Exclusion Clause Relating to Illegal or Criminal Activity

By Maud Rivard, partner, and Carolane Gélinas, associate

In a judgment rendered on April 15, 2019, the Superior Court stated on a claim by the owners of a building that had caught fire against their insurer, denying coverage on the ground that the insureds had been growing marijuana in the building, and that therefore the exclusion clause related to the use of an insured property for illegal or criminal activity under the insurance policy was applicable¹.

The insureds were the owners of a quadruplex, where they lived in apartment no. 3. The building caught fire on May 1, 2013. The loss was the result of a faulty lamp located in apartment no. 4 which was being used for a cannabis growing operation. Prior to beginning his analysis, Mr. Justice Blanchard referred to two judgments by the same Court² to point out that [translation] “the proof of the knowledge of the illicit activity by the insured entails the application of the exclusion clause”³, that [translation] “the burden is on the shoulders of the insurer”⁴, and that this demonstration may be established by serious, precise and concordant presumptions.

The Court raised more than twenty factual elements, its overall appreciation of which led it to conclude that [translation] “the plaintiffs’ story is incredible and completely implausible, if not to say abnormal and exentric”⁵. In particular, the Court noted that:

1. The other three (3) apartments were uninhabited and exclusively dedicated to the cannabis cultivation, they contained no personal belongings and the bathrooms were not functional;
2. Ventilation ducts had been installed in the three (3) apartments and were evacuating out of the bathroom windows located at the back of the building, which had been boarded up with plywood;
3. The insureds’ apartment had a ventilation duct similar to those in the other three (3) apartments;
4. All of the windows and exterior doors of the three (3) apartments were blocked off;
5. The installations for the marijuana cultivation were identical in all three (3) apartments, whereas the insureds claimed they had three (3) different tenants;
6. One of the insureds had done work on the roof as well as in apartment no. 1;
7. Cigarette butts of a brand that one of the insureds admitted to smoking were found in apartment no. 4, and the same insured admitted, in his testimony, that the cigarettes in question had been smoked by him;
8. Cannabis leaves were found in a plastic bag in the freezer of the insureds’ apartment;
9. All the tenants had left the building no later than the Fall of 2012 and the original leases which were produced as exhibits were, according to the Court, most probably documents that were made by the insureds after the loss occurred;
10. The tenants who were purportedly living in the three (3) apartments could not be tracked down by the insureds or by the insurer’s representatives; and
11. The insureds were paying the electricity bills for all of the apartments, which were extremely high for the apartments dedicated to cannabis cultivation, and there is no proof that the tenants had repaid any amount whatsoever to the insureds landlords.

Accordingly, in light of the facts submitted into evidence by the insurer, the lack of credibility the judge ascribed to the version of the insureds as well as the serious weaknesses in the evidence submitted by them, the Court decided that the exclusion clause related to illegal or criminal activity applied and dismissed the insureds’ claim.

The Court of Appeal also rendered a decision on June 10, 2019⁶, where it deals more particularly with the rules of evidence applicable in matters of extrajudicial statements. In this case, the appellant was claiming compensation from his insurer, the respondent, following damage caused to his commercial building due to a tenant’s operation of a hydroponic cannabis cultivation operation. When the damage was discovered, the equipment had disappeared and the tenant had left the premises. The trial judge ruled in favour of the insurer, which was asserting the nullity ab initio of the insurance contract on the ground that the insured had not disclosed the situation to the insurer, although he knew about the cannabis production operations and was participating in them directly or indirectly.

The decision of the trial judge was primarily based on the recordings of phone conversations between the tenant and a lawyer who worked for the same firm as the insurer’s lawyer. A motion for leave to produce these recordings was made by the insurer during the trial, after the insureds had concluded his evidence and considering it was impossible to execute a warrant against the tenant to force him testify before the Court. The trial judge granted the motion and the recordings were filed as extrajudicial statements.

The appeal dealt primarily with the admissibility of these recordings, which were the only direct evidence of the appellant’s involvement in or knowledge of the cannabis cultivation in the building. In particular, the recordings contain the following statements by the tenant:

1. The appellant and the tenant had been introduced to each other for the purposes of setting up a cannabis growing operation in the appellant’s building;
2. The appellant had paid for the equipment required to carry out this project;
3. The appellant had allowed the tenant to install the said equipment in his building and the installations had been built with his knowledge and approval;
4. The damaged premises had been used to grow cannabis; and
5. The appellant had promised to provide the tenant with a financial reward with money from the insurance indemnity claimed from the insurer, provided that he remained “hidden” for the time being⁷.

The Court of Appeal concluded that the recordings did not meet the procedural requirements and the reliability criterion under Article 2870 C.C.Q. First, the motion for leave to produce the recordings as testimony made during the trial was late. The Court indicated that the notice mentioned in Article 2870 C.C.Q. must be given before the case has been put ready for trial. In this case, it appeared to the Court that the insurer had known since February 2015 that the tenant was unlikely to appear before the Court to testify and, moreover, that it was very possible that the transcripts of the recordings would be needed to be able to contradict the tenant as a hostile witness. The Court therefore stated that this information was a good indication that the transcripts should have been filed before the trial and that the trial judge had erred in finding that the notice given after the appellant had concluded his evidence as plaintiff was sufficient, especially considering the highly prejudicial nature of these statements for the appellant.

As regards the criterion of reliability required by Article 2870 C.C.Q., the Court of Appeal decided that the reliability of the statements contained in the recordings was not sufficiently guaranteed, and therefore they should not have been admitted into evidence. In particular, the Court underlined the fact that as a defendant in warranty, the tenant had a definite interest in seeing the appellant’s claim dismissed and for the recourse in warranty to be consequently dropped. The Court also added that the trial judge herself had stipulated that the tenant was a criminal who had been evasive and demonstrated reticence in his comments, which could not permit his statements to be considered reliable.

Accordingly, given that the excluded recordings were the only direct evidence of the appellant’s knowledge of or participation in the cannabis cultivation, the Court of Appeal overturned the first decision, finding that in the absence of evidence concerning the appellant’s involvement, the judge could not rule that the insurance policy was void ab initio. The policy was therefore valid and covered the damage caused to the appellant’s building since the various exclusions raised by the insurer did not apply to the facts of the case, in particular the one concerning the actions of a person to whom property has been entrusted. In this regard, the Court specified that [translation] “the insured has not committed a dishonest act and a tenant (Séguin) cannot be considered a person to whom the property has been entrusted given that the subscription states that the building is occupied by a ‘third party’”⁸.

The Court of Appeal then stated on the quantification of the damages, finding that there was no need to send the case back to the Superior Court, notwithstanding that the trial judge did not address this question. [translation] “Granting the appellant’s application would effectively be contrary to the interests of justice and the rules of proportionality and the proper use of judicial resources. Provided that the appeal judges are in possession of evidence to quantify the damages, sending a case back to the trial court is not desirable⁹.” Finally, the Court stated that although the policy did not stipulate replacement value protection, such protection appears in the insurance application, which prevails in case of inconsistency in accordance with Article 2400, para. 2 C.C.Q.

_{¹ Vo v. Compagnie d’assurances Desjardins (Desjardins, Groupe d’assurances générales), 2019 QCCS 1382.
² Lévesque v. Compagnie d’Assurance Desjardins, 2013 QCCS 1552, paras. 59 and 60; Canuto v. Allstate Insurance Company of Canada, 2008 QCCS 5460, paras. 20 and following.
³ Idem, para. 14.
⁴ Idem, para. 14.
⁵ Idem, para. 57.
⁶ Cousineau v. Intact, compagnie d’assurances, 2019 QCCA 1022.
⁷ Idem, para. 28.
⁸ Idem, para. 65.
⁹ Idem, para. 68.}