is not liable, notwithstanding any agreement to the contrary, for prejudice arising from the insured's intentional fault.
The origin of art. 2563 C.C.L.C. is confirmed by a statement by the Minister responsible for this legislation when it was tabled in the National Assembly (Journal des débats, November 19, 1974, vol. 15, No. 82, at p. 2873), and in the Faribault Report, "Commentaires sur le projet de loi sur le contrat d'assurance", article 40. These two sources are mentioned solely as indications of the origin of art. 2563 C.C.L.C., not with a view to determining the legislature's intent in adopting this provision: Commerce & Industry Insurance Co. v. West End Investment Co., [1977] 2 S.C.R. 1036, at p. 1043, per Pigeon J. for the majority, and at p. 1051 per de Grandpré J.
In considering legislation borrowed almost word for word from a provision of a foreign statute, it has to be assumed that the legislature knew of the foreign law so adopted (Côté, The Interpretation of Legislation in Canada (1984), at p. 441):
When the enactment is inspired by foreign legislation, the courts can assume that in most cases Parliament was aware of the interpretation given by foreign courts. It is therefore generally accepted that the courts may consider judicial interpretations of the text on which the statute was modelled. This approach, however, has its inherent risks. It cannot be applied blindly, because a change in wording, a different context or a simultaneous change in wording and context may render that case law totally inapplicable. [Emphasis added.]
In the present case, as I noted at the outset, there are striking differences between the context in which art. 2563 C.C.L.C. is to be interpreted and the background to interpreting art. 12 of the Law of July 13, 1930, including the absence of similar hypothecary clauses in France. Professor Côté's caution is worth noting here. With this in mind I will discuss French cases and authors and their relevance in interpreting art. 2563 C.C.L.C.
B. Basis of Art. 2563 C.C.L.C.
The absolute prohibition on indemnifying prejudice arising from the insured's intentional fault is based on considerations of two different types: first, public morality, and second, the very nature of an insurance contract.
Good morals are the basis of the prohibition codified in art. 2563 C.C.L.C., in the sense that the article expresses the legislature's condemnation of a contract that would allow an individual to benefit from his intentional fault:
[TRANSLATION] In the great majority of cases it would be entirely immoral to argue that the insurer should bear the consequences of his intentional act. This would mean allowing the most anti‑social acts to be committed and their civil pecuniary consequences avoided.
(Encyclopédie juridique Dalloz: Répertoire de droit civil, vol. I, 2nd ed., "Assurances terrestres", by Durry, No. 116.)
More generally, this prohibition coincides with and clarifies that of art. 13 C.C.L.C.:
13. No one can by private agreement, validly contravene the laws of public order and good morals.
This justification is common to art. 2563 C.C.L.C. and art. 12 of the Law of July 13, 1930.
The second justification for art. 2563 C.C.L.C. lies in the concept of insurability, intrinsically associated with that of unforeseeability. As a French writer puts it, [TRANSLATION] "The uncertainty of the insured event -‑ the risk ‑- determines its insurability": Bigot, "Assurances de responsabilité: les limites du risque assurable" (1978), 49 Rev. gén. ass. terr. 169. For the insured himself, the damage resulting from his own intentional fault is not in any way unpredictable, as the result is the desired consequence of his action, and therefore he cannot be indemnified for it. As Professor Lambert‑Faivre puts it (Droit des assurances (6th ed. 1988), at p. 196, No. 168):
[TRANSLATION] Insurance is a technique for guaranteeing against risk for which statistics make it possible to formulate mathematical laws: introducing a guarantee for an intentional act in the operation of insurance would thus fundamentally undermine its premises; the insurance technique requires that the risk insured be an uncertain event, the occurrence of which does not depend on the wishes of the insured or the beneficiary of the contract. If the insured or the beneficiary intentionally causes the event risked to occur, therefore, this is outside the scope of the contract: it is a "legal exclusion of the risk" which applies to damage insurance as well as to insurance of persons, the State itself undertaking to compensate certain victims of offences. [Emphasis added ‑- italics in original -‑ footnotes omitted.]
(See also Picard and Besson, Les assurances terrestres (5th ed. 1982), vol. I, at p. 109, No. 66; Agen, December 8, 1964, Parfait v. Assurances générales et Nationale incendie (1965), Rev. gén. ass. terr. 333.)
Having said that, is the contract concluded between the hypothecary creditor and the insurer, under which the hypothecary debtor's intentional fault cannot be invoked against the creditor, contrary to art. 2563 C.C.L.C., in light of its purpose as explained above?
C. Legality of the Hypothecary Clause
In the second insurance contract contained in the policy, the hypothecary creditor and not the debtor is the insured. Accordingly, the hypothecary creditor is not benefiting from his intentional fault when he claims to be entitled to the insurance indemnity as a result of the fire caused by the intentional fault of his debtor. In such circumstances, the insured (the hypothecary creditor) has not committed any fault, intentional or otherwise. Neither does the hypothecary debtor benefit from his intentional fault, since the payment of the indemnity by the insurer does not result in his release, but simply a substitution of debtor (subclause (b) of the hypothecary clause). Thus, moral considerations discussed above do not stand in the way of indemnifying the hypothecary creditor.
Similarly, once his mandate is completed by the purchase of a separate insurance contract, the hypothecary debtor becomes, as to his creditor, a third party for whose actions the latter is not responsible. As far as the hypothecary creditor is concerned, the debtor's actions can be likened to fortuitous events, in that they are external, unforeseeable and unavoidable (art. 17(24) C.C.L.C.). As such, even intentional fault by the hypothecary debtor is an uncertain event so far as the insurance contract between the hypothecary creditor and the insurer is concerned. It is therefore an insurable risk.
French law, while it does not have the custom of a hypothecary clause, certainly allows the act of a third party to be insured, even if that act may be characterized as intentional fault within the meaning of art. 12 of the Law of July 13, 1930. Such insurance is allowed even when the insured and the third person are connected, as in the case of a hypothecary creditor and debtor. Picard and Besson describe the legitimacy of such an insurance contract as [TRANSLATION] "beyond question" in French law (Traité général des assurances terrestres en droit français, vol. 2, op. cit., p. 470, No. 206):
[TRANSLATION] The simplest and most direct procedure is the purchase by the hypothecary creditor of his own insurance at his own expense with provision in the hypothecary loan deed for repayment of the premiums by the debtor.
. . .
[Such insurance] can even secure the creditor against a loss intentionally caused by the debtor, as the latter's fraudulent act, which he cannot insure, is a risk for the creditor and for third parties in general. [Emphasis added -‑ footnotes omitted.]
The decisions of the Quebec Court of Appeal are overwhelmingly of the same view; thus, in Madill v. Lirette, supra, Vallerand J.A. wrote (at p. 1006):
[TRANSLATION] I do not think anyone will dispute that the hypothecary creditor may, by a separate policy, insure his debt and insure it against any intentional fault, whether by the owner or a third party. No one will argue either that in such a case it is not possible to invoke against someone who is unquestionably an insured, but not the person who committed the intentional fault, such intentional fault committed by another insured covered by another policy. This means that regardless of the prohibition of public order in art. 2563 the hypothecary creditor can legitimately shield his interest from the owner's intentional fault and thus, by a circuitous man{oe}uvre, defeat a provision of public order. That being the case, the outcome can hardly be different depending on whether he is insured in the same policy or in a separate policy. There is absolutely no authority for such a conclusion apart from a finicky interpretation and application of art. 2563. [Emphasis added.]
I agree. There would not seem to be any valid reason for distinguishing between a policy taken out by the hypothecary creditor personally and one taken out by the latter through a mandatary, in the person of the hypothecary debtor. They are both separate insurance contracts in which the insured is the hypothecary creditor.
The French decisions submitted by the appellant, to the effect that the non‑insurance resulting from intentional fault by the insured applies [TRANSLATION] "to all parties" (Parfait v. Assurance générale et Nationale incendie, supra, at p. 334; Cass. civ., February 28, 1939, La Confiance v. Le Phénix (1939), 10 Rev. gén. ass. terr. 469; Cass. civ., December 4, 1946, Consorts Poudenx v. Cie d'assurance La France, D.1947.25), concern only the rights of hypothecary creditors under art. 37 of the Law of July 13, 1930. I reproduce the first paragraph of that article and the first paragraph of art. 2586 C.C.L.C., based on the former:
Law of July 13, 1930
[TRANSLATION] Art. 37. The indemnities owed as a consequence of insurance against fire, hail, animal mortality or other risks shall be apportioned to preferred or hypothecary creditors, according to their rank, without any express delegation being required.
C.C.L.C.
2586. The indemnities exigible are apportioned among the creditors having hypothecs or privileges on the property damaged, according to their rank and without express delegation, upon mere notice and proof by them.
Under art. 37 of the Law of July 13, 1930, hypothecary and preferred creditors are legally subrogated in the rights of the insured (the hypothecary debtor), and it seems clear that, as in Quebec under art. 2586 C.C.L.C., the intentional fault of the insured may be invoked against all hypothecary creditors (Sicot and Margeat, Précis de la loi sur le contrat d'assurance (4th ed. 1962), at p. 222, No. 372; Sumien, Traité théorique et pratique des assurances terrestres des opérations de capitalisation, d'épargne et de crédit différé (7th ed. 1957), at p. 111, No. 197; Consorts Poudenx v. Cie d'assurance La France, supra, at p. 25). These decisions are of no relevance to the scope of the rights of hypothecary creditors conferred by a hypothecary clause of the type at issue here. Accordingly, they are of no assistance to the Court in examining the question now before it.
When dealing with a hypothecary clause evidencing a separate insurance contract with the insurer, as is the case here, fault by the hypothecary debtor must be treated as fault by a third party within the meaning of art. 2563 C.C.L.C., since the creditor and not the debtor is the insured. Consequently, the clause stating that the hypothecary debtor's intentional fault cannot be set up against the hypothecary creditor in no way contravenes that provision.
Conclusion
In conclusion, the insurance clause in the hypothecary loan contract contains all the elements of a contract of mandate, under which the hypothecary debtor has undertaken to keep the property subject to the hypothec insured. In accordance with that mandate, the hypothecary debtor took out an insurance policy containing a hypothecary clause, which sets out a separate insurance contract between the hypothecary creditor and the insurer. Since the hypothecary creditor and not the debtor is the insured under this separate second contract, indemnification of the hypothecary creditor for the loss caused by its debtor's intentional fault is not contrary to the prohibition of public order contained in art. 2563 C.C.L.C.
Accordingly, for all these reasons, I am of the view that the appeal should be dismissed, the whole with costs throughout.
Appeal dismissed with costs.
Solicitors for the appellant: Joli‑C{oe}ur Lacasse Simard Normand & Associés, Ste‑Foy.
Solicitor for the respondent: Louis Gagné, Nicolet.