The exclusion for gross negligence in a financial planner professional liability insurance policy is inopperative because contrary to public policy, and the reaffirmation by the court of appeal of the state of the law in quebec regarding the notion of concurrent causes

In the ruling Souscripteurs du Lloyd’s c. Alimentation Denis & Mario Guillemette inc., rendered on August 2, 2012, the Court of Appeal ordered a financial planner’s liability insurance carrier to indemnify the former’s client.

Definition of “professional services”: a broad and pragmatic interpretation

The following is a general summary of the Court’s ruling. The E&O insurer denied coverage, alleging that the activities of the insured were not professional services provided by independent representatives as defined in the Act respecting the distribution of financial products and services. Rather, the insurance provider alleged that their insured was acting as a stockbroker according to the Securities Act, an activity that was not covered by the policy. The Court dismissed these arguments, concluding that although the insured traded securities without authorization he was nevertheless acting on behalf of his clients, the plaintiffs in this case, as a duly authorized financial planner. His activities were therefore governed by the Act respecting the distribution of financial products and services. The Court was of the opinion that the losses claimed by the plaintiffs were directly caused by poor financial planning resulting in bad investments. According to the Court, the fact that the insured additionally traded securities for his clients without authorization and in violation of the Securities Act did not exclude him from the ambit of the Act respecting the distribution of financial products and services.

The Court continued its analysis, stating that the loss suffered by the plaintiffs was the direct result of poor financial planning by the broker who, in the exercise of his “professional duties”, did not act according to the rules of good practice and standards and violated certain obligations imposed by the Code of Ethics of the Financial Securities Board. The Court therefore found that the conditions of the insurance policy were met, seeing as the fault occurred while providing services governed by the Act respecting the distribution of financial products and services and therefore qualifying as professional duties within the meaning of the exemption clause.

“Concurrent causes” and insurance coverage in Quebec law

The significance of this decision also lies in its analysis of concurrent causes. According to the Court, the plaintiffs’ loss was caused primarily by poor financial planning and was therefore covered by the liability insurance policy despite the fact that the poor planning resulted in an acquisition of securities governed by the Securities Act, an activity that was not covered by the policy. The state of the law in Quebec, based on the Court of Appeal ruling in Sécurité Nationale c. Éthier as well as the commentary by the Minister of Justice, is uncontested: in situations of concurrent causes, where one cause (financial planning) is explicitly covered, coverage must be applied regardless of whether a concurrent cause (securities trading) is excluded.

This view is consistent with the common-law perspective, as exhibited by the Supreme Court of Canada in Derksen v. 539938 Ontario Ltd.

The rejection of “gross negligence” exclusion in light of public policy governing a financial planner

The Court also provided an analysis of the exclusion clauses raised by the professional liability insurer. In particular, an exclusion for gross negligence contained in the insurance policy was raised by the insurer. The Court found that the exclusion was inoperative because it contradicted the public policy provisions of the Act respecting the distribution of financial products and services.

The Court found that, although the broker had committed gross negligence, the public policy regulations governing his profession did not allow for the existence of such an exclusion clause. The insurance provider therefore had to cover such a loss.

Following a discussion of articles 76, 83, 131, 136 and 196 of the Act respecting the distribution of financial products and services, the Court provided an analysis of the legislative intention to protect consumers, concluding that the regulators did not make a distinction between the different faults that must be covered. The Court observed that the intention to exclude gross negligence or to treat it differently must be explicitly articulated in the legislation (setting aside the notion of intentional fault which is automatically excluded from an insurance policy pursuant to article 2464 C.C.Q.).

The defense of contributory fault should be assessed in light of the situation of individual clients as well as their degree of sophistication

Another point of interest in this ruling is its analysis of the broker’s professional liability and the defense against the contributory negligence (faults) alleged against the plaintiffs.

In this case, the plaintiffs had a relatively low level of education, had no knowledge of securities or other financial products and had intended to invest their savings prudently in order to safely ensure their retirement. They decided to entrust this task to a certified financial planning professional. The Court found that there was a relationship of confidence and trust between the professional and his clients, with the latter having consistently followed the former’s recommendations without ever suspecting that the investments presented to them as secure were, in fact, not.

The Court upheld the conclusion of the trial judge who found that, even if the plaintiffs may have been naïve, they could not be held responsible for not knowing that the investments proposed by the broker were not in the least bit secure, contrary to the assurances made by the latter throughout. Applying the principles embraced by Justice Gonthier of the Supreme Court of Canada in Laflamme c. Prudential-Bache Commodities Canada Ltd, the Court cited the following extract:

“54 I would add that the sense of trust that is characteristic of a contract of mandate also has a significant impact on the state of mind of a client who is the victim of a fault committed by a manager. In this case, that trust lay in the belief acquired in the professional merit of the manager, as a result of which a client, especially one who is not knowledgeable, may be unable or at least reluctant to believe that the manager is incompetent. Both that trust and the confusion resulting from a loss of trust will make it particularly difficult for the victim to take charge of the situation. Awareness of the extent of the injury dawns more slowly. This situation, which the manager himself has created by representing himself as a professional worthy of trust, must be taken into account before blaming the victim for any want of diligence in mitigating damages, especially since the measures to be taken were not obvious and responsibility for taking or advising those measures rested primarily on the respondents, as knowledgeable dealers and managers. [...]”

In conclusion, the Court of appeal found in the present matter that:

“[36] Considering the complexity and the risks associated with investments, courts must recognize that individuals who, with little or no knowledge of investment mechanisms, choose to entrust their business to financial consultants or intermediaries, cannot be expected to check and double check [the soundness of their investments] after having hired the services of professionals precisely in order to avoid having to worry about this. This is not to say that investors should be permitted to ignore blatantly obvious problems. However, in this case, considering the limited knowledge of the respondents and the assurances provided by Mr. Tardif whenever they became anxious about their portfolio, there can be no question of willful blindness.

[37] No contributory fault can therefore be held against the respondents in this case: In behaving as he did, Mr. Tardif abused the trust that the respondents had in him. They respondents were therefore blameless.”