Mainville, Gagné, Beaupré

Appeal from a Superior Court judgment granting an application for indemnification in connection with bonds. Application for leave to appeal de bene esse from a judgment of the Superior Court dismissing and declaring abusive an application for damages. Dismissed. 

At the time of the dispute, the respondent provided the appellants with various bonds in exchange for signing indemnification agreements. At the request of one of the appellants, a rider was taken out to add Limestone Development LLC as a principal debtor. Because the respondent was not authorized to issue bond contracts in the United States, the respondent, with the appellants’ knowledge, entered into a reinsurance agreement with Hartford Fire Insurance Company to provide bonds in favour of Limestone for two construction projects. Following claims by subcontractors Limestone had failed to pay, Hartford was reimbursed by the respondent, who in turn claimed this amount from the appellants based on the indemnification agreement. The trial judge determined that the reinsurance agreement between the respondent and Hartford was not a contract of reinsurance, but rather a commercial agreement, and that the respondent’s right of action was rooted in the indemnification agreement. According to the judge, the appellants’ fundamental undertaking was to reimburse the respondent in the event of loss as a result of bonds issued at its request.

The judge did not err in concluding that the respondent’s right of action was rooted in the indemnification agreement, in which the definition of [translation] “bond” is very broad and encompasses bonds provided by the respondent or by any other guarantor obtained by the respondent, in this case, Hartford. Limiting the respondent’s rights to only the bonds it provided, as the appellants suggest, would go against the overall scheme of the indemnification agreement. The bonds issued by Hartford for the two Limestone projects in the United States are covered by the indemnification agreement, even though they were not provided by the respondent. The respondent is therefore entitled to be indemnified by the appellants for loss or damage it suffered due to the issuing of these bonds.

The question of whether the judge erred in law in interpreting the reinsurance agreement between the respondent and Hartford as a simple commercial agreement, thereby neutralizing article 2397 of the Civil Code of Québec (S.Q. 1991, c. 64) (CCQ), appears superfluous. Even if this agreement was a contract of reinsurance, this provision would not preclude the respondent’s claim based on the indemnification agreement (Boiler Inspection and Insurance Company of Canada c. H.A. Simons Ltd. (C.A., 2011-06-23), 2011 QCCA 1194, SOQUIJ AZ-50763357, 2011EXP-2133, J.E. 2011-1164). The appellants undertook to indemnify the respondent, so the fact that the latter was not legally subrogated in Hartford’s rights changes nothing.

In addition, the Court does not believe that a contract of reinsurance within the meaning of article 2397 CCQ may have a contract of suretyship as its cause. In Quebec civil law, suretyship contracts and insurance contracts are distinct and are governed by different rules. The mere fact that guarantee companies use insurance to limit their risks does not mean that article 2397 CCQ applies to suretyships. Moreover, the fact that the reinsurer (the respondent) is the one who pays a “bond fronting fee” to the reinsured (Hartford) for the latter to provide the bonds, and not the other way around, convinces the Court that the respondent is not the reinsurer of Hartford within the meaning of that term in insurance law. The Court therefore agrees with the judge that, despite its title, the reinsurance agreement between the respondent and Hartford is not a contract of reinsurance within the meaning of article 2397 CCQ.

Text of the decision: http://citoyens.soquij.qc.ca