One of the main differences between Quebec insurance law and that of other provinces is a provision that insurers must assume defence costs of their insureds over and above the limits of their insurance policies.
First enacted half a century ago, this provision is meant to help insureds by prohibiting the erosion of their insurance policies’ limits by legal defence costs. Most recently, the Supreme Court of Canada in Deguise, reinforced the public policy nature of this provision, further protecting Quebec policyholders.
Article 2503 CCQ, which protects policyholders and allows them the full limits of their policies in the event of a claim, also prevents insurers, and sometimes highly sophisticated insureds, from agreeing to other terms that would better suit their needs. As the complexity and amount of the claims increase, so does the cost of legal services. An insurer could potentially underwrite a 5M$ policy to an insured, only to find itself on the hook for double or triple that amount in defence costs. This scenario is especially true in securities class action litigation where the stakes are extremely high as policies respond to claims against the entity, as well as individual directors and officers named in the proceedings. Also, more than one action is often instituted against the same individuals and entities in other provinces and countries, thus doubling or tripling legal defence costs.
The Canadian insurance market is firming up, and this public order provision contributes to the increasing cost of insurance in Quebec. This means that the provision’s benefits to insureds are eroding, as insurers have had to increase their premiums or sometimes pull out of the market entirely, making it difficult for insureds to find affordable insurance.
On Thursday, December 10, 2020, Quebec’s Finance Minister tabled a bill to address this growing problem. An Act Respecting the Implementation of the Budget Speech of 10 March 2020 proposes an amendment to this provision that would address the problems both insureds and insurers face by injecting some flexibility to this public policy provision. This amended article would read as follows:
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 government appears to be opening the door to potential negotiations between sophisticated insureds and their insurers regarding defence costs for some policies. The amendment may also allow policyholders some flexibility in adapting their insurance programs to their specific realities. The corollary of the duty to defend an insured is the insurer’s right to control the defence. Sophisticated insureds may prefer to keep control of their defence for part of their coverage, and consequently, assume defence costs. This amendment would allow them to do so – at a better price.
Insurers and insureds need to keep in mind that this will not be retroactive. As stated in the amendment itself, a regulation must be drafted to determine the policies to be affected and the type of insureds subject to the amendment. This process may take several months. Still, the amendment is a very welcome change for both parties to the insurance contract.
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SNC-Lavalin inc. (Terratech inc. et SNC-Lavalin Environnement inc.) c. Deguise, 2020 QCCA 495 (CanLII)