In a ruling on April 17, 2014,1 the Quebec Court of Appeal upheld a Superior Court decision2 dismissing the motions filed by insureds against the Barreau du Québec’s Professional Liability Fund (the Fund) to force it to take up their defence.

Facts

In this instance, the appellants are a law firm (the Firm) and four partners of the Firm that are insured with the Fund (collectively, the Insureds). The Insureds are being sued in five separate actions in connection with alleged fraud committed by a former lawyer of the Firm (the Lawyer) when the latter was or appeared to be a partner of the Firm in the summer of 2011.

The plaintiffs in three of the actions maintain they were approached by the Lawyer to participate in an investment project. They granted short-term loans to the Lawyer and the loan amounts were deposited in the trust accounts of the Firm and the Lawyer. In the other two actions, the Lawyer proposed that the plaintiffs take part in a transaction with a Swiss company in order to help a U.S. company withdraw from bankruptcy. As part of that transaction, the plaintiffs deposited funds in the Firm’s trust account and signed deposit agreements.

In June 2011, the Lawyer ceased to be a partner of the Firm but didn’t tell the investors. Concurrently with the Lawyer’s departure and without the plaintiffs’ authorization, the Firm transferred the amounts that had been deposited in its trust account to the Lawyer’s personal trust account. The plaintiffs are therefore claiming the reimbursement of their investments from the Insureds.  

The Fund denied coverage and refused to take up the Insureds’ defence because, in its opinion, the allegations made did not arise from professional services and the plaintiffs are not claiming compensatory damages within the meaning of the Fund’s insurance policy (the Policy). The Insureds therefore filed motions in the proceedings against them in order to force the Fund to take up their defence.

Decisions

First, the trial judge noted that none of the plaintiffs in the actions against the Insureds were claiming to be a victim of professional negligence. Instead, they were claiming to have availed themselves of a business opportunity presented by the Lawyer. The Fund’s duty to defend, and its duty to indemnify, exists only in cases where “professional services” have been rendered by the insured. Moreover, the Policy defines “professional services” as being services that were or should have been rendered by the named insured solely in his capacity as a lawyer and as a member in good standing of the Barreau du Québec. The trial judge therefore determined that, in the absence of professional services, management of a trust account is not covered by the Policy.

In its decision, the Court of Appeal begins by reiterating the “duty to defend” principles the Supreme Court of Canada refers to in Progressive Homes Ltd. v Lombard General Insurance Company of Canada.3 It then states that the plaintiffs are claiming in essence that the Insureds led them to believe the Lawyer was a partner of the Firm, which, while it may constitute negligence, can in no case be qualified as professional negligence. The existence of a professional service (and professional negligence) is a “[translation] sine qua non condition for the applicability of the Barreau du Québec’s mandatory professional liability insurance coverage.”4

Second, according to the trial judge, it had not been demonstrated that the plaintiffs’ deposits were related to professional services rendered by the Lawyer or the Firm. Part C of the Policy provides coverage for the misappropriation of funds required to be deposited in trust while rendering “professional services.” Moreover, the Policy specifically excludes any claims arising from services in matters of investment. On this point, the Court of Appeal once again upholds the trial court’s decision and stresses that an investment dealer service is not a service rendered “solely in the capacity of a lawyer.”  

Lastly, the trial judge noted that, in some of the actions, the claims were based on non-performance of a deposit agreement and consequently were not claims for compensatory damages.

The Court of Appeal agrees entirely with the approach favoured by the trial judge, adding that decisions analyzing the Fund’s Policy in distinct and separate matters have consistently held that only compensatory damages are covered.