Québec modulates the duty to defend for certain categories of insurance and insureds

Quebec has always been distinct from other Canadian provinces with respect to the duty to defend. Article 2503 of the Civil code of Québec[1] (Civil Code) indeed provides that the insurer must take up the defence of its insured and that defence costs are in excess of insurance policy limits. This principle was amended in June 2021 in order to permit the Government to pass a regulation to determine certain categories of insurance contracts and insured parties that would not be subjected to this rule. On September 8, 2021, the Government of Québec tabled the draft Regulation respecting categories of insurance contracts and insured parties that may depart from the rules of articles 2500 and 2503 of the Civil Code (the “draft Regulation”).

Historical background

Articles 2500 and 2503 C.C.Q. establish the rules under which insurers are obliged, in matters of liability insurance, not only to pay the benefits that must be paid to injured third persons, but also to take up the defence of their insureds and to cover the entire cost of their defence, in excess of policy limits.

On December 11, 2020, draft Bill 82 entitled An Act respecting mainly the implementation of certain provisions of the Budget Speech of 10 March 2020 (the "draft Bill") was tabled by Finance Minister Eric Girard, introducing most notably an amendment to article 2503 C.C.Q., permitting the Government of Québec to pass a regulation to determine certain categories of insurance contracts and insured parties that would not be subjected to these rules.

On June 2, 2021, the draft Bill received assent and came into force, thus confirming the amendment to article 2503 C.C.Q.

When introducing the draft Bill, Mr. Girard indicated that the government was seeking to address "a distinction with the rest of Canada that placed large Québec public companies at a disadvantage compared to their competitors, as premiums for Directors’ and Officers’ Liability Insurance were much higher in Québec"[2] and that the amendment sought to "help our companies grow and encourage head offices to remain here"[3].

The Draft Regulation

In particular, the draft Regulation, tabled on September 8, 2021, provides that an insured that meets one of the following conditions may be covered by a contract that departs from the rules set out in articles 2500 and 2503 C.C.Q.:

  • the insured is a drug manufacturer;
  • the insured is part of one of the following investment funds or their subsidiaries: (a) Capital régional et coopératif Desjardins, (b) Fondaction, le Fonds de développement de la Confédération des syndicats nationaux pour la coopération et l’emploi, and (c) the Fonds de solidarité des travailleurs du Québec;
  • the insured is covered by civil liability insurance contracts where the total coverage is at least $5,000,000 and is either (a) considered to be a large business for the purposes of the Act respecting the Québec sales tax or is a person related to a large business within the meaning of the Taxation Act; (b) a reporting issuer or a subsidiary of such a reporting issuer within the meaning of the Securities Act; (c) a foreign business corporation within the meaning of the Taxation Act; or (d) an insured pursuing an activity outside Canada and deriving income from that activity (solely for this activity);
  • the insured is (a) one of certain intermediate resource; (b) a private seniors’ residence; or (c) a private health and social services institution operating a residential and long-term care centre or rehabilitation centre[4]; or
  • the insured is covered by one or more other primary civil liability insurance contracts that already cover legal costs and expenses resulting from actions against the insured, including those of the defence, and interest on the proceeds of the insurance.

The directors, officers, or trustees of any such insureds may be covered by a contract that departs from the rules set out in articles 2500 and 2503 C.C.Q, except for activities as a member of a pension committee.

The draft Regulation also provides that the insurance contract that departs from the duty of the insurer to take up the defence of its insured and cover the defence costs (article 2503 par. 1 C.C.Q.) must state that the insured may, after consulting the insurer, select counsel, and that the insured must keep the insurer informed of the progress of the proceeding and allow it to participate in the defence.

Finally, the draft Regulation provides that when a civil liability insurance contract specifies that the proceeds of the insurance are not applied exclusively to the payment of injured third persons, the percentage of the proceeds that may be applied to other purposes may not exceed 50%, unless the insured is found to be not liable or unless the payments to injured third persons do not reach 50% of the proceeds or where a minimum amount of civil liability insurance coverage is specified by law. In this last case, proceeds must be applied to the payment of injured third persons before any other payment.

In concrete terms, the draft Regulation provides that the above-mentioned insureds may be covered by a civil liability insurance contract that does not oblige the insurer to take up their defence[5] or that does not cover defence costs, since such costs reduce the proceeds applied to the payment of injured third persons.

It should be noted that the draft Regulation should be passed and come into force on the fifteenth day following its publication in the Gazette officielle du Québec.

Conclusion

While the draft Regulation is the first of its kind since the passing of the draft Bill, it is not impossible that other industries may eventually be permitted to depart from articles 2500 and 2503 C.C.Q. We will continue to closely follow the passing of new measures that may affect your insurance coverage, as well as that of any amendment to the Regulation to be passed.

 

[1] CQLR, c CCQ-1991 ("C.C.Q.").

[2] NATIONAL ASSEMBLY OF QUÉBEC, Journal des débats of the National Assembly, 1st session, 42nd legis., May 27, 2018, "Draft Bill 82 — An Act respecting mainly the implementation of certain provisions of the Budget Speech of 10 March 2020", 12:10 am (Eric Girard).

[3] Ibid.

[4] It should be noted that for these insureds, only a departure from the second paragraph of article 2503 C.C.Q. is permitted, such that the insurer must still take up the defence of the insured and cover the defence costs, as these defence costs may be included in the amount of insurance coverage.

[5] With the exception of the insureds referenced in note 4.

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