What to expect when you're expecting... An answer from a regulator: SCC to discuss the reasonable diligence defense in cases or strict liability offenses

The Supreme Court of Canada recently granted leave to appeal in a case involving the Autorités des marchés financiers (“AMF”), the Quebec regulator regarding financial products and services. The most important issue discussed by the Court of Appeal concerns the possibility or not for Sovereign, General Insurance Company (“Sovereign”) to use the reasonable diligence defense because it made a mixed error of law and fact.



The facts in this matter are rather complicated, but for present purposes, may be summarized as follows:

Sovereign delivers insurance policies in Quebec through Flanders Insurance Management and Administrative Services Limited (“Flanders”) an insurance broker that does not have a licence issued by the AMF;

After having investigated a complaint made by Flanders’ competitor, the AMF determined that Flanders needed a licence to sell Sovereign’s insurance policy in Quebec;

In the course of its investigation, the AMF contacted Sovereign in order to obtain more information about its business relationship with Flanders and GE;

In one of its answers, Sovereign submitted the reasons for which, in its opinion, Flanders did not need a licence to sell its insurance policy in Quebec and expected AMF to confirm or infirm its position;

AMF never answered but issued 56 counts against Flanders once it renewed 56 different insurance policies, as well as against Sovereign pursuant to Section 482 of the Distribution of Financial Products and Services Act, RSQ, c. D-9.2 (“DFPSA”) which provides that:

“482. Every insurer that helps or, by encouragement, advises or consents or by an authorization or order, induces a firm or an independent representative of independent partnership through which it offers insurance products or an executive officer, director, partner, employee or representative of such a firm or independent partnership to contravene any provision of this act or the regulations, is guilty of an offence.

The same applies to any director, executive officer, employee or mandatory of an insurer.” (emphasis added)

Decisions Below

The Quebec Court judge decided that Sovereign was guilty of the offences since it was only pleading ignorance of the law which cannot be recognized as a defense in Canadian law and therefore condemned it to pay $560,000 ($10,000 minimal sanction on each 56 counts);

The Superior Court overturned this ruling, and the judge sitting in appeal of the Quebec Court decision determined that, the situation being complex, Sovereign could successfully argue that it committed a mixed error of law and fact. Based on the facts that (1) it had obtained a legal opinion from Flanders to the effect that Flanders did not have to be registered, (2) the nature of the insurance scheme was complex, and (3) the AMF omitted to answer to Sovereign’s letter exposing its view on the subject, Sovereign could argue that it acted with reasonable diligence.

The Superior Court's decision was reversed by the Quebec Court of Appeal, where Mr. Justice Cournoyer wrote the reasons of the majority to which Mr. Justice Kasirer subscribed. The latter nevertheless wrote his own opinion to add comments in respect of the availability of a defense of mixed error of law and fact in the circumstances. Mr. Justice Dalphond wrote a dissenting opinion and determined that the elements of the actus reus had not been proven since Sovereign played a passive role and did not, in any way, help or induce Flanders to contravene any provision of the act. On the mens rea issue, Mr. Justice Dalphond agreed with his two other colleagues that the offense provided for in Section 482 DFPSA is a strict liability one, so that Sovereign must have shown that it had taken all reasonable steps to avoid committing the offence or that it has a proper defence of mistake. He determined, as the Superior Court judge had done, that Sovereign could successfully plead that it committed a mixed error of law and fact, so that it cannot be condemned to the $560,000.

The majority reasons by Mr. Justice Cournoyer indicate that, since the AMF did not have any duty to answer Sovereign’s letter exposing its views on the interpretation of the law, Sovereign could not rely on the AMF’s omission to answer to determine that it was acting in accordance with the law. Moreover, relying on a legal opinion (obtained from Flander’s lawyer in this case) is not a defense. The reasonable diligence defense should not be widened to include cases where a regulator which does not have any duty to answer to a request on the legality of a modus operandi, does not. This should not contribute to establish a context of mixed error of law and fact when it clearly does not constitute an officially induced error.

It should be mentioned that Mr. Justice Cournoyer ends his reasons by stating that he shares the worries expressed in the Superior Court judgment regarding the AMF conduct who decided not to inform Sovereign of its opinion but rather waited for the insurance policy to be renewed by Flanders to issue counts against Sovereign for a total of $560,000 of minimal sanction. He adds that it would have been better if the AMF answered Sovereign’s questions instead of issuing the counts, which could even have prevented all counts from being issued.

Potential significance

The reasonable defense through the mixed error of law and fact can be used in all cases of strict liability offences. Therefore, the judgment to be rendered by the SCC could have a tremendous impact on any regulatory litigation involving a party that actively tried to obtain confirmation that its complex modus operandi was in accordance with a certain law.

Case information

Sovereign General Insurance Company v. Autorités des marchés financiers

Quebec Supreme Court docket : 34699

Date leave granted : June 28, 2012

insurance policies reasonable diligence defense



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