On August 2, 2012, the Quebec Court of Appeal, per the Honourable Marie-France Bich, J.A., handed down a unanimous decision in Alimentation Denis et Mario Guillemette inc.1 and upheld the judgment of the Honourable François Huot, J.S.C., ordering an insurer to pay $460,000 to investors who had lost their life savings as a result of negligent acts committed by their financial planner and the firms for which he worked.
This decision is relevant for insurers and brokers active in this field.
Denis Guillemette and France Mercier are a married couple who operate a grocery store, Alimentation Denis & Mario Guillemette, their alter ego (the Respondents). From 1996 to 2005, Guillemette and Mercier entrusted their savings to their financial planner, Yves Tardif. Despite the fact that the Respondents wished to secure their retirement through safe, low-risk investments, Tardif chose to focus their portfolio on high-risk products, resulting in the Respondents losing all their money.2 In 2008, the Respondents instituted an action for damages against Tardif and two companies Tardif worked for that are now bankrupt, iForum Financial Services Inc. and iForum Securities Inc. The Respondents also sued Lloyd’s, which, during the time in question, insured the services of Tardif and iForum Financial Services Inc.3
The trial judge maintained the Respondents’ action. He found Tardif and his employers liable. He determined that Tardif had failed in his duty to inform and to exercise due care as the financial planner of the Respondents, who were laymen.4 The judge also found iForum Financial Services Inc. and iForum Securities Inc. liable, particularly because of section 80 of An Act respecting the distribution of financial products and services (ADFPS),5 which states that: “[a] firm is responsible for any injury caused to a client by the fault of one of its representatives in the performance of the representative’s functions.”6 The judge also concluded that the insurer was required to indemnify the Respondents under the terms of the liability insurance policies taken out by Tardif and iForum Financial Services Inc.
Arguments of the insurer
On appeal, the insurer argued three grounds. First, it argued that the first judge had erred in not considering the contributory negligence of the Respondents. It then submitted that the first judge erred in considering that Tardif’s negligence had been committed in the course of professional activities covered by the liability insurance policies and in the performance of Tardif’s functions. Finally, it contended that the first judge had erred in finding the exclusion clauses for gross negligence and embezzlement inapplicable. The Court of Appeal rejected all three arguments.
Decision of the Court of Appeal
Absence of investor contributory negligence
First, the Court of Appeal determined that the Respondents had not committed any negligence and had not contributed to the loss that was the object of their claim. They had chosen to entrust their savings to Tardif precisely because of their limited knowledge of financial products and equity investments and because of Tardif’s expertise. The Court pointed out that, given the complexity of the investment sector and financial markets, laymen who entrust their affairs to a financial intermediary do not have an ongoing duty to verify the state of their portfolio. Indeed, they chose to rely on the services of a professional so they would not have to concern themselves with such matters.8 In the Court’s opinion, clients must not turn a blind eye to glaring problems; however, given the Respondents’ limited knowledge of the inner workings of financial markets and given the assurances that Tardif was providing them while he was handling their portfolio, wilful blindness by the Respondents was not an issue in this case.9 The Court found that, through his actions, Tardif had abused the Respondents’ trust and concluded that it should not be held against them.10
Acts in the course of professional activities covered by the insurance policies and in the performance of Tardif’s functions
Second, the Court found that even though Tardif undertook professional actions that came under the purview of the Securities Act11 while he was not in possession of the necessary professional licences, the negligence giving rise to the loss sustained by the Respondents was the negligence relating to his activities as a financial adviser, activities which were governed by the ADFPS and covered by the insurance policies.12 In the alternative, the Court applied the theory of concurrent causation (where two concurrent causes inextricably cause the loss), which was recognized in Sécurité nationale (La) c Éthier.13 According to this approach, in the event there are two concurrent causes, a determining cause that is covered by the policy – in this instance, financial planning – and another cause that is excluded – in this case, securities trading – the coverage shall prevail.14 Finally, since Tardif had acted while he was performing his functions, the Court determined that the insurance coverage also covered his employer, iForum Financial Services Inc.15
Exclusion causes for gross negligence are of no force or effect
Third, the Court determined that the exclusion clauses for gross negligence in Tardif’s and iForum Financial Services Inc.’s insurance policies were of no force or effect, particularly because of section 196 ADFPS and its related regulations. The insurer asserted that Article 2464 CCQ did not prevent it from excluding gross negligence from coverage.16 The Court pointed out that the ADFPS is a statute of public order whose purpose is to protect investors and determined that the general civil law must give way to specific legislation.17 As the policies at issue contained a statutory compliance clause, the Court found that the exclusion clauses were of no force or effect because the ADFPS and the applicable regulations do not state that a financial planner’s insurance coverage can exclude gross negligence.18