Earlier this year, the Quebec Court of Appeal rendered two decisions addressing the issue of gross negligence coverage in insurance law. These decisions offer two contradictory conclusions as to the validity of exclusion clauses pertaining to gross negligence in professional liability insurance policies in the Province of Quebec.
1) Souscripteur du Lloyd’s c. Alimentation Denis & Mario Guillemette Inc. [Guillemette]
In Guillemette,1 the owners of a grocery store retained the services of Yves Tardif, a financial planner, to develop and implement a low-risk investment strategy on their behalf. Contrary to the instructions received, Tardif maintained a high-risk portfolio. The Guillemettes lost everything and sued the receiver of their then insolvent planner and his former employers, as well as their professional liability insurer, Lloyd’s underwriters, to recover their lost investments.
At trial, Justice François Huot concluded that Tardif had breached his duty to act prudently and diligently, as well as his duty to inform. He further concluded that coverage had been triggered under the policies issued by Lloyd’s, and that the exclusion for gross negligence was inapplicable, as he did not identify any intentional fault or gross negligence on the part of Tardif.
The Court of Appeal confirmed the judgment, adding, in obiter, that even if the trial judge findings regarding the absence of gross negligence could be questioned, the exclusion for gross negligence would be declared inoperative, as it contravened the provisions of An Act respecting the distribution of financial products and services2 (the “Act”) and its regulations.
In this respect, Section 17 of the Regulation respecting the pursuit of activities as a representative3 and Section 29 of the Regulation respecting firms, independent representatives and independent partnerships4 lay out the requirements that the representatives and the firms’ liability insurance policies must meet. These provisions aim to protect the consumers and the public interest. According to Justice Bich’s reasoning, since theregulatory authority does not distinguish between the different types of faults, gross negligence should therefore be covered, to comply with the mandatory regulatory requirements.5
In that case, given that the policies contained a clause providing that any of their terms which conflicted with the legislation of the Province in which they had been issued were amended to comply with such legislation, Bich J.A. concluded that the Lloyd’s policies were consequently amended so as to cover gross negligence.6
2) Audet c. Transamerica Life Canada [Audet]
The Quebec Court of Appeal came to a completely different conclusion in Audet.7 Following the death of their mother, Pierre and Marie Audet retained Jacques-André Thibault, an insurance broker, to manage their assets. Thibault sold them life insurance policies and segregated funds, but failed to inform them that their investments would be taxed as “other income”, and not as capital gains. As a consequence, the Audets found themselves in a situation where they either had to sell off a portion of their investments or borrow funds to pay their taxes and insurance premiums. Thibault further performednumerous transactions which were found to be inappropriate. The Audets sued Thibault and Transamerica Life Canada, as well as certain Lloyd’s underwriters, claiming to have suffered significant losses as a result of Thibault’s faulty advice.
At trial, Justice Marc De Wever severely blamed Thibault and found him liable, adding that several of his faults amounted to gross negligence. He then turned to the issue of whether coverage was available pursuant to Thibault’s professional liability policies, to conclude that gross negligence had been excluded, and he denied coverage accordingly.
On appeal, Dalphond J.A. found that although the legislator had not expressly authorized for the possibility of a contractual exclusion for gross negligence, this type of exclusion was nonetheless valid and enforceable. Justice Dalphond relied on Article 2464 of the Civil Code of Quebec (“C.C.Q.”):
2464. The insurer is liable to compensate for injury resulting from superior force or the fault of the insured, unless an exclusion is expressly and restrictively stipulated in the policy. However, the insurer is never liable to compensate for injury resulting from the insured’s intentional fault. Where there is more than one insured, the obligation of coverage remains in respect of those insured who have not committed an intentional fault.
Where the insurer is liable for injury caused by a person for whose acts the insured is liable, the obligation of coverage subsists regardless of the nature or gravity of the fault committed by that person.
Given that an exclusion for the risks ensuing from gross negligence is not explicitly prohibited by the C.C.Q. or the Act, it cannot be revoked or modified by the regulations.8
Dalphond J.A. further referred to Justice Bich’s approach in Guillemette, and warned that although it would undoubtedly benefit consumers, a number of potentially negative consequences could arise from its implementation. Premiums could increase if insurers were to be obliged to defend or indemnify an insured who has committed a gross fault.9 Justice Dalphond also underlined that an exclusion for gross negligence in professional liability insurance policies is not unusual.10
Ultimately, Justice Dalphond emphasized that it will be up to the legislator to clarify the mandatory insurance requirements.11
As outlined above, Bich and Dalphond J.J.A. disagree over the appropriate approach regarding professional liability insurance in cases of gross negligence and the validity of exclusions for same. Obviously, insurers and consumers alike now face uncertainty, which might bring about an intervention from the regulatory authority.
We note, however, that an application for leave to appeal to the Supreme Court of Canada has been filed in the Guillemette case. If leave is granted, one of the questions the Supreme Court will have to answer is whether exclusion clauses for gross negligence in professional liability insurance policies are valid under Quebec law. Until then, it will be interesting to see which side the lower courts will choose when faced with similar situations.