UK: Broker’s Liabilty And Coverage For Gross Fault

Last Updated: 16 October 2012
Article by Jo-Anne Demers and Valérie De Grandpré Chapdelaine

On September 27, 2012, the Quebec Court of Appeal, in a judgment written by Justice Pierre J. Dalphond, rendered an important decision on the liability of a life insurance and investment broker in Audet v Transamerica Life Canada1 ("Audet"). This judgment, rendered subsequent to the same court's decision in Souscripteurs du Lloyd's v Alimentation Denis & Mario Guillemette Inc.2 ("Guillemette") sheds new light on exclusions for gross fault in liability insurance policies.

Audet involved an action against Jacques- André Thibault, a broker, instituted by two former clients, Marie and Pierre Audet (the "Audets"). The Audets inherited approximately $1.5 million each upon their mother's death in 1998 and retained Mr. Thibault to devise and implement an investment strategy for them. The Audets alleged having suffered significant losses further to Mr. Thibault's faulty advice.

At trial, Justice Marc De Wever found Mr. Thibault liable. Among the faults retained against him were not having completed an investment profile for the Audets, not being sufficiently informed on the tax treatment of Transamerica funds, and having recommended that the Audets purchase several life insurance policies without verifying whether they had sufficient liquid assets to cover the premiums.

Justice De Wever also considered the coverage available under the professional liability insurance policies (the "Policies") issued by Lloyd's Underwriters ("Lloyd's") to Mr. Thibault and his firm. With respect to the exclusion for gross fault invoked by Lloyd's, Justice De Wever ruled that several of the faults committed by Mr. Thibault were gross faults. He therefore concluded that Mr. Thibault did not have insurance coverage for the Audets' claim.

Justice De Wever's decision was upheld on appeal. The Court of Appeal ruled that Mr. Thibault had been negligent in recommending an investment strategy that was inappropriate for the Audets', due to his lack of knowledge of their situation and of the recommended products, as well as his desire to earn the greatest commission possible.

As to whether Mr. Thibault's conduct could be characterized as gross fault, the Court of Appeal first noted that gross fault is the result of extraordinarily deficient, indeed inexcusable, conduct, demonstrating a complete disregard for the interests of others.

With respect to Mr. Thibault's lack of knowledge of the tax treatment of Transamerica funds, the Court of Appeal reversed the trial judge's decision, concluding that Mr. Thibault's conduct in this regard did not constitute gross fault considering that it was no different than the conduct of other brokers in similar circumstances. Regarding the purchase of several life insurance policies further to Mr. Thibault's repeated recommendations, the Court of Appeal ruled that it did in fact constitute gross fault in view of Mr. Thibault's desire to earn commissions and his inexcusable lack of concern for the consequences for the Audets.

In this regard, the Court of Appeal confirmed that this gross fault was excluded under the Lloyd's Policies.

Yet, in Guillemette, the same court concluded that in order to comply with legislation, in particular the Act respecting the distribution of financial products and services and its regulations, the liability insurance policies issued to the market intermediaries governed by this legislation, including financial planners, could not exclude gross fault.

After characterizing the comments made to this effect in Guillemette as obiter and discussing the various consequences that this decision could potentially have, the Court of Appeal readjusted its position, noting that it would be up to the regulator to clarify the application of the legislation and the mandatory insurance requirements. Moreover, the Court ruled that even if the terms of a liability insurance policy contradicted the applicable legislation, this could not have the effect of modifying the contractual agreement between an insurer and its insured.

Reiterating that the duty to indemnify is not nullified by the fact that damages result in part from an excluded fault, the Court of Appeal ruled that Lloyd's was liable to the Audets in the amount of $500,000 each, being the limit of insurance per occurrence under the relevant policy. In this regard, the Court of Appeal dismissed Lloyd's argument that it was one and the same occurrence in the case of Marie and Pierre Audet, concluding that they were separate clients of Mr. Thibault and that, at all relevant times, their investments were separate and their contractual relationships with Mr. Thibault were distinct.

It is also worth noting that the Audets had appealed the trial judge's decision finding Transamerica, which sold some of the insurance products in which they had invested, not liable. The Court of Appeal ruled that Transamerica, as an entity selling investment vehicles to the public, failed in its obligation to inform the market intermediaries of all the relevant facts concerning the products so they could in turn properly advise potential investors. In this case, the obligation to inform extended to the consequences of withdrawal including the tax treatment of any gains or losses. The Court ruled, however, that this omission did not cause the Audets any damage, since the tax treatment of the Transamerica products had not been a determinative factor in the Audets' decision to invest.

In conclusion, pursuant to the Court of Appeal's decision in Audet, it will be up to the regulatory authorities to determine mandatory professional liability insurance requirements, and more specifically, whether the professional has the obligation to carry liability insurance that does not exclude gross fault. In any event, it should be noted that according to the Court of Appeal in this case, failure to comply with such an obligation would not have the effect of modifying the terms of the contractual agreement between an insurer and its insured, between which freedom of contract will prevail.


1. 2012 QCCA 1746

2. 2012 QCCA 1376.

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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Jo-Anne Demers
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