On August 26, 2009, the Québec government published the Regulation under the Act respecting insurance (the “Regulation”). Most of the provisions of this Regulation came into force September 10, 2009. These changes will significantly rejuvenate the previous implementing regulation that was first adopted in 1976, and was subsequently amended many times over the years (the “Previous Regulation”). The Regulation introduces few new subjects, although it makes major changes to some of the principles that have applied until now. This Bulletin will summarize the principal changes.
Constitution, continuance and amendment of the articles of insurance companies
A number of clarifications have been made to the formalities that apply to the constitution of insurance companies, mutual insurance associations, federations of mutual insurance associations and guarantee funds. The same also holds for amendments to the articles of insurance companies and their continuation under Part IA of the Companies Act (Québec). The fees payable to the Autorité des marchés financiers and/or the Québec Minister of Revenue in respect of these measures have also been increased (Sections 1 to 10 of the Regulation).
Classes of Insurance
It is the Regulation that lists the classes of insurance for which insurers may obtain licenses in Québec under Section 201 of the Act respecting insurance (Québec) if they are to be authorized to engage in insurance activities.1
Here are some of the amendments that were made:
- the “accident and sickness insurance” class has been broadened and now provides for payment of an indemnity in the event of bodily injury including death, resulting from an accident sustained by an insured, the payment of an indemnity in the event of sickness or disability of an insured, and now specifies that reimbursement for expenses incurred for the health care of an insured are now also included in this insurance class (Section 14 of the Regulation);
- The Regulation simplifies the description of the “property insurance” class to provide that it contemplates insurance that indemnifies against loss of or damage to property, to the extent that the insurance does not cover property that is more specifically covered by another class of insurance (Section 17 of the Regulation). You may perhaps remember that this class of insurance previously contained an exhaustive list of the types of insurance included in this class. The following more specific classes were explicitly targeted: livestock insurance, immoveable property insurance, moveable property insurance, plate glass insurance, impact by vehicles insurance, falling aircraft insurance, water damage insurance, explosion insurance, forgery insurance, sprinkler leakage insurance, limited hail insurance, fire insurance, weather insurance, civil commotion insurance, windstorm insurance, transportation insurance, earthquake insurance and theft insurance;2
- the description of the “boiler and machinery insurance” class has been amended to increase its scope; among other things, it specifically indemnifies the insured against material loss or damage sustained by the insurer by reason of the explosion or rupture of a boiler or any other pressure vessel or resulting from an accident in the course of its operation, as well as any liability arising out of bodily injury or damage to property caused by the same events. This class now also authorizes the indemnification of insureds against material loss or damage sustained by reason of the use, breakage or breakdown of machinery (Section 18 of the Regulation);
- what was formerly known as the “guarantee insurance” class, which covered surety insurance and fidelity insurance, has now disappeared and been replaced by two separate insurance classes, namely “surety insurance” and “fidelity insurance” (Section 19 of the Regulation);3
- the “fidelity insurance” class has been broadened to indemnify not only against loss resulting from theft, embezzlement or breach of trust committed by an employee, but also committed by an agent, a mandatary, a partner, an officer or a member; it now also includes indemnification of insureds should any of those persons mentioned above fail to perform duties or perform them inappropriately (Section 23 of the Regulation);
- the “credit protection insurance” class is new; it seeks to indemnify a creditor against loss resulting from failure, on the part of an insured natural person owing a debt to the creditor, to repay the latter by reason of insufficient income up to the amount of the debt; however, it specifically excludes the protection included in hypothec insurance or credit insurance; credit insurance seeks to indemnify insured creditors against loss resulting from failure on the part of debtors to repay the insured creditors, and does not include protection for claims secured by hypothec (Section 20 of the Regulation);
- the “hypothec insurance” class has been broadened to indemnify an insured creditor against loss resulting from failure on the part of a debtor to repay not only a loan secured by an immoveable hypothec, but also secured by a moveable hypothec (Section 22 of the Regulation);
- “fire insurance” has been added as a separate class; in addition to indemnifying insureds against the loss or damage that is the direct consequence of fire or the burning of insured property, this class now targets damage that is the direct consequence of fire or the burning of insured property during transportation or resulting from the methods used to extinguish the fire (Section 26 of the Regulation);
- the “title insurance” class is drafted in far broader terms than previously, seeing as it now indemnifies insureds against (i) loss or damage resulting from a defect in the title to property; (ii) the existence of a hypothec, a prior claim, a servitude or any other restriction on the right of ownership of property; (iii) a defect in a document that evidences a hypothec, a prior claim, a servitude or a restriction on the right of ownership of property and (iv) any other situation affecting title to property or the existence of another real right, including the right to the enjoyment of property (Section 28 of the Regulation);
- the “marine insurance” class has also been broadened to cover, in addition to the financial consequences of liability arising out of bodily injury or damage to property arising out of or related to shipping by sea or inherent to such transportation, the risks of an adventure analogous to a marine adventure, land risks incidental to a marine adventure and risks incidental to the building, repair and launch of ships (Section 29 of the Regulation).
Commercial practices and disclosure of conditions of insurance contracts
The Previous Regulation contained a number of sections on the standards that apply to the disclosure of conditions of insurance contracts in general advertizing. The Regulation now limits itself to four sections. Despite the restricted number of provisions contained in the Regulation, the Autorité des marchés financiers can be expected to fill some of the voids with its policy on commercial practices that should be published in the coming months. Remember, too, that some provisions of the Consumer Protection Act (Québec)4 also apply to insurance and annuity contracts, specifically as they pertain to the provisions of that act regarding commercial practices.
The provisions of the Regulation that contemplate commercial practices and the disclosure of conditions of insurance contracts are set forth in Sections 34 to 37, and read as follows:
“34. Insurers must present themselves under their true identity and not use a phrase that could cause confusion, particularly as regards trademarks or service marks, slogans, symbols or any other identification marks.”
“ 35. An insurer may not, in any insurance offer, exaggerate the extent of the protection offered or the amount of payable benefits, nor minimize the cost thereof.
Except in its advertising, an insurer must also specify the exclusions likely to affect the nature or scope of the protection under the contract. The insurer must also expose any limitation resulting from a waiting period.
Upon renewal, cancellation or termination of a contract, the insurer must refer to the relevant provisions in the contract.”
“36. An insurer advertising that no prior medical examination is required under the contract must specify whether the stipulation applies to the insurance application only, or also to the payment of benefits. The insurer must also indicate the limits to protection under the contract in the case of death, illness or disability resulting from conditions existing prior to the effective date of the insurance.”
“37. No insurance offer may falsely claim or suggest that the insurance offered constitutes special protection and that the policyholder will be able to benefit from certain additional advantages if the insurance is taken out, or that the insurance is limited to a determined group of persons.”
Section 34 of the Regulation does not specify, as did the Previous Regulation in its Section 250, that it is only in the context of advertisement that insurers must establish their real identity. It is now up to the insurers to present themselves under their true identity without using any additional qualifiers. Note that, contrary to what was the case in the first version of the Regulation, the words “in all circumstances” were omitted in the final version adopted by the government, which required insurers to present themselves “in all circumstances” under their true identity.
The Regulation has considerably expanded the scope of investments representing more than 30% of the assets or the voting rights of a legal person that an insurer or its subsidiary can make.
Section 244.1 of the Act respecting insurance (Québec) provides that an insurer other than a mutual insurance association may not acquire, directly or through a partnership or legal person it controls, more than 30% of the assets or the voting rights attached to the shares of a legal person, a cooperative or other similar legal person whose head office is situated outside Québec.
A similar provision also applies to mutual associations.
However, an exception set forth in Section 244.2 of the Act respecting insurance (Québec) stipulates that an insurer may acquire directly all or part of the shares (i) of a legal person that only carries on activities similar to those the insurer is authorized to carry on and (ii) of a legal person who complies with the conditions set forth in the Regulation.5
The Regulation now provides, in Sections 38 and 39, that an insurer may acquire the shares of a legal person (i) whose principal activity is the purchase, management, sale or leasing of immoveables; (ii) whose principal activity is the offering of shares in investment portfolios, the making of loans and investments, factoring, leasing, the offering of computing services or actuarial advisory services; (iii) whose principal activity is complementary to the distribution of certain insurance products such as travel assistance, legal assistance and road assistance; (iv) whose activities are those of a firm within the meaning of the Act respecting the distribution of financial products and services (Québec) or that offers financial products and services outside Québec.
Moreover, an insurer other than a mutual insurance association may acquire all or any of the shares of a legal person operating a residential and long-term care center.
Finally, Section 40 of the Regulation also authorizes an insurer’s subsidiary to acquire more than 30% of the voting shares issued by a legal person if (i) the legal person’s principal activity is the purchase, management, sale or leasing of immoveables, (ii) the legal person’s principal activity is the offering of shares in investment portfolios, the making of loans and investments, factoring, leasing, or the offering of computing services or actuarial advisory services; (iii) the legal person’s principal activity is complementary to the distribution of certain insurance products such as travel assistance, legal assistance and road assistance; or (iv) the legal person is an insurer, a bank, a trust company, a savings company, a firm within the meaning of the Act respecting the distribution of financial products and services (Québec),6 a securities dealer or advisor, or is a legal person that offers financial products and services outside Québec.
Activities of a trust company
Section 44 of the Regulation specifies the activities of a trust company that an insurance company holding a licence issued under the Act respecting insurance (Québec) is authorized to carry on. While the Previous Regulation contained no equivalent reference, Section 33.2.1 of the Act respecting insurance (Québec) provides that an insurance company may also carry on the activities that only a trust company may carry on under the Act respecting trust companies and savings companies (Québec)7 that are authorized by a government regulation. The activities set forth in the Regulation are (i) acting as trustee for any retirement plan, retirement savings plan, education savings plan, disability savings plan or any other plan, fund or mechanism of the same nature administered by the insurance company and registered under the Taxation Act (Québec)8 or the Income Tax Act (Canada),9 (ii) acting as trustee of an investment fund within the meaning of the Securities Act (Québec)10 administered by the insurance company and (iii) the activities that a trust company may carry on under the Act respecting trust companies and savings companies (Québec) in respect of the annuity contracts administered by the insurance company and the insured amounts kept by it for the benefit of others.
Investments in legal persons controlled by an insurer transacting damage insurance
Investments in legal persons controlled by an insurer transacting damage insurance must henceforth be valued on an equity basis rather than the basis applicable to the unconsolidated annual statements (Section 51 of the Regulation).
The Regulation now specifies that the assets of separate funds maintained by an insurer transacting insurance of persons and contracting obligations that vary according to the market value of a specified group of assets must now be valued in accordance with generally accepted accounting principles rather than at their fair market value (Section 52 of the Regulation).
Group insurance of persons
The Regulation makes several amendments to the provisions of the Previous Regulation on group insurance of persons. Our goal here is not to delve into all of the amendments made, but only the most important ones. However, any insurer offering group life insurance or group sickness or accident insurance should carefully examine the applicable provisions of the Regulation. These will specifically have an impact on the product features offered by an insurer, on the actuarial risks and, consequently, on premiums.
Conditions applicable to contracts for group insurance of persons
The Regulation now provides for similar requirements as in the Previous Regulation respecting the criteria used to determine what a specified group of persons is for the purposes of group life, sickness or accident insurance. However, the Regulation adopts far more flexible wording than did the Previous Regulation. A group is now defined as a group whose members share common activities or interests before a group insurance plan is offered to them, including socio-economic or cultural interests, and that a specified group of persons may not be constituted for the sole purpose of entering into a group insurance contract, and group insurance may be offered to the members of a group only as a benefit complementary to membership (Section 60 of the Regulation). The Previous Regulation introduced very specific criteria respecting the years of the body’s existence, the annual assessment charged to its members and the holding of annual meetings.
The Regulation specifies that if the policyholder is an association of employees or a professional syndicate, it may enter into an agreement with the employer or a third party so that the employer or third party person may manage the master policy in the name of the policyholder (Section 61 of the Regulation). The Previous Regulation does not provide for any exception to the principle that the policyholder of a group insurance contract must be able to provide for the management of the master policy, as well as for the collection and remittance of premiums (also Section 61 of the Regulation).
Under the Regulation, insurers may pay policyholders of a group insurance on life or health contract no remuneration other than reimbursements for expenses actually incurred to administer the contract. Such expenses may not be calculated as a percentage of the premiums or be otherwise associated with the premiums, except in the case of expenses incurred for the collection of premiums. Such a restriction seeks to prevent policyholders from being incited, by reason of the financial compensation they receive, to unduly insist that members of a particular group take out the insurance (Section 85 of the Regulation). Under the Previous Regulation, Sections 259 and 292 that applied to group life insurance contracts and group life or health insurance contracts of debtors, respectively, prohibited insurers from paying compensation to the policyholder of a group life insurance contract, his representative or a person insured under a master policy for the solicitation or negotiation of insurance, or reimburse any part of the expenses incurred for the collection of premiums in excess of 5% of the premiums collected from participants.
Conversion of a group life insurance contract
The participants’ rights to convert a group life insurance contract into an individual life insurance contract, which apply when they cease to belong to the group before age 65, are preserved under the Regulation. However, the maximum amount of protection that the participant may convert rose from $200,000 to $400,000, while the minimum amount of protection that may be converted rose from $5,000 to $10,000. For the participants’ family members, the minimum amount of protection that may be converted is $5,000, although this cannot exceed the amount of insurance on the life of those persons on the conversion date. This conversion option does not apply to sickness or accident insurance incidental to the life insurance contract (Section 62 of the Regulation). As was the case in the Previous Regulation, this right may be exercised by the participant within 31 days after leaving the group, without the participant having to provide evidence of insurability, including for the family and dependants.11
Section 63 of the Regulation no longer restricts the products that insurers may offer participants who leave the group. Insurers must now offer either of the following options: (i) individual life insurance, temporary or permanent, at the participants’ option, providing protection comparable to that provided under the group insurance contract both as to amount and term, or (ii) individual life insurance for one year, providing protection comparable to that provided under the group insurance contract, but convertible at the end of the year, at the participant’s option, into the insurance described in paragraph (i) above (see Section 63 of the Regulation and Sections 262 and 263 of the Previous Regulation).
Provisions also apply to the conversion of any group life insurance protection into an individual life insurance of participants who have been insured for at least five years, upon expiry of the master policy, if the latter is not replaced or the replacement contract provides for a lesser amount of insurance. In such a case, the amount of insurance that may be converted must be no less than $10,000 (that amount was formerly $5,000) or 25% of the amount of the participant’s life insurance on the expiry of the master policy, whichever amount is greater. The sections that otherwise apply to the conversion of group life insurance protection of participants who cease to belong to the group also apply to conversions that take place upon the expiry of the master policy (Section 66 of the Regulation).
Compulsory clauses in group life insurance contracts
Group life, sickness or accident insurance contracts must provide for maintenance of the protection after their expiry or the cancellation of any contract protection if the claim arises from an event that occurred while the contract was still in force (Section 68 of the Regulation).
Under the Regulation, insurers are now bound for 180 days, up from the previous 90 days, to compensate participants in the event of a recurrence of the disabling affliction as long as they are not covered under another contract (Section 70 of the Regulation).
Similarly, the Regulation also increases from 90 to 180 the number of days that must have elapsed since the due date of the last benefit or the last premium for which there was a waiver and the beginning of the new disability period, preventing participants in a new contract from being exempted from any waiting period if the new disability period is attributable to the same or related causes that gave rise to the payment of benefits under the former contract (Section 73 of the Regulation and Section 271 of the Previous Regulation).
Extending this period from 90 to 180 days will certainly have a major impact on the evaluation of insurers’ actuarial risks and, eventually, on premiums.
Conditions applicable to group insurance contracts on the life or health of debtors and on the life of depositors
Section 75 of the Regulation, despite being based on an equivalent provision of the Previous Regulation, introduces new principles. It reads as follows:
“75. In group insurance on the life or health of debtors and on the life of depositors, the enrollment form or loan agreement must indicate the premiums required to cover all or part of the cost of the life insurance or sickness or accident insurance. If the cost of the premiums is determined by a rate of interest added to the rate of interest for the loan, the enrollment form or loan agreement must indicate the percentage of added interest that constitutes the premium.
All questions or limitations regarding state of health as a condition of eligibility must be clearly specified on the enrollment form.
The policyholder must, at the time the enrollment form is signed by the participant, give a duly completed and signed copy of the form to the participant.
Any form used in the policyholder’s business that contains an application for insurance constitutes an enrollment form.”
Section 282 of the Previous Regulation, the equivalent of Section 75 in the Regulation, did not apply to savings and credit unions (Section 283 of the Previous Regulation). Another important amendment set forth in Section 75 of the Regulation that applies to group insurance on the life or health of debtors and on the life of depositors is that if the cost of the premiums is determined by a rate of interest added to the rate of interest for the loan, the enrolment form for the insurance must now indicate the percentage of added interest that constitutes the premium.
The Regulation further specifies, where the Previous Regulation was mute, that a creditor may underwrite insurance on the life or health of persons other than the debtor, but only if the creditor has a pecuniary interest in their life or health (Section 76 of the Regulation).
Section 77 of the Regulation, also new, specifies that a creditor does not cease to act as the policyholder by reason of the assignment of the claim to a third person. Under such circumstances, the amount payable under the contract must be paid to the assignee.
Section 79 of the Regulation now provides that group insurance contracts on the life or health of debtors may, at the debtors’ option, provide for an amount payable that is equal to the amount of their loan or, in the case of a contract extending variable credit, equal to the amount of the variable credit authorized by the creditor. In the latter case, the maximum amount payable to the creditor is limited to the net debt of the debtor, the balance being paid to the designated beneficiary or, if applicable, to that person’s succession. This last option is a new principle introduced by the Regulation.
Some provisions omitted from the Regulation
All of the provisions of the Previous Regulation pertaining to the minimum excess amount of assets over liabilities that insurers are required to maintain have been omitted from the Regulation. Everything leads to believe that the Autorité des marchés financiers will henceforth rely on the provisions of the Act respecting insurance (Québec) and its guidelines in order to govern these aspects.
Moreover, all standards relating to the disclosure of conditions of individual insurance contracts and those relating to variable insurance contracts found in Sections 210 et seq. of the Previous Regulation were omitted from the Regulation. However, insurers will soon be subject to the Point of Sale Disclosure for Segregated Funds Guideline that will be adopted by the Autorité des marchés financiers. The guideline will, among other things, establish the specific expectations of the Autorité des marchés financiers with regard to the commercial practices of insurers who offer segregated funds to the public by means of individual variable insurance contracts. Moreover, the Règlement modifiant le Règlement sur les renseignements à fournir au consommateur (regulation amending the regulation respecting information to be provided to consumers), a draft of which was published in the September 4, 2009 issue of Autorité des marchés financiers’ Bulletin, sets out new provisions pertaining to the information that representatives must give clients subscribing for segregated funds under individual variable insurance contracts.
Many other subjects dealt with in the Regulation were already contemplated by the Previous Regulation, but have been revised as to their terms and scope. More specifically, amendments applicable to insurance classes are designed to harmonize them with those of other provinces. The insurer investment rules that had not been revised for a number of years have been clarified and broadened. Moreover, the group insurance practices have been updated.
Insurers who do business in Québec should therefore examine the Regulation in light of their current activities in order to quickly comply with the new requirements that came into force on September 10, 2009.