Canada: Quebec Liability Insurance Duty To Defend Update

After missing the net on his first attempt, the Minister of Finance has scored a goal with his second effort at drafting regulations identifying liability insurance contracts that are exempt from Quebec's public order "defence in addition to limits" requirement.

Overview

On May 5, 2022, a revised, long-overdue regulation [Regulation]¹ will come into force that exempts certain categories of Quebec liability insurance contracts issued to designated classes of insureds from the Civil Code of Quebec's [CCQ] public order requirement that the liability insurer is responsible for defence costs in addition to the insurance policy's indemnity limits. As discussed in our September 10, 2021 bulletin, public order article 2500 CCQ mandates that a liability insurance policy's limits must be used solely to pay the claims of injured third-parties (i.e. the claimants). Public order article 2503 CCQ mandates that a) the liability insurer must actively take up the defence of the insured in respect of covered claims, and b) the liability insurer must pay defence expense, interest and third-party costs in addition to policy limits.

The Regulation is the governmental response to the very significant hardening of the Quebec market for certain lines of insurance (D&O in particular) resulting from, inter alia, a combination of a) the carriers' exposure to potentially unlimited liability for defence costs,² b) the increase in class action indemnity exposure (Ibid), c) pandemic-related increased risks of liquidity/solvency (Ibid), d) the disproportionate cost of Quebec class action litigation notwithstanding its exceptionally low bar to certification,³ and Quebec's particularly broad consumer protection legislation (Ibid, p. 45).

The Regulation is the Quebec Government's second attempt to craft provisions that meaningfully addresses the competitive disadvantages faced by the generally united front of policyholders and carriers who had petitioned the Quebec Government for relief. As we discussed in our September 10, 2021 bulletin, the September 8, 2021 draft regulation suffered from significant constraints.

The Minister of Finance received abundant submissions from stakeholders pointing out the shortcoming of the previous draft. The Regulation eliminates, by amendment, a number of the elements that undermined the effectiveness of its predecessor.

The Regulations' Exemptions Are No Longer Subject to a 50% Cap

The previous draft regulation prohibited the issuance of policies that eroded more than 50% of the indemnity limits via the payment of defence costs (unless the insured was ultimately found not liable). This constraint has been eliminated by amendment in response to stakeholders' concerns that it significantly reduced the utility of the regulation and greatly increased the complexity of its application.⁴ Consequently, per the Regulation, up to 100% of the limits of qualifying policies can be eroded by the payment of defence costs.

The Amended Section 1 Exemption

If the following three classes of insureds enjoy the status described below at the time the policies are subscribed to, they can obtain liability insurance contracts that are exempt from the requirements at articles 2500 and 2503 of the CCQ [Exempt Insurance]:

1. Drug manufacturers under the Act respecting prescription drug insurance;
2. Three investment funds created by statute (Capital régional et coopératif Desjardins, Fondaction, le Fonds de développement de la Confédération des syndicats nationaux pour la coopération et l'emploi, and Fonds de solidarité des travailleurs du Québec (F.T.Q.); and
3. The directors, officers, and trustees of the foregoing entities, regardless of whether the entities subscribe to Exempt Insurance.

The previous version of this section's preamble did not specify that the designated entities continued to benefit from the exemption if they qualified at the time of subscription. This amendment addresses concerns raised about the uncertain consequences of the insured's loss of its qualifying status during the course of the contract (Ibid, p. 5). However, section 3 of the Regulation stipulates that all of its exemptions only apply to insurance contracts that do not exceed a one-year term. The designated entities must meet the qualifying criteria at renewal.

The Amended Section 2 Exemption (Applicable to Entities/Persons That Do Not Qualify for Exemption 1)

If the following four classes of insureds enjoy the status described below at the time the policies are subscribed to, they can obtain Exempt Insurance as long as their total coverage under all liability insurance contracts is at least $5M:

1. Entities registered as "large businesses" (companies with more than $10M annual taxable sales, generally speaking);
2. Public issuers or their subsidiaries;
3. Entities registered as "foreign businesses", and
4. The directors, officers, and trustees of the foregoing entities, regardless of whether the entities subscribe to Exempt Insurance.

The amendment to this section's preamble not only addresses concerns raised about the uncertain consequences of the insured's loss of its qualifying status during the course of the contract, but also resolves some of the uncertainty as to what happens if two or more of the liability insurance contracts whose combined limits total $5M have different expiry dates. However, it will be important to effectively co-ordinate the subscription and renewal of the multiple policies whose limits total $5M. As industry groups have pointed out, particular care will be needed when the different policies are procured by separate brokers (Ibid, p. 6).

This section was also amended to remove the exemption previously given to domestic entities solely for their foreign activities. Concerns were raised, inter alia, about the confusion that would arise if a qualifying entity was the object of a national product liability class action brought for the benefit of both Quebec and non-Quebec victims.(Ibid, p. 7)

The Elimination of the Exemption for Private Seniors Residences, Providers of Related Services and Residential, Long-Term Care, and Rehab Centres

The previous version of section 3 provided an exemption for private seniors' residences, providers of certain senior support services and/or certain similar services, operators of residential and long-term care or rehab centres (generally speaking), and their directors, officers, and trustees. This exemption was eliminated by amendment. Given that this sector is currently the object of considerable pandemic-related litigation, those entities that do not benefit from a section 2 exemption will likely continue to experience difficulty obtaining affordable liability insurance.

The Pension Committee Exception to Exemptions 1 and 2

Per the amended version of section 4 of the Regulation, directors, officers, and trustees who benefit from exemptions 1 and 2 are not exempt for activities they perform as members of pension committees. Such activities must be insured under policies that are in conformity with articles 2500 and 2503 CCQ.⁵

The Elimination of the Exemption for Insurance That Was Excess of Non-Exempt Primary Insurance

The previous version of section 6 provided an Excess Insurance exemption for a non-qualifying entity and/or their directors, officers, and trustees if the entity had a primary layer liability insurance policy that was in conformity with articles 2500 and 2503 CCQ. This exemption has been eliminated in response to concerns that primary layer carriers would end up assuming an inequitable defence cost burden (Supra, note 5, p. 7).

The Statutory Insurance Exception to Exemptions 1 and 2

Per section 5 of the Regulation, a further restriction applies to entities that are required by law to have a specified minimum amount of liability insurance (e.g. members of professional orders). That amount of indemnity cannot be eroded by other payments. This exception is a duplicate of that found at section 8 of the previous draft.

Concluding Remarks

While the final Regulation has marginally reduced the scope of the exemptions provided for in the preceding draft, the amendments have significantly enhanced the effectiveness of the legislation by eliminating certain constraints - particularly that which capped the erosion of limits - which greatly undermined both the utility and ease of application of its predecessor.

Footnotes

1. Regulation respecting categories of insurance contracts and classes of insureds that may derogate from the rules of articles 2500 and 2503 of the Civil Code, O.C. 656-2022, 6 April 2022, (2022) GOQ II, 1152.

2. See, e.g. 2021 Aon Reed Stenhouse Inc., 2021 Insurance Market Report Canada, Mid-year Review, p.13.

3. Catherine Piché, Perspectives de réforme de l'action collective au Québec : Rapport préparé à l'attention du ministère de la Justice du Québec, September 2019, p. 24.

4. See, e.g. Bureau d'assurance du Canada, Mémoire sur le projet de Règlement sur les catégories de contrats d'assurance et d'assurés pouvant déroger aux règles des articles 2500 et 2503 du Code civil, présenté à Monsieur Eric Girard, ministre des Finances, Gouvernement du Québec, p. 8.

5. The previous version of section 4 had placed constraints on the exemption previously afforded to domestic entities for their foreign activities. As discussed, this exemption has been eliminated.