Canada: When Defending An Insured Goes Wrong: The Quebec Superior Court Scolds An Insurer For Its Management Of A Claim

Justice Jean-Yves Lalonde of the Quebec Superior Court handed down a judgment recently in Taillefer c Continental Casualty Company,1 one of the many cases to come before the Quebec courts stemming from the Cinar debacle. The dispute centred around the bailiff firm Paquette & Associés (Paquette), which, in 2006, had invested the proceeds of a sale by judicial authority of the properties of former Cinar president Ronald Weinberg (Weinberg) in asset-backed commercial paper (ABCP). In May 2009, when it was ordered by the Court of Appeal to distribute and pay out the sale proceeds to Weinberg's creditors, Paquette, upon learning that the sums invested in the ABCP had disappeared as a result of the 2008 market meltdown, was obliged to borrow close to $4.5 million from the bank in order to satisfy the creditors. Paquette subsequently called on its professional liability insurers to indemnify it for the loss sustained as a result of the ABCP crash and to assume the costs incurred in defending its interests in the numerous lawsuits which led to this situation. Paquette's insurers refused to cover the loss, leading to a dispute before the Superior Court which raised a number of important legal issues.

In support of their position, the insurers submitted that Paquette had exceeded the boundaries of its role as bailiff when it invested the proceeds of the sale of Weinberg's properties in the ABCP. In addition, the insurers argued that no claim for damages owing to a professional error or omission had in fact been asserted against Paquette over the losses resulting from the ABCP. The insurers contended that the proceedings which resulted in Paquette having to pay the $4.5 million were more akin to execution of judgment proceedings taken by Weinberg's creditors than an action in damages based on professional errors and omissions, which the policy explicitly covered. Lastly and in the alternative, the insurers argued that coverage under the insurance policy issued to Paquette was limited to $2 million for all of Paquette's bailiffs together, such that the $4.5 million would only be partially covered by the policy.

In his analysis of the insurers' duty to defend, Justice Lalonde bases his findings largely on the conduct of the insurers from the time they were informed of a possible claim against Paquette. Thereafter, the insurers gave the insured contradictory messages, suggesting in the same communication that they were appointing a law firm to defend Paquette's interests in the case but that the same attorneys also had a mandate to defend the interests of the insurers. A few weeks later, another letter was sent to Paquette in which the insurers affirmed that they would defend Paquette under a reservation of rights. In the same letter, the insurers went on to say the opposite, stating that based on the insurance coverage in place, they would be unable to defend or indemnify Paquette and that the attorneys that had been appointed would now only defend the insurers' interests. In view of the foregoing, Justice Lalonde comes to the conclusion that the insurers created a muddled and ambiguous situation by appointing counsel with the dual mandate of simultaneously protecting the interests of the insured and the insurers.2 In the Court's view, this resulted in the attorneys retained by the insurers being placed in a conflict of interest situation and thus acting in a manner that was contrary to their duty to protect Paquette's interests. Accordingly, the Court finds that the insurers acted reprehensibly such that they were barred from invoking any refusal to defend the insured at any time during the proceedings. In effect, the Court considers the insurers' conduct to constitute grounds for estoppel, but it applies the concept without relying on any authorities that relate to a comparable situation.

In spite of the conclusion reached in this regard, Justice Lalonde nevertheless goes on to analyse the insurers' additional arguments in support of their denial of coverage. He determines that the proceedings taken against Paquette were indeed in the nature of an action in damages for professional liability, even though they did not take the form of a typical damage suit. In the Court's view, it is clear that the basis for the proceedings is an error or omission by Paquette in the context of providing bailiff services. Hence the true nature of the proceedings was sufficient to give rise to the insurers' duty to defend Paquette in the circumstances.

As for the insurers' duty to indemnify Paquette for its losses, the Court, after reviewing the insurance contract, dismisses the insurers' argument that the $2 million insurance coverage limit had to apply collectively to all of the bailiffs working for Paquette. Given the legal obligation for bailiffs to be insured for a minimum of $500,000 per individual, it would make no sense, in the Court's view, for the insurance policy to have a single $2 million limit for the seven (7) bailiffs working for Paquette who were plaintiffs in the case. For this reason, the Court concludes that the intention of the parties to the insurance contract was for each bailiff to be insured individually, for an amount of $2 million each. The Court thus determines that the insurers must indemnify Paquette for all the losses that it suffered, including all judicial and extrajudicial costs incurred in connection with the proceedings.

The insurers have appealed the ruling by Justice Lalonde. It will therefore be interesting to see whether the numerous criticisms levelled at the insurers in connection with their management of the file are upheld by the Quebec Court of Appeal.


1 Taillefer c Continental Casualty Company, 2011 QCCS 6722.

2 Ibid, para 72.

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