New Quebec Regulation to Exempt Certain Insurance Policies from Prohibition of Costs Eroding Limits and the Duty to Defend

On May 6, 2022, a new and long-awaited regulation will come into effect exempting “civil liability insurance contracts” issued to certain insureds from the Civil Code of Quebec (the "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 that liability insurers defend their insureds (the "Regulation").

Background

In a previous post, we discussed how Articles 2500 and 2503 of the CCQ, which set out the above requirements, were amended to allow for exemptions to be adopted by regulation.  

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.

On September 8, 2021, the Quebec government published a draft regulation outlining the "categories of contracts" and the "classes of insureds" it proposed to exempt from Articles 2500 and 2503 of the CCQ and gave interested parties 45 days to comment. For more details, we refer you to our previous post concerning the draft regulation.

The New Regulation

On April 20, 2022, the Quebec government published a final version of the Regulation listing the exempted categories of contracts and classes of insureds. It will come into effect 15 days following its publication, on May 6, 2022.

Several provisions of the September 2021 draft regulation were left out of the final version.

Under the Regulation, the following three exempted classes of insureds may be covered by a “civil liability insurance contract” that departs from the requirements at Articles 2500 and 2503 of the CCQ (i.e. 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 that liability insurers defend their insureds):

• 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, (3) and 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, even if the entity itself is not insured under such a contract, but not for activities undertaken as members of a pension committee.

The following four classes of insureds are also exempt, but only if they have subscribed to civil liability insurance contracts with a total coverage of $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; 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 activities undertaken as members of a pension committee.

However, the Regulation stipulates that where a minimum amount of civil liability insurance coverage is required by law such amount must be applied entirely to the payment of injured third persons before any other payment.

The Regulation specifies that the insured must fall in one of the exempted classes of insureds at the time of subscription to be exempt.

The maximum duration of an exempted civil liability insurance contract is one year. Upon renewal of the contract, the insured must still fall under one the exempted classes of insureds to be exempt.