The Limit to the Insurer’s Subrogatory Action Against the Manufacturer
In its recent decision in CNH Canada Ltd. v. Promutuel Lac St-Pierre – Les Forges, société Mutuelle d’assurances générales, 2015 QCCA 204, the Court of Appeal confirmed that an insurer’s subrogatory rights against a manufacturer, in this case represented by Langlois Kronström Desjardins, is limited to the rights that its insured had in the covered product, regardless of the extent of the indemnity paid out to the insured further to the loss.
In August 2007, two farm tractors parked side by side went up in flames. A Case brand tractor manufactured by the Appellant was the source of the fire, which caused the loss of a Fendt brand tractor. Each tractor was operated by a separate entity, both of which were insured by the Respondent Promutuel Lac St-Pierre – Les Forges, société Mutuelle d’assurance générale (“Promutuel”). The fire caused the total loss of both tractors.
In what proved to be a key factor in the outcome of the litigation, the Case tractor was leased to its operator, while the operator of the Fendt tractor owned it.
Following these losses, Promutuel indemnified each of its insured for the full value of their respective tractors.
Promutuel brought a subrogatory action against the Appellants, in which it alleged that the Case factor had a latent defect that had caused the loss.
The Superior Court ruled in favour of Promutuel1. The Court found that the cause of the fire was an electrical failure in the Case tractor and, applying the warranty of quality regime under the Civil Code of Quebec to Promutuel’s claim altogether, ordered the Appellants to reimburse Promutuel for the full amount of the indemnities paid out to its insureds.
On appeal, the Court of Appeal deferred to the trial judge with respect to his finding regarding the cause of the fire and upheld his order to reimburse Promutuel for the loss of the Fendt tractor. The manufacturing defect in the Case tractor amounted to a fault that caused the loss of the Fendt tractor, for which the Appellants were liable. Promutuel’s subrogatory action for that loss was well-founded.
However, the same cannot be said for the loss of the Case tractor, which was leased by its operator. The Court pointed out that the nature of the insured’s rights in a thing for which it had received insurance proceeds was critically important.
In this instance, the loss of the Case tractor due to an inherent defect had the effect of terminating the lease, and the loss was accordingly suffered by the lessor rather than Promutuel’s insured.
As the Appellants had argued, the Court found that under these circumstances the indemnification paid by Promutuel to its insured for the full value of the tractor could not justify the subrogation alleged by the insurer:
[TRANSLATION]  That said, neither Mr. Lévesque nor JFL Inc. owned the Case tractor. The loss suffered by Mr. Lévesque was in his capacity as lessee of the tractor, not as its owner.
 However, this part of Promutuel’s claim against the appellants is based on its contention that it is subrogated in the rights of its insured after indemnifying Mr. Lévesque and JFL Inc. “for the loss of the leased tractor”. …
 The judge should have rejected this part of Promutuel’s claim. No insurance proceeds were owed by Promutuel, as it is the lessor who was responsible for ensuring normal use of the thing leased. …
The Court of Appeal thus concluded that Promutuel was not bound to indemnify its insured for the loss of the Case tractor as if the insured owned it. It therefore refused to recognize the subrogaty right invoked by Promutuel.
The Court of Appeal’s analysis stand for the principle that an indemnification paid out by an insurer for a loss that would not otherwise have entitled the insured to sue the third party responsible for the loss does not constitute an indemnity within the meaning of Article 2474 of the Civil Code of Québec.
The ruling in CNH Canada Ltd. v. Promutuel Lac St-Pierre – Les Forges, société mutuelle d’assurance générale is of importance as it tends to confirm that the extent of the insurer’s subrogatory rights are linked to the nature and extent of the rights of its insured in the covered product.
This ruling is consistent with the Domtar2 case, which confirmed that a payment for a loss that was excluded from coverage does not give rise to any legal subrogation in favour of the insurer and that the defendant to a subrogatory action can plead the absence or the inappropriateness of the alleged subrogatory rights.
Insurers should therefore make a careful analysis of the circumstances of a loss before paying out any indemnity to the insured or instituting a subrogatory action against the party allegedly responsible for the loss.
By the same token, defendants to a subrogatory action would be well advised to closely scrutinize the nature of the rights alleged against them as well as the rights that the insured had in the product at issue.
1 Promutuel Lac St-Pierre – Les Forges, société mutuelle d’assurances générales v. CNH Canada Ltée, 2012 QCCS 4437
2 ABB Inc. v. Domtar Inc., 2005 QCCA 733, appeal dismissed,  3 S.C.R. 461