Trust is essential in finance. It’s true for investors who rely on wealth managers to invest their money for them. It’s also true for insurers who rely on the representations of their insured to provide them with coverage.
This was made abundantly clear in a precedent setting decision the Quebec Court of Appeal, which recently upheld an insurer’s right to have mandatory professional liability policies annulled where the insured had misrepresented or concealed facts in its application or renewal.
The case of Brunet v. Axa Assurances Inc.1 involved two investors, the appellants Jean-Pierre Brunet and Giovanni Berretta who, along with their respective holding companies, had invested various retirement savings with a brokerage firm, Triglobal Capital Management Inc. The firm was registered with Quebec’s oversight body for the financial sector, the Autorité des marchés financiers, and its president, Themiskoklis Papadopoulos, invested some of these savings in offshore investment funds in the Bahamas and the Cayman Islands.
In the spring of 2007, media rumours surfaced that Triglobal and Papadoupolous were involved in fraudulent offshore investment funds. At this same time, Triglobal’s insurance policies with the respondent, Axa Assurances Inc., were up for renewal. Given the allegations of fraud, Axa pressed Papadopoulos on the subject during its renewal process. Papadopoulos dismissed the rumours as lies. There were also retractions and corrections in the media about some of the allegations that had been made. In this context, and relying on Papadopoulos' representations, the respondent renewed Triglobal’s coverage.
In December 2007, however, Triglobal and Papadopoulos were subject to a cease-operating and blocking order issued by an independent securities tribunal. In response to these developments, Axa notified Triglobal that its policy had been cancelled.
It turned out that Papadopoulos used Triglobal investments and the offshore funds to defraud clients in a Ponzi scheme that amounted to tens of millions of dollars. In light of this scandal, the appellants made a claim against Axa to recoup their losses arguing that Triglobal’s policy was in force when the loss occurred.
In Superior Court, the trial judge2 dismissed these claims, referring to an insured’s disclosure obligations under Articles 2408 and 2466 of the Civil Code of Quebec ("CCQ"). The judge also refused to disassociate Triglobal from its president Papadopoulos who had fraudulently responded to the renewal questions on the firm's behalf.
The appellants argued that Triglobal's policy constituted the mandatory professional liability coverage for brokerage firms required by the Act respecting the distribution of financial products and services and the Regulation respecting firms, independent representatives and independent partnerships. According to the appellants, since the coverage was mandatory to protect the public, the respondent could not rely on Article 2410 CCQ to have the policy annulled on the basis of the insured's misrepresentation or concealment of facts.
The Court of Appeal disagreed and ruled that nothing in the Act or Regulation expressly or implicitly dismissed the importance of the fundamental relationship of trust between an insurer and an insured that underlies the principle of Article 2410 CCQ.3 Agreeing with the trial judge, the Quebec Court of Appeal held that the respondent would have never taken on the risk of covering Triglobal had it been aware of the fraudulent investment schemes.
It also agreed that the dishonest disclosures made by Papadopoulos could be deemed to have come from Triglobal. As the president of Triglobal, Papadopoulos had directive authority during the policy renewal period and can be considered as an alter ego in the context of insurance law. The court warned that the issue of identification would have been more complicated had Papadopoulos simply been a Triglobal employee, rather than its president, however this was not relevant in the facts at issue.
By upholding the principle of trust in the insurer-insured relationship, which underlies Quebec's insurance law, the court made it clear that an insurer must be able to rely on an insured's statements to adequately assess risk and offer coverage in an informed manner.
The court also set a precedent in this case by confirming that insurers may have professional liability policies annulled if an insured has misled the insurer or concealed facts – even if the coverage is mandatory under the legislation regulating the relevant profession. In the absence of clear legislation to the contrary, future claimants cannot rely solely on the mandatory nature of such policies to overlook the importance of an insured's disclosure obligations.