Fidelity and Casualty Co. of New York v. General Structures Inc., [1977] 2 SCR 1098

Supreme Court of Canada

Fidelity and Casualty Co. of New York v. General Structures Inc., [1977] 2 S.C.R. 1098

Date: 1976-10-05

The Fidelity and Casualty Company of New York (Garnishee) Appellant;

and

General Structures Inc. (Seizing plaintiff) Respondent;

and

William Harold Booth (Defendant) Mis en cause.

1975: December 5; 1976: October 5.

Present: Martland, Judson, Spence, Pigeon and de Grandpré JJ.

ON APPEAL FROM THE COURT OF APPEAL FOR QUEBEC

Insurance—Professional liability—Misrepresentation—Irrelevant replies—Insurer not aware of the real situation—Question of “materiality”—Civil Code, arts. 2487, 2488, 2489 and 2490.

Following the collapse of a building the prefabricated metal structure for which had been supplied by respondent, the latter obtained an award for damages against its general manager and chief engineer, the mis en cause, as well as the managing director of the company by which machining of the parts had been done. This order was made jointly on the grounds that they had, in their capacity as consulting engineers, drawn up faulty plans and estimates. After the writ of seizure of garnishment was issued, respondent discontinued its judgment against the managing director of the company.

The insurance policy relied on by respondent was issued to Breault, Booth & Associates.

Appellant, the insurer of the company, challenged the seizure by garnishment, alleging misrepresentation in certain answers given by the mis en cause to questions in the proposal, and contended that the policy was null and void. The trial judge concluded that there were misrepresentations in favour of the insurer. The Court of Appeal did not concur in this finding: it considered that the answers given by the mis en cause were substantially true and that the insurers were aware of the real situation. This appeal asks the Court to rule on the validity of the professional liability insurance issued by appellant.

Held: The appeal should be allowed.

The findings of the judgment at trial concerning the following misrepresentations are restored: (1) at the time in question, there was no partnership between the

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mis en cause and Breault; (2) the mis en cause, the only person with an interest in the partnership, was engaged in construction work; (3) the mis en cause had no employees.

Neither in law nor in fact did the insurer know the real situation. He did not waive the possible effects of these false statements noted by the trial judge. The insurer had no obligation to conduct an inquiry when precise questions are asked and they receive a false reply.

From the point of view of “materiality”, the mis en cause did not state fully and frankly the acts which might indicate the nature and the scope of the risk or prevent him from being insured or at least influence the risk premium. In such a precise case the insured is obliged to give a complete picture of the situation, since the case in question is a particularly delicate one.

Gauvremont v. The Prudential Insurance Company of America, [1941] S.C.R. 139; Henwood v. The Prudential Insurance Company of America, [1967] S.C.R. 720, referred to.

APPEAL from a decision of the Court of Appeal of Quebec, quashing a judgment of the Superior Court. Appeal allowed.

Guy Gilbert, Q.C., for the appellant.

André Brossard, for the respondent.

The judgment of the Court was delivered by

DE GRANDPRÉ J.—This appeal, on a seizure by garnishment after judgment, asks this Court to rule on the validity of a professional liability insurance policy issued by appellant to Breault, Booth & Associates. The Superior Court found in favour of the insurer, and the Court of Appeal quashed this judgment.

On May 1, 1966, respondent received from Webcon Limited an order for a large (100′ x 160′ x 24′) prefabricated metal structure, to be delivered to Corner Brook, Newfoundland and erected by the customer. The necessary calculations, plans and estimates were carried out; machining of the parts was done by Les Bâtiments d’Acier Préfabriqués Inc.; the structure was delivered to Corner Brook and the installation was complete by December 1966. Unfortunately, an error had been made in the calculations, with the result that the

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weight of snow caused the structure to collapse in March 1967. Hence, on February 20, 1969, respondent obtained an award for damages of $59,959.94 against its general manager and chief engineer, the mis en cause Booth, as well as André Breault, the managing director of Bâtiments d’Acier Préfabriqués Inc., a company belonging to his family. This order was made ex parte against the defendants jointly on the grounds that they had, in their capacity as consulting engineers, drawn up the faulty plans and estimates. Subsequently, after the writ of seizure by garnishment was issued, respondent discontinued its judgment against Breault.

The insurance policy relied on by respondent was issued to Breault, Booth & Associates, described as a partnership. It came into effect on September 11, 1966, for a period of twelve months. The insurance agreement stipulates that the insurer undertakes:

To pay on behalf of the insured all sums which the insured shall become legally obligated to pay as damages because of liability arising out of any act of negligence, error, mistake or omission in rendering or failing to render professional architectural or engineering services whether performed by the insured or by others for whom the insured is legally responsible, provided claims made to recover therefor are brought within the policy period.

This policy was issued following the signing of an insurance proposal by the mis en cause Booth. alleging misrepresentation in certain answers given by Booth to questions in the proposal, appellant challenged the seizure by garnishment and contended that the policy was null and void. Appellant contended that this misrepresentation prevented it from fully appraising the risk (arts. 2487, 2488 and 2489 C.C.). Furthermore, appellant maintained that the answers to the questions in the proposal constitute warranties, and misrepresentation automatically nullifies the contract (art. 2490 C.C.).

The trial judge concluded that the following statements were misrepresentations:

(1) at the time in question, there was no partnership between Booth and Breault;

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(2) Booth, the only person with an interest in Breault, Booth & Associates, was engaged in construction work;

(3) Booth had no employees.

The trial judge considered that these facts were relevant to a sound appraisal of the risk and that, as the insurer and the broker were unaware of the real situation, the insurance contract was null and void. The Superior Court did not express any view on the defence based on art. 2490 C.C.

The Court of Appeal did not concur in the finding that the insurance proposal contained inaccuracies: it considered that the answers given by the mis en cause Booth were substantially true and that the insurers were aware of the real situation. I must, therefore, examine one by one the facts accepted by the trial judge and set aside by the Court of Appeal. If I conclude that there was really misrepresentation, I shall have to examine the other points, namely awareness of the situation on the part of the insurer and appropriateness of the answers. I shall, as did the trial judge, refrain from examining the question of warranties.

I

Section two of the proposal requests information about the insured, and the mise en cause Booth answered that it was a partnership composed of André Breault and himself. With respect to this answer, the trial judge concluded that [TRANSLATION] “this Court is satisfied that at the time the application was made, Breault no longer had any interest in the partnership Breault, Booth & Associates, and that this partnership no longer existed.” Basing his view on the history of the relations between Booth and Breault, Rinfret J. in the Court of Appeal came to a different conclusion; although Montgomery J. concurred in this conclusion, the terms he used were not very affirmative:

I can well understand why the trial judge concluded that the partnership “Breault, Booth & Associates” had ceased to exist. After the dissolution of the partnership between Breault, Booth and their two junior associates, the relationship between Breault and Booth seems to have been not so much a true partnership as a nebulous association based upon a community of interests.

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What was the real situation?

In 1961 a partnership was constituted between Breault, Booth and two other engineers, namely Smith and Sauvé. Each of these engineers had permanent employment, but the purpose of their association was to provide professional services outside their regular employment. In fact, as Booth stated in his testimony, this partnership provided various professional services to a number of clients until March 1964. From that time, with the exception of the work which the partnership did for respondent—a point to which I shall return subsequently—this partnership of four people was inactive until it was dissolved in November 1965, at which time almost all the remaining moneys were distributed: $107.09 was given to Sauvé and $214.18 to each of the other three. The previous month the necessary forms had been signed to terminate the joint insurance on the lives of the four partners.

Respondent and the mise en cause Booth maintain that a new partnership was then constituted between Breault and Booth. The trial judge rejected this proposition, and stated that he had been satisfied beyond any doubt by the evidence that there had not been any partnership between Breault and Booth since 1965. The learned judge pointed out that at that time Breault was giving all his time to his family’s company Les Bâtiments d’Acier Préfabriqués Inc., and that Booth was himself employed full-time by respondent. He referred also to the testimony and documents filed, and although he did not indicate which points he accepted, we can do so here since these points were not refuted, as they were drawn from the testimony of Booth himself. For the period in question Breault did not

(a) make any capital investment;

(b) introduce a single client;

(c) do any work whatsoever;

(d) receive any remuneration whatsoever.

These points are significant, particularly as the accounts, which Booth stated were those of the partnership in the years 1965 and 1966, show that the income for each year amounted to $1,300, that is, hardly more than the premium on the profes-

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sional liability insurance, which was $1,225 in 1965 and $1,265 in 1966. Moreover, the learned judge stated that he accepted the testimony of Breault despite his concealment but did not believe Booth.

Rinfret J. accepted the testimony of Booth that a partnership had been formed between Booth and Breault in November 1965 on the dissolution of the first partnership, and therefore Breault had the onus of showing to the satisfaction of the Court that this new partnership had in fact terminated before the insurance proposal was signed in August 1966. For my part, I cannot accept that this new partnership was constituted in November 1965, and therefore the finding of the trial judge appears to me unimpeachable and should not have been set aside by the Court of Appeal.

II

The fourth question in the proposal asks the proposer if he has employees “engaged in… supervision of actual construction”, and if the answer is in the affirmative, what proportion of the proposer’s overall professional services this represents. Moreover, section five asks the proposer if he is himself “engaged in the actual work of construction, other than supervision”. Booth gave a negative answer to both of these questions. The trial judge considered this a misrepresentation and pointed out that Booth was not only the general manager of respondent, to which he gave all his time, but also a substantial shareholder in it, as his share in the capital of the company had increased at the time in question from one-quarter to one‑third. As the trial judge stated, respondent erects iron structures and this should have been disclosed in Booth’s answers.

Rinfret J. saw the situation differently. Citing an extract from the testimony of Booth in which the latter stated that from the end of 1964 onwards respondent “ceased to perform our own erection operations”, he concluded that if respondent was not engaged in construction operations, the proposer Booth could not be so either. The question is whether the evidence as a whole really

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supports the view of Rinfret J. or indicates the contrary. When questioned on May 30, 1967 by counsel for the insurer, and this examination is included in the record, Booth described respondent’s activities as follows:

Q. Do they execute work themselves?

A. Yes.

Q. So that their field of activities is essentially building?

A. Right.

Q. As general contractor, or as subcontractor?

A. Both.

Moreover, with respect to his professional activities Booth stated the following in the same examination:

Q. So, in 1966, you were chief engineer of the company?

A. Yes.

Q. What was your work as chief engineer?

A. My responsibilities covered the construction of buildings, in the field, at the site.

These descriptions must be read in conjunction with the assertion made in the statement attached to the writ of summons, in the pleading submitted by respondent against Booth and Breault. Plaintiff describes itself therein as [TRANSLATION] “a construction company specializing in the construction of prefabricated steel structures”.

Respondent pointed out that questions four and five should be read in conjunction with question seven, which asks the proposer to specify the nature of his operations, and that, as the proposer is the engineer Booth in his capacity as an engineer, he is not obliged to say what his operations are in his capacity as an employee of respondent. I would accept respondent’s explanation along these lines, but I then wonder why the year before, when the previous policy to the one which concerns us here was issued, Booth sent to appellant through a broker a list of the ten largest contracts during the previous five years, and did not include any of the construction work done by the partnership. It is only necessary to re-read this list to see that it refers to construction work undertaken by the

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employers of one or the other of the four partners.

This construction work was done for:

Dominion Lime Limited

R.C.A. Victor Company

Hardifoam Products Limited

Shawinigan Chemical Limited

Hydro Québec

Wabush Mines

Westminster Paper Company Ltd.

City of Montreal

Auto Dupreau

Drew Brown Ltd.

whereas Booth’s testimony indicated that the major contracts of the partnership during its existence were with:

Cal-Sil Products

Hill-Clark-Francis Ltd.

Lafrenière Developments

Ambassador Mfg. Ltd.

Canadian Erectors Ltd.

J.J. Fitzpatrick Ltd., and

City of Schefferville.

I would point out that the last of these partnership contracts was in March 1964.

It appears to me that respondent and the mis en cause are in the following dilemma since, as Booth himself has stated, if he acted as a consulting engineer during the period in question, it was for respondent only;

(1) either the engineering operations covered by the insurance policy are related to the construction and supervision work which Booth did for his employer, namely respondent, and are the substance of the insurance contract, in which case Booth should have answered questions four and five in the affirmative;

(2) or these engineering operations are not the substance of the insurance contract, with the result that this contract cannot be relied on by respondent to justify its seizure by garnishment.

I accordingly concur in the finding of the trial judge. In my view, the Court of Appeal erred by intervening.

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III

The third question in the proposal refers to the number of persons employed by the proposer. Booth answered that he had two draftsmen and a typist working for him. The trial judge considered that a misrepresentation, and he was clearly right to do so since it is admitted that Booth had no employees. In itself, this is not a major misrepresentation, but it must be re-read together with the other inaccurate answers and also with the answer to the sixth question, to which the Quebec courts have not referred.

This question refers to the cost of construction done during the previous year for which the proposer prepared the plans, to the estimated cost of construction for the year which is beginning, and to the estimated fees related thereto. As the policy which concerns us was preceded by three others, two of which give the same information, it is of interest to examine the figures given by Booth:

	Previous year	Current year	estimated fees
1964	$100,000	$200,000	$10,000
1965	200,000	500,000	25,000
1966	800,000	500,000	25,000

The reference in Booth’s testimony to the professional work which he did for respondent in no way suggests that this work was done free of charge. On the contrary, he stated that his fees were paid in two ways, by an annual retainer and by individual charges. If the figures given by Booth in answer to the sixth question are compared over the years with the total fees for the years 1965 and 1966 shown in the accounts, namely $1,300 a year, it is clear that the answer given to question six in 1966 contained at the very least inaccuracies.

It is time, I think, to refer to the testimony of Booth to see how, according to him, the relationship between respondent and himself worked, first in his capacity as general manager and chief engineer of respondent, and then in his capacity as a

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professional engineer. In his interview with counsel for the insurer in May 1967 he stated the following:

Q. Did you draw plans?

A. Oh, no.

Q. You did not draw plans?

A. No, the draftsmen did that.

Q. These draftsmen, did they report to you as chief engineer?

A. Not for that purpose. They worked under my direction as a Civil engineer in the partnership Breault, Booth Associates.

Q. These draftsmen, they were working for General Structures and paid by General Structures?

A. Yes.

Q. As employees of General Structures, did they report to you?

A. No, for matters of administration, they reported to me as General manager, but for matters of engineering, under the terms of my retainer for Breault, Booth Associates, we were requested to supervise the plans of General Structures.

Q. But as chief engineer for General Structures, you never worked on plans?

A. No.

Q. You swear to that?

A. I swear to that—I am under oath.

Q. You say that your work as chief engineer consists of?

A. Let’s say, all the engineering aspects of General Structures business, except for the design. The design came under my responsibility as consulting engineer.

It must be remembered that Booth stated that he devoted two to three hours a week to his professional engineering work outside the area of his employment with respondent.

Looking at the record as a whole, both the answers to questions two, three, four and five and the answer to question six, I concur in the view of the trial judge [TRANSLATION] “that the evidence has shown that the insurance proposal written by Booth was inaccurate and likely to mislead the

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company as to the scope of the risks which it was assuming”.

IV

Respondent maintains that, even though the facts were not correctly represented by Booth, these inaccuracies are unimportant since the broker and the insurer knew the real relationship between Booth and respondent.

This knowledge can only result from the documents given by Booth to the broker. Respondent sought to argue at first instance that the broker had learned all the pertinent facts during his interviews with Booth. The trial judge dismissed this contention and stated that he was satisfied that the broker [TRANSLATION] “never knew exactly the situation between Breault and Booth nor the interests of Booth in General Structures Inc.” As the Court of Appeal did not rule on this aspect of the record, we are left with this conclusion of the trial judge which seems to me perfectly consistent with the evidence.

However, respondent added, and the Court of Appeal accepted this contention, that the document given to the broker in October 1965 and forwarded by him to the insurer gives a complete picture. I cannot accept this view. This document is divided into two parts, the first of which refers to the ten largest construction operations, and I have already referred to this aspect, which in no way enlightens the insurer about the relationship between Booth and respondent. The second part of this document concerns details entitled “Personal Record for Underwriting of Partners”. These details refer to Breault’s experience as an engineer, mention his university degrees and list his employers including his participation in Breault, Booth & Associates. With respect to General Structures Inc., he is listed as its president. In the case of Booth, the details are of the same kind, and as regards General Structures Inc., he is referred to as “General Manager & Chief Engineer”. Furthermore, the history of Sauvé and Smith is also mentioned; this information shows that Sauvé was employed by General Structures Inc. as a construction manager (this information is interesting if compared with respondent’s claim that it did no

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construction work), whereas Smith appears to have no connection with respondent. To conclude from this document that the insurer possessed all the information required to ascertain that the answers in the proposal were inaccurate is a step which I definitely cannot take. This document in no way establishes

(a) that the partnership no longer existed in August 1966;

(b) that Booth had no employees in his service;

(c) that the figures given by Booth in answer to question six were not genuine;

(d) that Booth had a dual role, both as an employee of General Structures Inc., a company performing construction work, and as a professional engineer on his own behalf, giving his services exclusively to respondent for the sole purpose of drawing up plans and estimates.

The most one can say in favour of respondent’s argument, in view of the fact that the address of the insured is given in the policy as c/o respondent, 50 Place Crémazie, is that this document could have prompted appellant to seek further information. There was no obligation to do so in the circumstances, and I entirely agree with the following extract from the reasons of the trial judge:

[TRANSLATION] The fact that the garnishee would have been wiser to conduct a detailed inquiry cannot prevent him from seeking the annulment of the contract.

The questions which the insured must answer are put so as to avoid subjecting business transactions to excessively long and burdensome inquiries.

Neither in law nor in fact did the insurer know the real situation. Accordingly, he did not waive the possible effects of these false statements noted by the trial judge.

V

Examining the case from the point of view of “materiality”, the trial judge concluded:

[TRANSLATION] The defendant Booth did not state fully and frankly the facts which might indicate the

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nature and the scope of the risk or prevent the insurer from assuming it, or at least influence the risk premium.

The trial judge based his conclusion particularly on the view expressed by the expert witness Gerard John Lynch that, if the correct answers had been given to the questions in the proposal, he would not have issued the policy. Furthermore, this statement is consistent with the evidence submitted by three other witnesses, namely an insurance broker and two employees of appellant. These four testimonies have not been contradicted, as no witness was called by respondent on this point. We are therefore squarely within the confines of arts. 2487 to 2489 of the Civil Code, and appellant submitted evidence which was not submitted in Gauvremont v. The Prudential Insurance Company of America[1], where on page 160 Kerwin J., as he then was, stated:

The criterion, I apprehend, that is to be followed is the same as that set forth by the Privy Council in Mutual Life Insurance Company v. Ontario Metal Products Company, [1925] A.C. 344, i.e., whether if the matters concealed or misrepresented had been truly disclosed they would, on a fair consideration of the evidence, have influenced a reasonable insurer to decline the risk or to have stipulated for a higher premium. There is no evidence in the present case that the Company would have done either of these things nor is there anything in the record from which either may be presumed.

See also Henwood v. The Prudential Insurance Company of America[2].

While not expressly examining this question of materiality, Rinfret J. dismissed it indirectly by pointing out that the witness Lynch proceeded from a false premise when he assumed that respondent was in fact a construction company. I have already indicated that in my view the premise accepted by the witness Lynch is in fact the true situation, and therefore on this point I cannot concur in the opinion expressed by Rinfret J. Moreover, it is relevant to point out why the trial judge, following in this regard the statements of the witness Lynch and the other witnesses on the question of materiality, considered it very impor-

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tant that the insurer should know the real situation. In the words of the witness Lynch:

…the fundamental point in that would be that there is a community of commercial interests between, or appears to be a community of commercial interests between engineers and a construction company which militates.

This Court is not called upon to decide whether an engineer in the exclusive employment of a company can ever obtain professional liability insurance. I shall express no opinion on that matter, as indeed the evidence does not allow me to do so. What the testimony does clearly show, however, is that in a situation as precise as this one, the insured is obliged to give a complete picture of the situation, since the case in question is a particularly delicate one.

For these reasons, I would allow the appeal and restore the judgment at trial, which maintained with costs the negative statement of the garnishee-appellant, declared policy EP‑5718 null and void, quashed the garnishement and dismissed the contestations of the negative statement; the whole with costs in both the Court of Appeal and in this Court.

Appeal allowed with costs.

Solicitors for the appellant: Gilbert, Magnan & Marcotte, Montreal.

Solicitors for the respondent: Stikeman, Elliott, Tamaki, Mercier & Robb, Montreal.

Solicitors for the third party: Johnston, Heenan & Blakie, Montreal.