New regulations applying to the defense outside the limits section within Civil Code of Quebec

The Civil Code of Quebec (CCQ) has been amended and this bulletin outlines the changes. The CCQ previously stated that defense costs must be paid in addition to the limits of liability of an insurance contract per articles 2500 and 2503 of the Civil Code of Quebec¹:

• 2500. The proceeds of the insurance are applied exclusively to the payment of injured third persons.
• 2503. The insurer is bound to take up the interest of any person entitled to the benefit of the insurance and assume his defence in any action brought against him.
• Legal costs and expenses resulting from actions against the insured, including those of the defence, and interest on the proceeds of the insurance are borne by the insurer over and above the proceeds of the insurance.

In all other provinces, defense costs are part of the limit of liability and reduce the limit accordingly. With the increasing complexity of lawsuits including multiple counsel on one file, particularly for large corporations that are publicly traded on a stock exchange, defense costs are sizeable and sometimes larger than the actual settlement. The implications of the CCQ also proved to be far reaching, as it is not clear what is the CCQ jurisdiction. Was it losses only occurring in Quebec? Was it the fact that the company was Quebec-domiciled so no matter where the operations were being conducted, the loss could fall under CCQ jurisdiction?

This placed Quebec-domiciled companies at a disadvantage as an insurer is unable to accurately value a contract that could potentially pay out unlimited defense costs. While that had always been the case, there were recent high-profile cases which made headlines for large settlements, particularly the Pyrrhotite Case.² This caused the Canadian Directors & Officers (D&O) liability market to harden (drive prices up) earlier for Quebec-domiciled insureds before the rest of the Canadian market caught up in 2019. The hard market emphasized the struggle to find, and the steep cost of, D&O insurance for Quebec-domiciled companies. Some insurers scrambled to mitigate their risk by applying material retentions and quota sharing limits. In some situations, Quebec-domiciled companies chose to re-domicile outside of Quebec in an attempt to obtain, and afford, insurance.

The increasingly hard market was also the impetus for lobbying in earnest the Ministry of Finance in the Quebec government by various stakeholders, including Quebec-domiciled companies, insurance companies and the Insurance Bureau of Canada.

The Ministry of Finance heard and worked with stakeholders. It introduced section 86 of Bill 82³, which amends article 2503 of the CCQ by adding the following paragraph to the end of article 2503. The amendment provides a mechanism for some companies to opt out of article 2500:

• However, the Government may, by regulation, determine categories of insurance contracts that may depart from those rules and from the rule set out in article 2500, as well as classes of insureds that may be covered by such contracts. The Government may also prescribe any standard applicable to those contracts.

Bill 82 was assented in June 2021. The government published draft regulations in September 2021, which outlined those types of contracts and businesses which may opt out of article 2500. This movement was welcomed by insureds and insurers alike, and stakeholders were invited to provide comments to finalize the regulations.

The final version of the regulations was published on 20 Apri 2022, and the Regulation respecting categories of insurance contracts and classes of insureds that may derogate from the rules of articles 2500 and 2503 of the Civil Code (Regulation)⁴ came into effect on 6 May 2022.

The Regulation provides for deviation of article 2503 for any civil liability contract if one of the following conditions at the time of insurance placement is met:

1. the insured is a drug manufacturer under the Act respecting prescription drug insurance;
2. the insured is a legal person established under one of the specified Acts;
3. the insured is a director, officer or trustee of any entity referred to in paragraph 1 or 2, even one not insured under such a contract.

Further, an insured not referred to in 1, 2 or 3 above, but who meets one of the following conditions, and subscribes to civil liability insurance contracts which total at least $5,000,000, can opt out of articles 2500 and 2503:

1. A “large business” within the meaning of the Act respecting the Québec sales tax or a person related to such large business within the meaning of the Taxation Act;
2. A reporting issuer or a subsidiary of such a reporting issuer within the meaning of the Securities Act;
3. A foreign business corporation within the meaning of the Taxation Act or the Income Tax Act;
4. A director, officer or trustee of any entity referred to in paragraphs 1 to 3 above, even if such entity is not insured under such a contract; but members of pension committees must be covered under a contract that cannot deviate from articles 2500 or 2503.

The Regulation also provides that the duration of a contract departing from articles 2500 and 2503 may not exceed one year and that, in the case of a renewal, the insured must meet the conditions set out in the Regulation at the time of renewal to continue to opt out of articles 2500 and 2503.

There were many reactions to this Regulation since the first version was released for comment. It remains to be seen how the Regulation will be applied and how it will affect D&O insurance conditions and pricing for Quebec-domiciled Insureds, but everyone can agree that this is a welcomed change for insureds and insurers with exposure in the province.

Footnotes

¹ https://www.legisquebec.gouv.qc.ca/en/document/cs/CCQ-1991/20140501#se:2500

² Alary, Sophie and Tyndale, Catherine, Clyde & Co. July 20, 2021 https://www.clydeco.com/en/insights/2021/07/affaire-de-la-pyrrhotite-soulevez-les-questions-de

³ An Act respecting mainly the implementation of certain provisions of the Budget Speech of 10 March 2020.

⁴ Gazette Officielle Du Quebec, April 20, 2022, Vol. 154, No. 16. O.C. 656-2022, 6 April 2022.

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Renee Wang

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Brian Weiss

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