Quebec relaxing the rules for certain categories of insurance contracts and insureds

Under a newly in-force regulation in Quebec, insurance companies will be allowed to enter into civil liability insurance contracts in which they will no longer be required to pay the legal-defence costs, over and above the policy limit, of certain categories of insureds.

The regulation came into force May 5 and exempts specific categories of civil liability insurance contracts from articles 2500 and 2503 of the Civil Code of Quebec, under which insurers must pay insureds’ legal costs above the policy limit.

“This is a huge initiative from the Quebec government,” says Nathalie Durocher, a lawyer at Delegatus legal services inc. who focuses on insurance law and compliance matters. “Section 2503 hasn’t been subjected to any amendments for decades, and certain significant claims have led to an underwriting crisis in the Quebec civil liability insurance market.”

Insurance premiums have soared in the last decade, and companies have left the province, as a result, says Durocher.

Article 2500 requires that “the proceeds of the insurance are applied exclusively to the payment of injured third persons.” Article 2503 legally binds insurers to assume the insurance claimant’s legal costs and expenses and states that the insurer bears the interest on the insurance proceeds. The insurer must cover these costs “over and above the proceeds of the insurance.”

The regulation applies to drug manufacturers and three investment funds: Capital régional et coopératif Desjardins; Fondaction, the Development Fund of the Confederation of National Trade Unions for Cooperation and Employment; and the Quebec Workers’ Solidarity fund.

The regulation also applies to civil liability insurance contracts where the insured has subscribed to coverage totalling at least $5 million, as well as where the insured is a “large business” under the Taxation Act, a reporting issuer or subsidiary under the Securities Act, or a foreign business corporation under the Taxation Act or Income Tax Act. The exemptions also apply to the directors, officers, and trustees of those entities.

The exempt contracts must have a duration of no longer than a year, and when renewed, the insured meets the conditions at the time of renewal.

Quebec is the only province in Canada which requires insurance companies to pay insureds’ legal costs, says Durocher. In other provinces, the duty to defend is contractual, she says.

“This regulation is a very positive step,” she says. “It’s an encouraging initiative to relax and harmonize the rules applicable to civil liability insurance in Quebec with those prevailing in other Canadian provinces.”

She notes that the regulation applies to the insurance contracts of large businesses and “sophisticated insureds” who have sufficient financial resources to pay for significant litigation. In contrast, the individuals and small- and medium-sized businesses still have access to the protection offered by articles 2500 and 2503.

“It also demonstrates that the government is listening to certain needs and issues of the Quebec insurance industry to promote and facilitate access to insurance for large businesses and corporations wishing to pursue their activities in the province of Quebec.”

“It’s a huge step,” she says. “It will change a lot of things in the insurance industry.”