The Quebec insurance industry has always been distinct from other Canadian provinces because Quebec insurers are legally required to take up the defence of their insureds and to cover the entire cost of their defence, even in excess of policy limits. These principles set out in arts. 2500 and 2503 of the Civil Code of Quebec are a matter of public policy and are therefore non-derogable,1 unlike in the common law provinces where the duty to defend is contractual.2
To this date, the courts have applied this article very strictly and have confirmed in several judgments the importance given to the duty to defend by the Quebec legislature.
For example, in 2015, the Superior Court ruled that an insurer had a duty to defend despite the existence of a clause stating that the insurer only assumed defence costs, with no duty to defend.3 In 2013, the Court of Appeal reiterated that the duty to defend is mandatory and distinct and concluded that an excess insurer had a duty to defend, even though the policy only provided for the payment of defence costs.4 Recently, the Court of Appeal reaffirmed these principles in SNC-Lavalin inc. (Terratech inc. and SNC-Lavalin Environnement inc.) c. Deguise.5
However, the situation could be about to change. Last May, the Minister of Finance, Economy and Innovation introduced section 86 of Bill 82,6 which would amend the scope of article 2503 by adding the following paragraph:
The insurer is bound to take up the interest of any person entitled to the benefit of the insurance and assume his defence in any action brought against him.
Legal costs and expenses resulting from actions against the insured, including those of the defence, and interest on the proceeds of the insurance are borne by the insurer over and above the proceeds of the insurance.
However, the Government may, by regulation, determine categories of insurance contracts that may depart from those rules and from the rule set out in article 2500, as well as classes of insureds that may be covered by such contracts. The Government may also prescribe any standard applicable to those contracts.
The legislation was assented to on June 2, 2021,7 but no draft regulations have been published to date.
The objectives of the bill and the proposed changes
An insurer's inability to deviate from the rigid framework imposed by article 2503 C.C.Q. can make it difficult for certain types of insureds to obtain an insurance product at a reasonable premium. The costs of defending certain types of cases, such as class actions, can be very high. In his comments, the Minister specifically referred to liability insurance for directors and officers of public companies. He also noted some insurance issues for certain private businesses such as restaurants and bars. The Minister mentioned that he was not targeting individuals or SMEs with this bill.
The proposed amendment to article 2503 C.C.Q. only provides, for the time being, that it will be possible to exempt certain categories of insureds and insurance policies from the rules in articles 2503 and 2500 C.C.Q., without specifying the extent of such exemptions. The Minister elaborated on his comments during the clause-by-clause consideration of the bill by the Committee on Public Finance. It would appear that the bill has two objectives:
- To allow for the possibility that an insurance policy may not cover or may only partially cover the defence costs of a type of insured determined by regulation; and,
- To offer this type of insured the option of freely choosing his or her own lawyer and controlling his or her own defence.
The Insurance Bureau of Canada ("IBC") has also voiced its support for the bill, stating that the economic environment in which businesses operate today is more diverse and complex.8 As a result, companies are more exposed to the risk of civil liability lawsuits and class actions. The government should account for this development and allow for a more market-oriented offering of insurance products.
Potential impacts of the amendments
This amendment will likely have a significant impact on the insurance industry. It is difficult to predict the extent of the impact at this time, as the regulations specifying which types of insureds and insurance policies will be affected have not yet been adopted. The current bill is also unclear about the extent of the exemptions to the current articles 2500 and 2503 C.C.Q.
However, we do expect impacts on certain elements at the very heart of liability insurance.
- On the tripartite relationship insurer/insured/ lawyer
It is well established in jurisprudence that the lawyer mandated by an insurer to defend an insured is in a unique situation, since he or she must loyally defend the insured while remembering that the conduct of the defence is the responsibility of the insurer.9 In practice, the insurer and the insured may not have the same vision. In such cases, the lawyer must act with caution so as not to place him or herself in a conflict of interest situation.
The amendment of article 2503 C.C.Q. could avoid such situations by giving the insured sole control over his or her case. Subject to what will be prescribed by regulation, the insured may be able to decide on the defence strategy without having to obtain the insurer's consent. In such a situation, the lawyer handling the case would not have to manage the dual mandate between the insurer and the insured since the insured would be the "master" of his or her case.
Potential situations of conflict between the insured and the insurer could still arise despite the greater flexibility.
- On sub-standard markets
As noted earlier, the Minister emphasized during the parliamentary debates that the amendment is aimed primarily at public companies and not at individuals or SMEs. When asked about the type of business being targeted, the Minister implied that seniors' residences might be a good example. However, we expect that many other businesses, such as large professional firms, will want to benefit from this exemption.
To the extent that the regulation would allow the insured to control his or her own defence, this amendment could impact the underwriting of "sub-standard" risks, such as restaurants and bars. For example, the manager of a restaurant chain may want to cover his or her own defence costs and choose his or her own lawyers in a lawsuit for both economic and personal reasons. This is an example of risk management. Thus, this change portends a significant impact on insurers' underwriting departments, as they will also have to adapt their products and pricing.
In conclusion, the amendment of article 2503 C.C.Q. could have a beneficial impact on insurers and insureds. However, no regulations have been adopted at this time and many questions remain to be answered. It will certainly be interesting to watch the jurisprudential evolution of this significant change. Perhaps the Quebec courts will be inspired by our Anglo-Saxon colleagues in their interpretation of the Act and its regulations. To be continued!
The authors would like to thank William Bourgault, a law student who assisted with the research for this article.
1 Article 2414 of the Civil Code of Quebec.
2 Emmanuelle POUPART, "L'obligation de défendre de l'assureur et l'allocation des frais de défense" in Commentaires sur le droit des assurances: Textes législatifs et réglementaires (French only), 3rd ed., Montréal, LexisNexis, 2017.
3 Boralex Inc. v. AIG Insurance Company of Canada, 2015 QCCS 972.
4 Canadian National Railway Company v. Chartis Insurance Company of Canada (Commerce and Industry Insurance Company of Canada, 2013 QCCA 1271.
5 2020 QCCA 495
6 An Act respecting mainly the implementation of certain provisions of the Budget Speech of 10 March 2020.
7 Bill 82 is now available online. After assent, section 84 concerns the amendment of article 2503 of the Civil Code of Québec.
8 IBC letter in support of Bill 82 amending the provisions of the Civil Code of Quebec regarding the obligation of insurers to pay defence costs.
9 Groupe DMR Inc. v. Kansa General International Insurance Co. Ltd., 2003 CanLII 47987 (QCCA), EYB-2003-46291, at para. 56.
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