New Québec regulation softens insurers’ duty to defend

It is now possible, under certain circumstances set out in 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), to enter into civil liability insurance contracts that depart from the following public policy principles: 1) insurers must assume an insured’s defence; 2) defence costs are in addition to the coverage limits; and 3) insurance proceeds must be applied exclusively to the payment of injured third persons.

The purpose of these amendments is to enable insurers to offer premiums that are lower and similar to the rest of Canada. Rising defence costs had challenged the business model of insurers in Québec, which faced rules not found anywhere else in Canada.

It is worth noting in Québec, unlike in common law provinces, the insurer’s duty to defend arises under law and not under contract.

What you need to know

• Articles 2500 and 2503 of the Civil Code of Québec (CCQ) set out the above-mentioned insurance principles which are unique to Québec:
  • 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 last paragraph of article 2503 CCQ was introduced in June 2021 by An Act respecting mainly the implementation of certain provisions of the Budget Speech of 10 March 2020, which allows the Québec government to determine by regulation certain categories of insurance contracts that may depart from these principles.
• An initial version of the Regulation related to certain categories of insurance contracts that may depart from articles 2500 and 2503 CCQ was adopted on September 8, 2021.
• The final version of the Regulation was published on April 20, 2022, and came into effect on May 6, 2022.

The Regulation

Under the Regulation, the following classes of insured may subscribe to a policy that does not include the requirement for the insurer to assume the defence of the insured or to bear his or her costs of defence:

• Drug manufacturers under the Act respecting prescription drug insurance.
• The following three investment funds as well as their subsidiaries: 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) the Fonds de solidarité des travailleurs du Québec.
• The directors, officers or trustees of any of these entities, excluding the activities that they pursue as members of a pension committee.

As for the following classes of insured, they can subscribe to a policy that departs from articles 2500 and 2503 CCQ if their total insurance coverage is at least $5 million:

• Large businesses for the purposes of the Act respecting the Québec sales tax (generally businesses with taxable sales in Canada of more than $10 million in a given fiscal year) or persons related to a large business within the meaning of the Taxation Act.
• Reporting issuers or their subsidiaries within the meaning of the Securities Act.
• Foreign business corporations within the meaning of the Taxation Act (Québec) or the Income Tax Act (Canada).
• The directors, officers or trustees of any of these entities, excluding the activities that they pursue as members of a pension committee.

It should be noted that the contracts covered by the Regulation cannot have a duration of more than one year, and in the case of renewal, the insured must still belong to a class of insureds that may deviate from articles 2500 and 2503 CCQ. Furthermore, the exemptions under the Regulation only apply to insureds who meet the criteria set out in the Regulation at the time of subscription.

It should also be noted that where a minimum amount of insurance coverage is specified by law, proceeds must first be applied to the payment of injured third persons.

What’s next

The requirement that insureds who subscribe to an insurance policy covered by the Regulation must meet the prescribed conditions at the time of subscription or renewal, as applicable, leads us to think that other insurance categories may be added or removed in the future. Our team will continue to monitor any amendments to the Regulation.