On April 9, 2020, the Supreme Court of Canada granted Co-Operators General Insurance Company’s leave application seeking leave to appeal the judgment of the Court of Appeal of Quebec in Compagnie d'assurances générales Co-Operators c Coop fédérée.[1] The Court dismissed the application brought by La Coop fédérée (“La Coop”).
This appeal arises from two actions relating to a cyber crime in Quebec. La Coop was a customer of the National Bank of Canada (“NBC”) and a victim of phishing. La Coop was scammed into issuing a payment order authorizing NBC to transfer funds of $4,946,355.26 USD to the account of the beneficiary designated in a bank in Hong Kong.[2] By the time La Coop became aware of the scam, the money transfer had been completed and could not be reversed.[3]
La Coop held two relevant insurance policies.[4] The first policy was a $1 million policy issued by Liberty International Underwriters (“Liberty“) against fraud and embezzlement, expressly limiting the nature and extent of the guarantees offered.[5] The second was a policy for up to $15 million issued by the Co‑operators General Insurance Company (“Co‑operators”) for property, subject to a retention of $500,000 and a deductible of $5,000.[6] While Liberty paid the coverage limit provided under the first policy, Co‑operators denied coverage under the second policy for various reasons.
The Decision of the Superior Court
La Coop commenced a proceeding for a declaratory judgment (File No. 500‑17‑092055‑154 (“154”)) in order to have its rights and obligations under the two policies determined, among other things. In addition, Liberty filed an originating motion (File No. 500‑17‑092579‑161 (“161”)) under article 2496 of Quebec’s Civil Code (“CCQ”) the provision governing the relationship among multiple insurers in Quebec. Liberty sought to recover from Co‑operators a portion of the amounts it had paid La Coop, in proportion to the insurance limits of each policy. Co-Operators also made a request to change its defence to include La Coop’s failure to invoke the nullity of the payment order. The court rejected this request.[7]
The matters were heard together before the Superior Court of Quebec and one judgment was issued. The first issue before the court was whether the loss should be born by La Coop or NBC and whether the Bill of Exchange Act applied. The judge found that the Bill of Exchange Act did not apply to the electronic transfer and declared that the loss suffered must be assumed by La Coop under article 2327 of the CCQ.[8] Next, the court reviewed the Co-Operators insurance policy and determined that the loss suffered by La Coop constituted a risk covered by that policy.[9] The court then reviewed the Liberty policy and determined it was not a “specific risk” policy.[10] Since both policies covered the same loss there was a plurality of insurance, and since neither was a specific risk policy and Quebec civil law does not provide a specific calculation method to asses the apportionment of each insurer’s contribution, the court turned to the common law.[11] The court ordered that each insurer must pay in proportion to the amount of coverage provided by their respective policies. As a result, the court ordered that Co-Operators must pay the balance of the loss suffered by La Coop, and also reimburse Liberty to reduce its contribution to the loss to its proportionate share. Liberty was therefore ordered to pay $5,521,195.15, including reimbursement to Liberty in the sum of $726,124.47.[12]
The Decision of the Court of Appeal of Quebec
Multiple issues were raised on appeal. Ultimately, the court allowed the appeal only in relation to the nature of the Liberty insurance policy.[13] Unlike the lower court, the court held that the policy was a “specific risk” policy and therefore Liberty was the primary insurer.
First, the court considered whether the payment was subject to the Bills of Exchange Act. The court concluded that the transfer or electronic transfer of funds did not constitute a bill of exchange and the Act therefore did not apply.[14]
Next, the court considered Co-Operator’s application to amend its defence. The court noted that the appellant’s request, made at the time of oral arguments, was more of a request to add a ground for non-coverage.[15] The court found the appellant failed to demonstrate that the judge improperly exercised his discretion and dismissed this ground of appeal.[16]
The court then considered whether the lower court erred in deciding that the loss suffered by La Coop as a result of the phishing scam constituted a risk covered by Co-operator’s property policy. The court concluded that the policy was unambiguous and covered all property, and the list of exclusions from the policy was specific and exhaustive and no relevant exclusion precluded insurance coverage.[17] The court found there was no reviewable error on this question.[18]
Next, the court considered whether the lower court erred in finding that the respondent owned the embezzled money. Co-Operators argued that the court erred in concluding the amount of money diverted belonged to La Coop and not to NBC.[19] The court disagreed, noting that La Coop had a pre-authorized line of credit in US dollars granted by NBC, and that the electronic transfer order executed by NBC at the request of La Coop made the latter the debtor to the bank for the corresponding disbursement.[20]
The court then considered the issue of plurality of policies and whether either the Liberty or Co-Operators policy was primary or both had to provide proportionate coverage. The court referred to the six conditions of plurality as set out by the lower court: (1) the identity of the insured; (2) the identity of the object; (3) the identity of the interest in the object; (4) the identity of risk; (5) the existence of another insurance policy in force and recoverable; and (6) the absence of relevant exclusion.[21] The court agreed with the lower court judge that all six conditions were satisfied.[22]
The court confirmed that, in the case of a plurality of insurance, the insured is entitled to seek the full extent of coverage from either policy but that insurer may seek contribution from the other insurer(s) proportionate to the amount of coverage each provides for the risk. In this way, the loss is evenly distributed between the insurers. However, this is not the case where one of the policies is a so-called specific insurance.[23]
As to whether the Liberty policy was a specific risk policy, as noted above, the court disagreed with the lower court and held that it was a specific risk policy within the meaning of the exception of paragraph 3 of Article 2496 of the CCQ because it covered a particular category of risks (fraud, and embezzlement).[24] The court stated that it would unduly restrict the qualification of specific insurance as the primary insurer if it was limited to only the goods covered by the policy. Instead, the court held that insurance granted to cover a particular category of risks may also, depending on the context, be considered as specific insurance.[25] As a result, the Liberty policy became the primary insurance.[26]
Incidentally, the court commented on the fact that both policies included “excess clauses” and followed a decision of the Supreme Court of Canada to hold that the effect was to cancel each other out in order to avoid an unreasonable result of either over-compensation or the absence of compensation.[27]
In the result, the court determined that Liberty had already discharged its obligation toward La Coop by remitting the amount of the limits of its coverage. Thus, Co-Operators must assume the excess of the loss less the amount of the retention ($500,000) and the deductible ($5,000) since the loss was below its insurance cover limit ($15,000,000).[28] Further, the court found that, since it had provided a specific risk policy, Liberty could not benefit from a distribution of the loss between it and Co-Operators.[29]
The court considered the method chosen by the lower court judge for the calculation of the compensation, noting the judge’s decision required deference and there was nothing to justify the intervention of the court in this regard.[30] The court found that the compensation due to La Coop by Co-Operators was simplified due to the qualification of the Liberty policy as specific risk, and thus the total compensation due to La Coop was $5,984,618.10 CAD, less the amount already collected by La Coop from Liberty ($1,000,000 CAD), which left a balance owing to La Coop from Co-Cooperators in the amount of $4,984,618.10.[31] The court concluded that Co-Operators did not owe anything to Liberty.[32]
Conclusion
With cyber crimes on the rise, this appeal raises important and timely questions on how the court and insurers should address coverage issues resulting from internet fraud. We look forward to guidance from the Supreme Court of Canada on how these issues, including whether a loss of the kind suffered by La Coop is properly covered by a property insurance policy, will be treated and interpreted in the era of cyber liability.
[1] Compagnie d'assurances générales Co-Operators c. Coop fédérée, 2019 QCCA 1678 [Co-Operators].
[2] Ibid at para 16.
[3] Ibid.
[4] Ibid at para 19.
[5] Ibid.
[6] Ibid.
[7] Coop fédérée c compagnie d'assurances générales Co-Operators, 2016 QCCS 6302 at para 34.
[8] Ibid at para 76.
[9] Ibid at para 85.
[10] Ibid at para 100.
[11] Ibid at para 113.
[12] Ibid at para 153.
[13] Co-Operators, supra note 1 at para 152.
[14] Ibid at para 67.
[15] Ibid at para 81.
[16] Ibid at para 89.
[17] Ibid at para 103.
[18]Ibid at para 104.
[19] Ibid at para 105.
[20] Ibid at para 111.
[21] Ibid at para 128.
[22] Ibid at para 130.
[23] Ibid at para 136.
[24] Ibid at para 138.
[25] Ibid at para 137.
[26] Ibid at para 138.
[27] Ibid at paras 134-135.
[28] Ibid at para 139.
[29] Ibid.
[30] Ibid at paras 147 – 148.
[31] Ibid at para 150.
[32] Ibid at para 151.
