On August 2, 2012, the Court of Appeal handed down a major decision on professional liability insurance1. As a result of this decision, insureds, and insurers, may need to review their contractual insurance coverage, especially the clause excluding liability for gross fault and the clause defining "professional activities". The Court of Appeal decision is also of interest for its treatment of apportionment of liability between the professional and the client.
THE FACTS AND THE JUDGMENT OF FIRST INSTANCE
Denis Guillemette and France Mercier entrusted their life savings earned mainly from their business, Alimentation Denis & Mario Guillemette ("the investors"), to a financial adviser and planner, Yves Tardif ("Tardif"), while he was working at Norshield Fund Management. When Tardif moved to iForum Financial Services Inc., their account followed.
Following a series of investments that did not comply with their instructions, the investors lost all their savings. They then sued Tardif, his firm, iForum Financial Services Inc. ("the firm2") as well as their liability insurer, Lloyd's Underwriters ("Lloyd's").
In 2011, the Superior Court held that Tardif and the firm were liable3, in particular because of their obligations under the Act respecting the distribution of financial products and services ("ADFPS")4. The judge held that Tardif had acted illegally by making a distribution of securities governed by the Securities Act5when he was not authorized to do so. The judge also held that Lloyd's was liable because the faults committed by its insureds were covered under the insurance policy issued to Tardif and the firm. The Court therefore ordered the firm and Lloyd's to pay the sum of $460,000 to the investors. The proceedings against Tardif were abandoned because he had been declared bankrupt.
ISSUES IN DISPUTE
Although a number of arguments were abandoned during the proceedings, the Court of Appeal had to determine the following issues:
1. Had the investors committed a fault contributing to their damages ("contributory negligence") thus resulting in shared liability?
2. Were any of Tardif's actions excluded from the definition of professional activities in the insurance contract because they were outside the scope of activities that he was legally allowed to perform?
3. According to the provisions of the ADFPS and its regulations, did the exclusion for "gross negligence" apply in this case?
4. Could the liability insurer argue that because of Tardif's gross fault, the exclusion clause applied to the claim filed against the firm?
THE COURT OF APPEAL DECISIONS
In a unanimous decision written by Justice Marie-France Bich setting forth the Court's reasoning, the four questions were answered in the negative and the judgment in first instance rendered against Lloyd's was upheld.
Firstly, based on the first judge's appreciation of the evidence against Tardif, the Court found that he had committed major breaches of his legal and professional obligations under the ADFPS. The Court applied the principles formulated by the Supreme Court of Canada in Laflamme v. Prudential-Bache Commodities Canada Ltd6and held that there was no contributory fault on the part of the investors. Justice Bich wrote as follows:
"Given the complexity of the investment sector and its
inherent risks, it must be recognized that if a person entrusts
such decisions to a financial advisor or intermediary because he or
she has little or investment knowledge, that person is not under an
obligation to constantly check and double check, when, rightly so,
the person has deferred to a professional in order to avoid having
to do precisely that. Obviously, the investor must not be willfully
blind to a flagrant problem, but, in this case, considering the
respondent's limited investment knowledge and Mr. Tardif's
assurances that assuaged their anxiety over the state of their
portfolio, willful blindness is not at issue.
Secondly, the Court of Appeal rejected Lloyd's argument based on the definition of professional services in the insurance contract. According to the insurer, because Tardif procured financial products governed by the Securities Act when he was not authorized to do so, his actions were outside the scope of the professional responsibility covered under the contract. Justice Bich held that the fault causing the damages sustained by the investors resulted from Tardif's professional actions viewed as a whole. Tardif's unauthorized and illegal actions were the concrete manifestation of improper financial planning. Therefore, the fault was a consequence of services governed by the ADFPS or its regulations and meets the definition of "professional activities" covered by the insurer.
Lloyd's further argued the common law theory of concurrent causation should apply such that when two concurrent faults have been committed, one excluded in reason of a clause and the other not, the exclusion clause prevails. However, the Court of Appeal followed the decision in Sécurité Nationale v. Éthier8and stated that this theory does not apply in civil law.
Thirdly, the Court examined the provisions of the ADFPS and its regulations. Comparing them with other laws and regulations that specifically exclude this type of fault, the Court held that the legislator had not excluded gross fault from the legislative provisions requiring that professionals governed by the ADFPS and its regulations must have liability insurance. Consequently the Court declared that the clause excluding gross fault in the insurance contract was inoperative. It is of particular note that the Court drew a distinction between an intentional fault, which may never be covered, as stipulated in article 2464 of the Civil Code of Québec, and gross fault, which may be covered.
Fourthly, considering the facts of the case, Justice Bich held that the firm had committed a fault, but it cannot be characterized as gross fault. The Court added that the finding against Lloyd's as the firm's liability insurer must stand because of articles 2414 and 2464 of the Civil Code of Québec, even if Tardif had committed gross fault, the exclusion would not apply in respect of the firm. Article 2464 reads as follows:
"2464. The insurer is liable to compensate for injury resulting from superior force or the fault of the insured, unless an exclusion is expressly and restrictively stipulated in the policy. However, the insurer is never liable to compensate for injury resulting from the insured's intentional fault. Where there is more than one insured, the obligation of coverage remains in respect of those insured who have not committed an intentional fault.
Where the insurer is liable for injury caused by a person for whose acts the insured is liable, the obligation of coverage subsists regardless of the nature or gravity of the fault committed by that person." (Court's emphasis)
In other words, because Tardif is "a person", distinct from his firm, the exclusion respecting Tardif's potential gross fault cannot be set up against the insured and therefore cannot be argued by Lloyd's in an action brought against the firm for the faults committed by the person for whose acts the firm is liable in law.
In light of this recent Court of Appeal decision, it would be prudent for any insurer or insured to closely review their professional liability insurance coverage. Depending on the legislative framework, certain clauses excluding liability for gross fault could be declared inoperative. It is crucial to consider the relevant legislation and regulations governing professional liability and the attendant obligation to have liability insurance.
This decision also stands for the proposition that the definition of "professional activities" must be considered in light of the specific circumstances and all the professional's actions. Examination of all the circumstances of each case will determine if the professional activity covered falls within the definition in the insurance policy, even if some of the professional's actions do not at first glance appear to be covered by the definition. Such an analysis must be based on all the facts of each situation, i.e., the analysis must be contextual and must take into consideration all the professional's action. Isolating a particular action must be avoided, even if that act is illegal and causal. The proper approach is to consider all the facts to determine the context in which the fault resulting in the injury was committed to thus ascertain if it really falls within the definition of "professional activities" in the insurance contract under consideration. In that respect, it would be worthwhile for insurers to conduct the statutory examination authorized under article 2471 of the Civil Code of Québec.
1 Souscripteurs du Lloyd's v. Alimentation Denis & Mario Guillemette, 2012 QCCA 1376, Justices Benoît Morin,
Julie Dutil and Marie-France Bich.
2 As the firm was declared bankrupt during the proceedings in first instance, it was represented by the trustee of
3 Alimentation Denis & Mario Guillemette v. Groupe Boudreau Richard inc., 2011 QCCS 2362, Justice François Huot.
4 R.S.Q., c. D-9.2.
5 R.S.Q., c. V-1.1.
6  1 S.C.R. 638
7 Para 36 of the judgment.
8  R.R.A. 614 (C.A.).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.