Canada: Québec Court Of Appeal Decision Impacts Insurance Brokers, Financial Planners And Insurers

On August 2, 2012, the Québec Court of Appeal rendered a decision against Les Souscripteurs du Lloyd's ("Lloyd's Decision")1 in a claim involving professional liability insurance.  The Lloyd's Decision has important implications on the obligations of dealers and their representatives, and increases the possibility of investment advisors raising a client's contributory negligence in their defence.  It will also encourage professional liability insurers to review exclusions for gross fault.


This case is one of many surrounding the Mount Real scandal where hundreds of investors were defrauded over $65M.

Plaintiffs Denis Guillemette and France Mercier invested directly or via Alimentation Denis & Mario Guillemette Inc. with Respondent, Yves Tardif, a representative who was employed by iForum Financial Services Inc. ("iForum"), a mutual fund dealer registered in Québec under an Act Respecting The Distribution Of Financial Products And Services ("Distribution Act")2.

Contrary to Plaintiffs' clear instructions, Tardif concentrated all their portfolio in high risk products, causing them ultimately to lose their investment.  In 2008, Plaintiffs filed a claim against Tardif, iForum and Lloyd's, which insured them both under separate policies. Tardif and iForum eventually sought bankruptcy protection, leaving only Lloyd's available to compensate the Plaintiffs.

In first instance, the Superior Court found that Tardif failed as financial advisor to fulfill his duties of information, care and diligence and that he invested Plaintiff's savings in products that he was not authorised to distribute. The trial Court also found iForum liable both as the employer of Tardif and as a firm for failing in its duty of supervision. Finally, the trial Court dismissed Lloyd's defense that the professional activities in question were not covered due to the exclusions contained in the policy and rendered a judgment against Lloyd's in the sum of $460,053.45 CAD.

The Court of Appeal, per Justice Bich, dismissed Lloyd's appeal.

A Question of Reliance

On the first ground of appeal the Quebec Court of Appeal dismissed Lloyd's claim that the clients had contributed to their losses by their own negligence.

The Court of Appeal applied the Supreme Court of Canada decision in Laflamme v. Prudential-Bache Commodities Canada Ltd. ("Laflamme")3 and in relation to the trust a client places on his representative, noted that:

  1. A representative has an obligation to know his client and must act prudently and diligently in order to respect the client's investment objectives.
  2. The contributory negligence of a client depends to a large degree on the level of trust that the client places on his representative. A client that does not have knowledge in the area of investments refers primarily to a representative on whom he places significance reliance and consequently, the client cannot be found to have contributed to the fault of the representative or his firm.
  3. The Lloyd's Decision lists factors that suggest a high degree of reliance by the client, which include the client's age, his knowledge and experience in the area of investment, his level of education in general, his financial situation, his occupation and his involvement in the account.
  4. In addition, the registration status of the representative, the types of services he provides to the client (such as financial planning), and his title, can increase the level of trust a client places in his representative.

Broad definition of "professional services"

The insurance policies provided coverage for representatives' actions or omissions that occurred within the scope of their "professional activities". "Professional activities" are defined in the policies as including activities rendered in accordance with the Distribution Act.

However, Tardif's registration, at the relevant time, like that of his firm, did not permit him to exercise professional activities regulated by the Securities Act (Québec)4 (i.e. the distribution of promissory notes). The argument made by Lloyd's was that Tardif was not acting in the scope of his professional activities, as he was not licensed or registered to give advice to invest in promissory notes. However, the Court of Appeal concluded that Tardif was negligent in the context of his "professional activities" because, as a financial planner, Yves Tardif advised his clients to invest in the promissory notes.

In our respectful opinion, the Quebec Court of Appeal confused the activities of a financial planner with those of an adviser or portfolio manager, a category of registration in Québec found exclusively under the Securities Act (Québec).

While a financial planner is permitted pursuant to the Distribution Act to analyse the portfolio of a client and provide recommendations relating to the types of securities and sectors of the market in which the portfolio of a client should be invested, only the adviser may provide investment advice to clients in respect of any particular security governed by the Securities Act (Québec), such as a promissory note.

The definition of the term "adviser" found in the Securities Act (Québec) describes it as follows:

"5.In this Act, unless the context indicates otherwise, "adviser" means a person engaging in or holding themselves out as engaging in the business of advising another with respect to investment in or the purchase or sale of securities, or the business of managing a securities portfolio."

Section 148 of the Securities Act (Québec) requires that persons who act as an adviser must be registered.

In the present case, the activities of Tardif did exceed the limits of his registration as a mutual fund dealing representative and financial planner because he provided advice to his clients to acquire particular promissory notes and thereafter assisted them in acquiring those securities.

Gross Fault Exclusions

The Court of Appeal concluded that the failure of iForum to monitor and supervise Tardif was not a gross fault (or gross negligence) because proof was not provided that these deficiencies were significant when compared with industry standards. The court therefore dismissed the argument that the gross fault exclusion in iForum's policy applied.

In our opinion, considering the gatekeeper duty incumbent on firms in the industry, the fault of iForum may very well have been gross negligence. It appears that not only was the supervision exercised by iForum insufficient but the firm also permitted Tardif to offer and advise his clients in securities that exceeded the limits of his registrations5.

What is more, even though the Court of Appeal concluded that the issue of whether Tardif committed a gross fault is debatable, it found that the exclusion would still not be enforceable because the law requires liability insurance to cover "any fault".

The Court relies on Article 17(3)(a) of the Regulation Respecting The Pursuit Of Activities As A Representative6 and Article 29(3) of the Regulation Respecting Firms, Independent Representatives and Independent Partnerships7, that provide that liability insurance coverage "shall extend to the liability arising from the fault, errors, negligence, or omissions". The Court concludes that because the legislator did not expressly exclude gross fault, insurers must cover gross fault.

Furthermore, the Court explained that in case of conflict between the laws of the Province of Quebec and the policy, the policy provides that it is modified to include the laws of the Province.


1 Les Souscripteurs du Lloyd's v. Alimentation Denis & Mario Guillemette, 2012 QCCA 1376 ("Lloyd's Decision").

2 Act respecting the distribution of financial products and services, R.S.Q. c. D-9.2.

3 Laflamme v. Prudential-Bache Commodities Canada Ltd., [2000] 1 R.C.S. 638.

4 Securities Act, R.S.Q. c. V-1.1.

5 Paragraph 60 of the Lloyd's Decision, note 1.

6 Regulation respecting the pursuit of activities as a representative, R.R.Q., c. D-9.2, r. 10.

7 Regulation respecting firms, independent representatives and independent partnerships, R.R.Q., c. D-9.2, r. 2.

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.

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