In September 2021, Québec’s minister of finance, Éric Girard, tabled a draft regulation setting out the types of civil liability insurance contracts that may depart from certain rules in the Civil Code. In addition, the RCCAQ submitted its observations to the minister during the consultation process. Tabled in early April 2022, an Order in Council was published in late April enacting the Regulation respecting categories of insurance contracts and classes of insureds that may derogate from the rules of articles 2500 and 2503 of the Civil Code. To keep its members informed about the Order in Council’s impacts and implications, the RCCAQ consulted its legal advisors. The main interpretations are provided below in this survey of the scope of insurance brokerages’ obligations.

Ground rules

The government’s objective with this Order in Council¹ is to foster balance between Québec’s civil liability insurance markets in relation to the more competitive market in the rest of Canada (the market in Québec is more restricted, while premiums there are higher than elsewhere in Canada). Essentially, this situation is attributable to the obligation imposed on insurers issuing contracts in Québec: they are required to fully assume the defence of their insureds in any related legal actions and to pay all costs (expenses, legal costs, interest), even if they exceed the sum underwritten, even by a significant amount. As a result, insurers risk having to cover costs well in excess of the contractual insurance amount. Please note that the insurance amount must exclusively be used to compensate injured third parties (art. 2500, 2503 CCQ).

Until April 6, 2022, this rule allowed for no exceptions in Québec, even if the contract entered into by the parties excluded such a commitment by the insurer. The situation was different in the rest of Canada, where insurers were not subject to these rules: defence costs were deducted from the insurance amount available for injured third parties. Bear in mind that in Québec, the obligation to defend the insured is distinct from that aimed at compensating injured third parties. This principle has been confirmed by the courts on multiple occasions. Until April 6, insurers’ contractual agreements could not deviate from this rule, which had prompted an exodus of insurers from this subsector of Québec’s insurance market. The remaining insurers raised their premiums and limited the insurance amount.

Exceptions since April 2022

To rectify the situation, Québec lawmakers added a third subsection to article 2503 of the Civil Code. The new wording states that exemptions to the above-mentioned requirements are authorized by regulation. It is for that reason that Order in Council 656-2022 was issued. By opening the door in certain specific situations, the provincial government is confirming the possibility of contractually limiting the insurer’s commitment. This makes it possible not only to deduct defence costs from the insurance amount, but also, in the regulation’s current iteration, to simply reject the obligation to defend and thus to only assume the obligation to pay compensation. Therefore, contractually speaking and in certain specific situations, insurers may limit their obligation to compensate injured third parties, up to the insurance amount. The insured would then be required to cover any amount over and above the defence costs.

Example

Take, for example, an insurer that issues $5 million in coverage while the injured third party suffers recognized damages totalling $4.5 million. For discussion purposes, the defence and legal costs amount to $750,000. If the insurance contract is limited to the compensation obligation (and not the defence obligation), the insurer will pay $4.5 million (plus interest, up to a maximum of $5 million) to the injured third party, but no more. If the contract also includes the obligation to defend the insured, the financial commitment would be limited to $5 million including principal, interest, expenses and legal costs. The remainder would be covered by the insured, i.e. $250,000, plus accrued interest on the principal amount paid to the injured third party.

Clearly, the amendments brought in by the Order in Council could have severe financial consequences for insureds. Consequently, all brokers must be extra-vigilant when fulfilling their duty to advise clients.

Clarifications

Please note that the situations authorizing departures from articles 2500 and 2503 of the Civil Code are primarily geared towards large entities and businesses, most likely excluding individuals, small and medium-sized enterprises and legal persons under public law. Cases in which insurers can set aside their obligation to defend, including expenses (fees) and legal costs, or their obligation to pay over and above the insurance amount, essentially concern the following insureds:

1. Drug manufacturers.
2. Legal persons or their subsidiaries constituted under the:
   1. Act constituting Capital régional et coopératif Desjardins.
   2. Act constituting the Fonds d’actions and the Fonds de développement de la Confédération des syndicats nationaux pour la coopération et l’emploi.
   3. Act constituting the Fonds de solidarité des travailleurs du Québec.
3. A director, officer or trustee of any entity referred to in the above-mentioned situations if the entity is not insured under such a contract.

In all other cases, the following insureds, if they have coverage totalling $5 million or more (under all civil liability insurance contracts they have entered into), may be insured under a contract that excludes or limits the obligation to defend or pay expenses and fees over and above the insurance amount:

1. A large business within the meaning of the Act respecting the Québec sales tax or a related person within the meaning of the Taxation Act for the 2021-2022 tax year (a business is considered “large” if the value of the taxable sales in Canada by it or its partners exceeds $10 million during the last year ended prior to the beginning of the year in question).
2. A reporting issuer or a subsidiary thereof within the meaning of the Securities Act.
3. A foreign business corporation within the meaning of Québec’s Taxation Act or Canada’s Income Tax Act.
4. A director, officer or trustee of any entity referred to in the above-mentioned cases, even if the entity is not insured under such a contract.

It should be noted, however, that for a director, officer or trustee referred to in the above cases who also engage in activities as a member of a retirement committee, such activities must be covered under the contract, which must not depart from articles 2500 and 2503 of the Civil Code. In that case, the broker must ensure that the $5 million insurance coverage limit (for all contracts) is complied with at all times. Hence the need to carefully check the end date of each insurance policy making up the aggregate coverage amount.

Please also note that Québec’s lawmakers have emphasized that the duration of contracts that may depart from the requirements of articles 2500 and 2503 of the Civil Code may not exceed one year. Upon renewal after one year, brokers may then reassess the client’s situation to determine whether the company still meets the “large business” criteria, among other factors. Once again, brokers must be extra-vigilant.

In conclusion, for most brokerage firms insuring small and medium-sized businesses, the Order in Council will have a limited impact given that, with the exception of legal persons constituted under the above-mentioned acts, usually only certain large businesses will qualify for these exemptions. If such a scenario does come to pass, brokers would do well to carefully review the scope of their clients’ civil liability coverage. If they do not, their own liability may come into play, with the resulting financial consequences. Unfortunately, this is the price that must be paid to ensure a minimum level of competition in Québec, compared to the rest of the Canadian market.

The above provides a summary of the essential points regarding insurance brokerage firms’ obligations in line with the Order in Council dealing with the types of insurance contracts and insureds authorized to depart from the rules set out in articles 2500 and 2503 of the Civil Code.

If you have any further questions, please feel free to contact the RCCAQ.

____________

¹ This Order in Council adopts and enacts the Regulation respecting categories of insurance contracts and classes of insureds that may derogate from the rules of articles 2500 and 2503 of the Civil Code.