Quebec proposes exemptions to the principles of defence costs outside of limits & the duty to defend

The Quebec government has published a draft regulation that spells out the "categories of insurance contracts" and "classes of insureds" it proposes to exempt from the Civil Code of Quebec (CCQ) requirements that defence costs in liability insurance policies not erode policy limits, that the limits be eroded only by the payment of "injured third persons", and even that liability insurers defend their insureds.

We previously discussed the legislative amendments to Articles 2500 and 2503 of the CCQ, which set out the above requirements. As a refresher, here are the articles, with the amendments underlined:

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.

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.

The legislative amendments, which were adopted in May 2021, allow the government to enact regulation exempting certain categories of contracts and classes of insureds from Articles 2500 and 2503 of the CCQ.

The draft regulation contemplated by the legislation was published on September 8, 2021. We summarize the highlights from the draft regulation below.

The exempted classes of insureds

First, the following three classes of insureds are exempt from the mandatory application of Articles 2500 and 2503 of the CCQ:

• Drug manufacturers under the Act respecting prescription drug insurance;
• Three investment funds created by statute, namely (1) Capital régional et coopératif Desjardins, (2) Fondaction, le Fonds de développement de la Confédération des syndicats nationaux pour la coopération et l’emploi, and, (3) Fonds de solidarité des travailleurs du Québec (F.T.Q.). The exemptions apply to their subsidiaries too;
• The directors, officers and trustees of the above entities, but not for activities undertaken as members of a pension committee.

Second, the following five classes of insureds are also exempt, but only if their total liability insurance coverage is $5 million or more:

• Large businesses under the Act respecting the Québec sales tax (which generally includes businesses whose taxable sales in Canada exceed $10 million in a given fiscal year) and persons related to such businesses under the provincial Taxation Act;
• Reporting issuers under the Securities Act (defined as issuers that have made a distribution of securities to the public) and their subsidiaries;
• Foreign business corporations under the provincial Taxation Act or the federal Income Tax Act;
• Any insured that operates a business outside Canada and derives income from it, but only with respect to those foreign operations; and
• The directors, officers and trustees of the above entities, but not with respect to activities undertaken as members of a pension committee.

Lastly, the following classes of insureds are exempt as it pertains to the obligation to reserve the proceeds of the insurance for the payment of injured third persons and pay legal costs and expenses over and above the insurance proceeds. Even so, the insurer still has a duty to defend actions against those insureds under Article 2503 of the CCQ:

• Certain intermediate resources (i.e. residential environments adapted to the needs of people with decreased independence or who need help or support in their daily activities) that are part of the government’s Support Program for the Autonomy of Seniors (or a similar type of resource – the regulation is not clear in this respect);
• Private seniors' residences as defined by article 346.0.1. of the Act respecting health services and social services;
• Private health and social services institutions operating a residential and long-term care or rehabilitation centre; and
• The directors, officers and trustees of the above entities, but not with respect to activities undertaken as members of a pension committee.

The exempted category of contracts

The draft regulation provides that, even if the insured does not fit within the above classes, a contract of insurance may derogate from Articles 2500 and 2503 of the CCQ if the legal costs and expenses resulting from actions against the insured and interest on the insurance proceeds are already covered by another primary civil liability insurance contract.

Mandatory provisions in exempted contracts

If the exempted contract provides that the insurer is not required to assume the defence of the insured, it must state that:

• The insured may select counsel upon consulting with the insurer;
• The insured must keep the insurer apprised of developments in the legal proceedings against it; and
• The insured must allow the insurer to participate in the defence.

Maximum erosion by defence costs

Also, payments for purposes other than the indemnification of injured third persons under exempted contracts (including defence costs) cannot exceed 50% of the proceeds of the insurance except in the following two scenarios:

• The insured is not found liable; or
• Payments to injured third persons do not reach 50% of the proceeds.

That said, where a minimum amount of civil liability insurance coverage is required by law, that amount must be applied entirely to the payment of injured third persons before any other payment (the English version of the draft regulation refers to the insurance proceeds rather than the minimum amount; this discrepancy remains to be clarified).

Effective date

The draft regulation was published on September 8, 2021. It stipulates that the government may enact the regulation within 45 days of this date. Interested parties may comment on it in the meantime. The regulation will come into effect 15 days after publication of the final version in the Gazette Officielle du Québec.