Insurance policies

New Quebec Regulation to Exempt Certain Insurance Policies from Limit Eroding Fee Prohibition: Clyde & Co




On May 6, 2022, a new and long-awaited regulation will enter into force by exempting “civil liability insurance contracts” issued to certain insured persons from Civil Code of Quebec (there “CCQ“) requirements that defense costs in liability insurance policies do not erode policy limits, that limits are eroded only by payment of “injured third parties” and that liability insurers defend their insureds (the “Regulation“).

Background

In a previous article, we discussed how Articles 2500 and 2503 of the CCQ, which set out the above requirements, have been modified to allow the adoption of derogations by regulation.

As a reminder, here are the articles, with the changes underlined:

2500. Insurance proceeds are allocated exclusively to the payment of injured third parties.

2503. The insurer is bound to take up the cause of any person entitled to the benefit of the insurance and to assume his defense in any action brought against him.

The costs and expenses resulting from the actions against the insured, including those of the defence, as well as the interest on the proceeds of the insurance are borne by the insurer in addition to the proceeds of the insurance.

However, the Government may, by regulation, determine the classes of insurance contracts which may derogate from these rules and from the rule provided for in section 2500, as well as the classes of insured persons who may be covered by such contracts. The Government may also prescribe any standard applicable to such contracts.

The legislative amendments, adopted in May 2021, allow the government to enact a regulation exempting certain categories of contracts and classes of insured from articles 2500 and 2503 of the CCQ.

On September 8, 2021, the government of Quebec published a draft regulation describing the “categories of contracts” and the “classes of insureds” that it proposed to exempt from articles 2500 and 2503 of the CCQ and gave 45 days interested parties for their comments. For more details, we refer you to our previous post regarding the draft regulations.

The new regulation

On April 20, 2022, the Government of Quebec published a final version of the Regulation listing the categories of contracts and classes of exempt insured. It will enter into force 15 days after its publication, i.e. May 6, 2022.

Several provisions of the September 2021 draft regulations were omitted from the final version.

Under the Regulation, the following three categories of exempt insureds may be covered by a “civil liability insurance contract” which derogates from the requirements of articles 2500 and 2503 of the CCQ (i.e. the defense costs in liability insurance policies do not erode the limits (the limits are only eroded by the payment of “damaged third parties”, and that liability insurers defend their insureds):

  • Drug manufacturers under the Prescription Drug Insurance Act;
  • Three investment funds created by law, namely (1) Capital regional and cooperative Desjardins(2) Fondaction, the Development Fund of the Confederation of National Trade Unions for Cooperation and Employment(3) and Solidarity Fund for Quebec Workers (FTQ). The exemptions also apply to their subsidiaries;
  • Directors, officers and trustees of the above entities, even if the entity itself is not insured under such a contract, but not for the activities exercised as members of a pension committee.

The following four classes of insured are also exempt, but only if they have purchased liability insurance contracts with total coverage of $5 million or more:

  • The big companies under the Quebec Sales Tax Act (which generally includes businesses whose taxable sales in Canada exceed $10 million in a given fiscal year) and persons related to those businesses under the tax law;
  • Reporting issuers under the Securities Law (defined as publicly traded issuers) and their subsidiaries;
  • Foreign joint-stock companies under the tax law or the federal income tax law; and
  • The directors, officers and trustees of the above entities, even if the entity itself is not insured under such a contract, but not with respect to the activities exercised as members of a committee of retirement.

However, the Regulations state that where a minimum amount of liability insurance cover is required by law, that amount must be fully allocated to the payment of injured third parties before any other payment.

The regulations specify that the insured must fall into one of the classes exempted from at the time of underwriting to be exempt.

The maximum duration of an exempt liability insurance policy is one year. When renewing the contract, the insured must still belong to one of the categories of exempt insured to be exempt.