M^e Jocelyn Aucoin, Stein Monast LLP, Attorneys

Last November 14, Superior Court issued an interesting ruling¹ on the intensity of a damage insurance representative’s professional obligation when renewing an insurance policy. The ruling deals with obligations related to the proper assessment of an insured building’s value at the time of renewal and the representative’s obligation to follow up.

THE FACTS

When it came time to renew her insurance policy on June 1, 2010, the insured had already been doing business with the brokerage firm for four years. However this time, a new damage insurance representative was in charge of her file. At a meeting with the insured’s representatives on May 27, 2010—just a few short days before the renewal date—the damage insurance representative told them that the building was potentially underinsured and recommended that an appraiser be mandated to review the situation. He confirmed that the firm would pay for a portion of the appraiser’s fees.

On May 28, 2010, the insured’s representative agreed to the suggestion that an appraiser be mandated and the damage insurance representative assured her that the appraiser would be in contact with her. On June 2, 2010, the damage insurance representative informed the insured that her insurance policy renewal was in force since June 1^st, but that for the time being, insurance coverage on the building would remain at $424,000—the amount that was currently on file.

Twenty days later, the insured’s representative had still not heard from the damage insurance representative. She therefore tried to reach him by phone. The next day, the damage insurance representative confirmed with her that the appraiser would contact her during the week of June 28^th. The appraiser’s report was finally signed on July 12, 2010, and sent to the damage insurance representative at an undetermined date, somewhere between July 12^th and 16^th. The cost of rebuilding was set at $565,000, however the appraiser failed to take into account the cost of demolition as well as costs related to bringing the building up to code.

The damage insurance representative read the report on July 20^th, but since he was about to go on vacation two days later, he gave the report to a colleague so she could follow up on the file. On July 23, 2010, the insured building went up in flames. The amount of coverage had not been changed, nor had the insured even been informed of the appraiser’s conclusions. In the final analysis, it actually cost $1,003,708 to demolish and rebuild the structure. However, after conducting an analysis, the court concluded that, had it not been for the faults committed by the damage insurance representative, the building would have been insured for $772,032.34 instead of $424,000, in other words the appraisal of the building at $714,845.14 plus 8% ($57,187.60), added for the cost of rebuilding. Damages were therefore assessed at $348,032.24, and the damage insurance representative and the firm were sentenced to pay this amount to the insured, plus interest and costs.

ANALYSIS AND RULING

Based on the premise that the Act respecting the distribution of financial products and services is to the insured what the Consumer Protection Act is to the consumer—in other words, a consumer protection tool—Justice Clément Samson explained at the outset that a damage insurance representative’s duty to advise is an obligation that must be renewed with the same regularity as an insurance policy. A damage insurance representative can therefore not be content to simply automatically renew an insurance policy.

Drawing on section 39 of the Act respecting the distribution of financial products and services, Justice Samson explained that when renewing an insurance policy, the coverage provided must meet the needs of the insured. Indeed, he concluded that if any adjustments to coverage are required, they must be made before renewal, since the policy must meet the insured’s needs at that very moment.

More specifically, Justice Samson found that the damage insurance representative committed faults at various points in the process of renewing the policy: 

• ​failure to understand and provide information on the importance of including the cost of demolition when assessing the overall cost of the insurance coverage; 
• failure to provide information on the impact of costs related to bringing the building up to code and on issues related to planning regulations; 
• poor management of the file, in particular when taking over the file, mandating the appraiser on behalf of the insured, and receiving and managing the appraisal report.

Finally, although the Court recognized the appraiser’s fault in incorrectly appraising the value of the building, the Superior Court concluded that this fault had not caused the damages the insured suffered and thus sentenced only the brokerage firm and the damage insurance representative to pay damages.

The lesson to be learned from this ruling is that the duties the legislation imposes are on-going and that professionals must proceed with diligence every step of the way during the entire life of the insurance contract. Here is a quick list of recommendations that we would like to take the liberty of suggesting: 

• be proactive; 
• be sure to collect the information needed to identify the client’s needs several weeks before the renewal date; 
• carefully re-evaluate the insured’s current insurance product in light of newly collected information; 
• identify the most appropriate insurance coverage to meet the client’s new needs; 
• make sure that you and your client properly understand all the details that could affect the amount paid in the event of a loss; 
• scrupulously document everything in the client record, in particular, all conversations with the client; 
• ensure proper follow-up with third parties who have been mandated to provide expertise that could change the insurance coverage, and keep the client well informed of such follow-up; 
• ensure that the insurance policy meets the client’s needs at policy renewal time; 
• avoid all automatic renewals.

RULING APPEALED

The firm and the damage insurance representative decided, however, to appeal the Superior Court’s ruling. They felt that the trial judge had erred when determining the amount of damages. Specifically, they called for the damages to be reduced to $186,200: $141,000 for the difference between the insured amount and the amount of the appraisal, and $45,200 for the cost of demolition. Furthermore, the firm and the damage insurance representative asked that the Court of Appeal determine how liability should be shared between them and the appraiser, in the event that the insured appealed.

The Court of Appeal will eventually look at this question, since a few days after the firm and the damage insurance representative registered their appeal, Bar et spectacles Jules et Jim Inc. also appealed the ruling, claiming, in particular, that the trial judge had erroneously concluded that the appraiser had not committed a causal fault with respect to the damages incurred, specifically for the amount that exceeded $186,200, the figure the firm and the damage insurance representative had not contested. The Court of Appeal’s decision will certainly have an impact on determining the causal link of a fault committed by an appraiser in cases such as this one.

^{1. Bar et spectacles Jules et Jim Inc. v. Maison Jean-Yves Lemay Assurances Inc., 2014 QCCS 5443.}