Insurance firms facing ‘a lot more disciplinary action at the provincial level,’ lawyer warns

OTTAWA — Canadian insurers and agents are encountering “more frequent use” of fines by provincial regulators, the federal regulator will be exploring the risks associated with cloud computing and the recent leak of nude photos of celebrities using Apple Inc.’s Internet services has raised awareness of cyber risk among insurance regulators, speakers suggested recently at the National Insurance Conference of Canada (NICC).

Meanwhile, one lawyer who spoke Tuesday on regulation at an NICC panel is calling for “harmonization,” across Canada, of the provincial regulations on “incidental” sellers of insurance, such as freight forwarders, deposit-taking institutions and vehicle and equipment dealers.

Saskatchewan and Alberta allow certain categories of companies — such as auto dealers, deposit-taking institutions and travel agents — to get restricted insurance agent licences. This essentially allows those agents to sell only certain types of coverage under certain conditions.

Manitoba also passed a regulation on restricted agents which comes into force next year. Manitoba will let some restricted agents sell cargo, creditor’s life and loss of employment, mortgage, funeral expense, portable electronics and some coverages with rented vehicles, among others.

Manitoba, like Saskatchewan and Alberta, will have restrictions on what types of businesses (such as auto dealers, freight forwarders and deposit-taking institutions) could apply for restricted agent licences. Manitoba’s law will prohibit restricted agents from making available their goods and services  “conditional upon” the consumer buying insurance from them.

“It’s nice to have the regulation,” said Gordon Goodman, a partner with Cassels Brock & Blackwell LLP, of those restricted agent regulations. “I think it would be wonderful to have some harmonization across Canada.”

Goodman made his remarks during a panel discussion Tuesday.

Jill McCutcheon, a partner with Borden Ladner Gervais LLP, also spoke on the panel. She said a Supreme Court of Canada ruling against Sovereign General Insurance Company “was a very interesting case.”

On Nov. 21, 2013, the highest court upheld a Quebec Court of Appeal ruling that restored a conviction, against Sovereign General, of 56 counts of consenting to and/or authorizing the issuance of insurance policies by a broker that was not registered to do so in Quebec. Sovereign General was fined $560,000, or $10,000 per count.

Court records indicate that in 2005, Sovereign General had written a floor plan policy, for a Canadian unit of General Electric Capital Corp., which provides financing for the recreational vehicle inventory of Canadian dealers, some of whom are in Quebec.

The broker, Flanders Insurance Management and Administrative Services Ltd., was based in Alberta and not licensed at the time in Quebec. In a separate case in 2007, Flanders pleaded guilty to 210 counts of “selling an insurance product without being registered” by Quebec’s Quebec’s Autorités des marches financiers (AMF) “as a damage insurance firm.”

Sovereign General’s conviction in 2008 — by the Court of Quebec (criminal and penal division), District of Montreal — was originally overturned in October 2009 by the Superior Court, District of Montreal. But the conviction was restored by the provincial appeal court, and then by the Supreme Court of Canada. 

“I think this is a great example of how we are seeing in particular a lot more disciplinary action at the provincial level, so more frequent use of administrative monetary penalties,” McCutcheon said Tuesday at NICC. “The size of the fines are also being increased and of course at the provincial level this can involve brokers and insurance companies.”

The third panelist at the regulatory outlook was Koker Christensen, co-chair of the financial institutions group with Fasken Martineau DuMoulin LLP.

“One of the things that will be interesting to watch is to what degree the provinces are activist and to what degree we will see provinces who have not been historically active becoming more active,” Christensen said.

At the federal level, Christensen noted, the Office of the Superintendent of Financial Institutions (OSFI) “raised concerns” in the past, “about cloud computing but I don’t think it’s particularly clear where that is going and I have heard people at OSFI talking about that as an issue that they will be looking into further.”

He added OSFI officials “have indicated quite clearly” that cyber risk “will be area of focus for them for the next number of years.”

Christensen cited several recent computer security incidents, including the December, 2013 theft of customer data from department store chain Target.

“There are significant regulatory and legal risks if there is a cyber breach and I think this is occupying even more attention that it would have because of some of the high profile incidents that have happened in the recent past,” Christensen said. “The one that obviously got the most press which was the hacking of Apple accounts, the leaking of nude celebrity photos. I think all of these create a heightened awareness of this issue with the institutions and also at the regulatory level.”

On Sept. 2, Apple attributed those celebrity photo leaks to “a very targeted attack on user names, passwords and security questions” of the celebrities storing their photos on its online services. Apple reported at the time that the leaks did not result from an actual breach of its iCloud service.

NICC was produced by MSA Research Inc. and held at the Westin Hotel in Ottawa.