The Québec Court of Appeal considers the issue of the amount of insurance:¹ liability of the broker and/or chartered appraiser

November 30, 2016

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Facts

Bar et spectacles Jules et Jim inc. (hereinafter the “Bar” or “Insured”) sought to renew the insurance coverage for its building, which was then insured for $424,000.² On the recommendation of its broker, it obtained an appraisal which concluded that the reconstruction cost of the building would be $565,000, meaning that the Bar was underinsured. The Bar’s representative sent the appraisal to the broker, who took no further action and, more specifically, did not forward it to the insurer.

The inevitable happened: a fire destroyed the building. The insurer paid the insurance indemnity of $424,000 as per the policy in effect. However, the reconstruction costs were admitted to be $715,000.

The Bar therefore brought an action against both the broker and the appraiser alleging that the reconstruction costs, including the demolition, in fact reached $799,000. It therefore claimed the amount of $375,000 representing the difference between this amount and the indemnity received ($424,000).

The Bar argued that the broker had neglected to conduct a diligent and rigorous follow-up of the Bar’s request to increase the amount of the insurance on the basis of the appraiser’s report. It also sued the appraiser on the basis that his report contained several errors that caused him to conclude that the reconstruction cost was $565,000, instead of $799,000.³

Trial judgment

The trial judge found that the broker had committed several faults, namely in: accumulating delays in the process of renewing the insurance policy; failing to inform his client (the Bar) of the need to consider the demolition costs in the amount of the insurance; delaying the retention of the chartered appraiser; failing to conduct an adequate follow-up of the appraisal; and especially, failing to forward the appraiser’s report to the insurer in a timely manner.

In so holding, the judge found the broker was liable to reimburse his client in the amount of $348,000, representing the difference between the indemnity received ($424,000) and the amount of the insurance it should have received ($772,000) had the broker properly fulfilled his professional obligations.⁴

The fault of the appraiser was admitted, however the Court held that the more significant faults of the broker broke the chain of causation that would be necessary to find the appraiser liable.

The broker appealed the judgment, arguing that if he had fulfilled his professional obligations, the policy limits would have been increased from $424,000 to $565,000 in accordance with the appraiser’s report. He therefore admitted his liability for the difference between these two amounts ($141,000). The appraiser obviously relied on the trial judgment, which had held that there was no causal link between the appraiser’s faults and the damage, given that the broker’s faults had broken the chain of causation. As for the Bar, it argued that regardless of the apportionment of liability, it should be awarded the difference between the indemnity it ought to have received ($799,000), if the defendants had properly fulfilled their respective contractual obligations, and the indemnity actually received ($424,000), representing a difference of $375,000.

Québec Court of Appeal’s judgment

The Court noted that the faults of the broker and appraiser were not at issue on appeal, and the only question was [translation] “their respective liability to the insured”.

First, the Court of Appeal reiterated the obligations of insurance brokers, noting that they have an obligation not only to provide information to their clients, but also to advise them. In that respect, the Court refers to section 39 of the Act respecting the distribution of financial products and services:

39. Damage insurance agents and brokers must, when renewing an insurance policy, take the necessary steps to ensure that the coverage provided corresponds to the client’s needs.

Since the broker is recognized as a specialist in risk assessment, he must act at all times with prudence and diligence.

In some cases, his obligation to advise should lead him to suggest that his client’s property be assessed by a competent appraiser. If he does so, he is generally not responsible for any damages that may result from a poor appraisal.

As for appraisers, their obligations are governed by the Code of Ethics of the members of the Ordre des évaluateurs agréés du Québec. In this case, the appraiser committed three main faults:

His appraisal of the building was based on the criteria for a residential property although the building was, at least in part, used for commercial purposes;
He neglected to include the demolition costs;
He neglected to consider the costs of upgrading to new standards in the event of the building’s reconstruction.

Had he properly prepared his appraisal, his report would have concluded that the reconstruction value (including demolition) was $799,000, rather than $565,000.

Both the appraiser and the broker committed faults of a contractual nature. Everyone acknowledged that the amount of the damages was the difference between the amount of the insurance that ought to have been contracted for ($799,000) and the amount of the existing coverage ($424,000), or $375,000.

The Court of Appeal held that the broker’s primary fault was his failure to forward the appraiser’s report to the insurer. If he had done so, based on the conclusions in the appraiser’s report, the amount of the insurance would have been increased by $141,000. Furthermore, once the broker noticed that the appraiser had failed to consider the demolition costs, he ought to have increased the insurance amount to $610,000. This therefore increases the broker’s liability to the total amount of $186,000 ($610,000 — $424,000).

As for the appraiser, had he properly carried out his work, his appraisal ought to have been for the amount of $799,000. Therefore, after the indemnity paid by the insurer ($424,000) and the portion of the damages attributable to the broker ($186,000), the balance owed by the appraiser was $189,000.

The Court noted that the broker is not liable for the appraisal of the insurance amount where it is done by the insured, whether or not through an appraiser.

In conclusion, the broker ought to have been found liable for the amount of $186,000 and the appraiser for the amount of $189,000.

What to remember

First, it is important for all of the parties involved (insured, broker and appraiser) to pay attention to the amount of insurance. Indeed, buildings can increase in value as renovations and improvements are made. Reconstruction costs can also fluctuate with changes both in building standards and inflation.

The primary responsibility for obtaining the correct amount of insurance falls on the insured himself. However, the broker, who has a duty to give advice, should remind his client to verify the amount and suggest that he retain an appraiser, in appropriate circumstances. In addition, where the broker has a mandate to change the amount of the insurance, he must act with due diligence.

As for the appraiser, he must comply with industry practice and should include an assessment of the reconstruction costs, demolition costs and costs of upgrading to current standards in his appraisal, since these standards can change over the years. His analysis should also be based on the proper standards, which can vary as opposed for a residential building to a commercial building.

If the amount of the insurance is insufficient in the event of a loss, one or more of the insured, broker and appraiser may be at fault and the rules of civil law will apply to determine the apportionment of liability.

In this regard, the decision of the Court of Appeal also contains a very interesting analysis (which we can’t review in detail in this bulletin) of various concepts relevant to causation, such as the notions of contributory fault, successive fault, fault that is a determining factor in the occurrence of the damages, and the theory of the break in the chain of causation.

Maison Jean-Yves Lemay Assurances inc. c. Bar et spectacles Jules et Jim inc., 2016 QCCA 1494.
All amounts are rounded up.
This last amount includes the demolition costs.
Note that the Court of Appeal found that the trial judge committed an error only in this respect, since the admitted amount of the damages was $799,000 and not $772,000.

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Written by

Frédéric Bélanger
Senior Associate

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Smart product liability: issues and challenges

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There are two factors that have a major impact on the liability that applies to smart products, namely transparency and apportionment of liability, and both should be considered in developing a regulatory framework for AI.4 But where does human accountability come in? Lack of transparency in AI and product liability When an autonomous product performs a task, it is not always possible for either the consumer or the manufacturer to know how the algorithm processed the information behind that task. This is what researchers refer to as “lack of transparency” or the “black box” problem associated with AI.5 The legislative framework governing product liability is set out in the Civil Code of Québec6 and the Consumer Protection Act.7 The provisions therein require distributors, professional sellers and manufacturers to guarantee that the products sold are free from latent defects. Under the rules governing product liability, the burden of proof is reversed, as manufacturers are presumed to have knowledge of any defects.8 Manufacturers have two means to absolve themselves from liability:9 A manufacturer may claim that a given defect is the result of superior force or a fault on the part of the consumer or a third party; or A manufacturer may argue that, at the time that the product was brought to market, the existence of the defect could not have been known given the state of scientific knowledge. This last means is specifically aimed at the risks inherent to technological innovation.10 That being said, although certain risks only become apparent after a product is brought to market, manufacturers have an ongoing duty to inform, and how this is applied depends on the evolution of knowledge about the risks associated with the product.11 As such, the lack of transparency in AI can make it difficult to assign liability. Challenges in apportioning liability and human accountability There are cases where the “smart” component is integrated into a product by one of the manufacturer’s subcontractors.In Venmar Ventilation,12 the Court of Appeal ruled that the manufacturer of an air exchanger could not be exempted from liability even though the defect in its product was directly related to a defect in the motor manufactured by a subcontractor. In this context, it would be reasonable to expect that products’ smart component would be likely to result many similar calls in warranty, resulting in highly complex litigation cases, which could further complicate the apportionment of liability. Moreover, while determining the identity of the person who has physical custody of a smart product seems obvious, determining the identity of the person who exercises actual control over it can be much more difficult, as custody and control do not necessarily belong to the same “person.” There are two types of custodians of smart products: The person who has the power of control, direction and supervision over a product at the time of its use (frontend custody); The person who holds these powers over the algorithm that gives the product its autonomy (backend custody)13. Either one of these custodians could be held liable should it contribute to the harm through its own fault. As such, apportioning liability between the human user and the custodians of the AI algorithm could be difficult. In the case of a chatbot, for example, determining whether the human user or the AI algorithm is responsible for defamatory or discriminatory comments may prove complex. C-27: canadian bill on artificial intelligence Canada’s first AI bill (“Bill C-27”) was introduced in the House of Commons on June 16, 2022.14 At the time of publication, the Standing Committee on Industry and Technology was still reviewing Bill C-27. Part 3 of Bill C-27 enacts the Artificial Intelligence and Data Act. If adopted in its current form, the Act would apply to “high-impact AI systems” (“Systems”) used in the course of international and interprovincial trade.15 Although the government has not yet clearly defined the characteristics that distinguish high-impact AI from other forms of AI, for now, the Canadian government refers in particular to “Systems that can influence human behaviour at scale” and “Systems critical to health and safety.”16 We have reason to believe that this type of AI is what poses a high risk to users’ fundamental rights. In particular, Bill C-27 would make it possible to prohibit the conduct of a person who “makes available” a System that is likely to cause “serious harm” or “substantial damage.”17 Although the Bill does not specifically address civil liability, the broad principles it sets out reflect the best practices that apply to such technology. These best practices can provide manufacturers of AI technology with insight into how a prudent and diligent manufacturer would behave in similar circumstances. The Bill’s six main principles are set out in the list below.18 Transparency: Providing the public with information about mitigation measures, the intended use of the Systems and the “content that it is intended to generate”. Oversight: Providing Systems over which human oversight can be exercised. Fairness and equity: Bringing to market Systems that can limit the potential for discriminatory outcomes. Safety: Proactively assessing Systems to prevent “reasonably foreseeable” harm. Accountability: Putting governance measures in place to ensure compliance with legal obligations applicable to Systems. Robustness: Ensuring that Systems operate as intended. To this, we add the principle of risk mitigation, considering the legal obligation to “mitigate” the risks associated with the use of Systems.19 Conclusion Each year, the Tortoise Global AI Index ranks countries according to their breakthroughs in AI.20 This year, Canada ranked fifth, ahead of many European Union countries. That being said, current legislation clearly does not yet reflect the increasing prominence of this sector in our country. Although Bill C-27 does provide guidelines for best practices in developing smart products, it will be interesting to see how they will be applied when civil liability issues arise. Jean-Louis Baudouin, Patrice Deslauriers and Benoît Moore, La responsabilité civile, Volume 1: Principes généraux, 9th edition, 2020, 1-931. Tara Qian Sun, Rony Medaglia, “Mapping the challenges of Artificial Intelligence in the public sector: Evidence from public healthcare”, Government Information Quarterly, 2019, 36(2), pp. 368–383, online EUROPEAN PARLIAMENT, Civil Law Rules on Robotics, European Parliament resolution of 16 February 2017 with recommendations to the Commission on Civil Law Rules on Robotics (2015/2103(INL)), available online at TA (europa.eu). GOVERNMENT OF CANADA, The Artificial Intelligence and Data Act (AIDA) – Companion document, online. EUROPEAN COMMISSION, White Paper on Artificial Intelligence: a European approach to excellence and trust, COM. (2020), p. 3. Madalina Busuioc, “Accountable Artificial Intelligence: Holding Algorithms to Account”, Public Administration Review2020, online. Civil Code of Québec (CQLR, c. C-1991, art. 1726 et seq. Consumer Protection Act, CQLR c. P-40.1, s. 38. General Motors Products of Canada v. Kravitz, 1979 CanLII 22 (SCC), p. 801. See also: Brousseau c. Laboratoires Abbott limitée, 2019 QCCA 801, para. 89. Civil Code of Québec (CQLR, c. CCQ-1991, art. 1473; ABB Inc. v. Domtar Inc., 2007 SCC 50, para. 72. Brousseau, para. 100. Brousseau, para. 102. Desjardins Assurances générales inc. c. Venmar Ventilation inc., 2016 QCCA 1911, para. 19 et seq. Céline Mangematin, Droit de la responsabilité civile et l’intelligence artificielle, https://books.openedition.org/putc/15487?lang=fr#ftn24; See also Hélène Christodoulou, La responsabilité civile extracontractuelle à l’épreuve de l’intelligence artificielle, p. 4. Bill C-27, An Act to enact the Consumer Privacy Protection Act, the Personal Information and Data Protection Tribunal Act and the Artificial Intelligence and Data Act and to make consequential and related amendments to other Acts, Minister of Innovation, Science and Industry. Bill C-27, summary and s. 5(1). The Artificial Intelligence and Data Act (AIDA) – Companion document, Government of Canada, online. The Artificial Intelligence and Data Act (AIDA) – Companion document canada.ca. Bill C-27, s. 39(a). AIDA, Companion document Bill C-27, s. 8. TORTOISE MEDIA, The Global AI Index 2023, available at tortoisemedia.com.

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The Québec Court of Appeal considers the issue of the amount of insurance:1 liability of the broker and/or chartered appraiser