On November 3, 2014, the Quebec Court of Appeal handed down a decision in one of the many cases to come before the Quebec courts stemming from the Cinar debacle.1 The Court was asked to rule on the appeal from a decision of Justice Jean-Yves Lalonde of the Quebec Superior Court centred around the bailiff firm Paquette & Associés (Paquette) and the conduct of its insurer following a significant loss suffered by Paquette several years before.2
In 2006, Paquette had invested the proceeds of a sale by judicial authority of the properties of former Cinar president Ronald Weinberg (Weinberg) in asset-backed commercial paper (ABCP). In May 2009, Paquette was ordered by the Quebec Court of Appeal to distribute and pay out the sale proceeds to Weinberg’s creditors. Paquette, upon learning that the sums invested in the ABCP had disappeared as a result of the 2008 market meltdown, was forced to borrow close to $4.5 million from the bank in order to satisfy the creditors. Paquette subsequently called on its professional liability insurers to indemnify it for the loss sustained as a result of the ABCP crash and to assume the costs incurred in defending its interests in the numerous lawsuits which led to this situation. Paquette’s insurers refused to cover the loss, giving rise to a dispute before the Superior Court that raised a number of important legal issues in insurance law.
In support of their position, the insurers submitted that Paquette had exceeded the boundaries of its role as bailiff when it invested the proceeds of the sale of Weinberg’s properties in the ABCP. In addition, the insurers argued that no claim for damages owing to a professional error or omission had in fact been asserted against Paquette over the losses resulting from the ABCP. The insurers contended that the proceedings which resulted in Paquette having to pay the $4.5 million were more akin to execution of judgment proceedings taken by Weinberg’s creditors than an action in damages based on professional errors and omissions, which the policy explicitly covered.
In his analysis of the insurers’ duty to defend, the first judge based his findings largely on the conduct of the insurers from the time they were informed of a possible claim against Paquette. Thereafter, the insurers gave the insured contradictory messages, suggesting in the same communication that they were appointing a law firm to defend Paquette’s interests in the case but that the same attorneys also had a mandate to defend the interests of the insurers. A few weeks later, another letter was sent to Paquette in which the insurers stated that they would defend Paquette under a reservation of rights. In the same letter, the insurers went on to say the opposite, stating that based on the insurance coverage in place, they would be unable to defend or indemnify Paquette and that the attorneys that had been appointed would now only defend the insurers’ interests. Justice Lalonde concluded that the insurers had created a muddled and ambiguous situation by appointing counsel with the dual mandate of simultaneously protecting the interests of the insured and the insurers.3 In his view, this resulted in the attorneys retained by the insurers being placed in a conflict of interest situation and thus acting in a manner that was contrary to their duty to protect Paquette’s interests. Accordingly, the Court found that the insurers’ conduct was reprehensible and constituted estoppel, which barred them from invoking any refusal to defend the insured at any time during the proceedings. Finally, in response to an argument by the insurers that no “remedy of damages” was being asserted against the insured, Justice Lalonde determined that the proceedings taken against Paquette were indeed in the nature of an action in damages for professional liability, even though they did not take the form of a typical damage suit. The Court therefore found that the true nature of the proceedings was sufficient to give rise to the insurers’ duty to defend Paquette in the circumstances.
In a unanimous decision penned by Justice Lorne Giroux, the Quebec Court of Appeal upheld the finding of the first judge in regard to the muddled and ambiguous situation created by Paquette’s attorneys. The Court agreed that the insurers’ conduct created grounds for estoppel for its denial of coverage arguments. It also agreed that the first judge had not committed any error by stating that the action for declaratory relief brought by the creditors was an action in the nature of damages for professional liability arising from an error or omission by the bailiff firm. The insurers therefore had a duty to defend the claim against Paquette.
As for the insurers’ duty to indemnify their insured for the loss sustained, the Court of Appeal rejected the insurers’ argument that the bailiff firm was not facing claims for compensatory damages since the only sums being claimed from Paquette were amounts entrusted to it for management purposes. On this matter, the Court distinguished this case from two Court of Appeal decisions4 by qualifying the action brought against Paquette as a bona fide claim for damages and not as a motion for repayment of amounts provided to it for management purposes. The bailiff firm’s duty to indemnify the creditors therefore results, in the Court’s view, from Paquette’s bad investment of the proceeds of the sale of Weinberg’s properties and consequently did not constitute the repayment of amounts entrusted to the firm by the creditors. The judgment in first instance was upheld in almost every respect, except on a minor point regarding the identity of the insurers and the amount of the applicable deductible.
This Court of Appeal decision shows how important it is for an insurer to take a clear and unambiguous position as soon as it receives notice that a claim is being brought against its insured. Indeed, any conduct by the insurer whereby it tries to “fence-straddle” by appointing the same attorneys to simultaneously defend the insured’s and its own interests could have disastrous consequences, such as estoppel barring any arguments for denying coverage that might be raised at a later stage.