Good news for Quebec’s D&O insurance market

Quebec has taken a big step towards aligning its duty to defend rules with those of other Canadian provinces, meaning certain insurance contracts in Quebec will be exempt from a legal requirement to pay for insurance defence costs above and beyond policy limits.

“This new regulation in Québec is an important step forward and a breath of fresh air for the Québec insurance industry and those who do business in Québec,” Nathalie Durocher, a lawyer specializing in insurance law at Delegatus, said in an interview with Canadian Underwriter.

“It demonstrates the government is listening to certain needs and issues of the Québec insurance industry to promote and facilitate access to insurance for large businesses and corporations wishing to pursue their activities in the Province of Québec.”

For almost 50 years, Article 2503 of the Civil Code “has subjected insurers insuring civil liability risks in Quebec to the obligation of assuming the defense of their insureds as well as the related costs,” as André Legrand, Thierry Dorval and Petra Vrtkova of  Norton Rose Fulbright Canada LLP explain in an article for Mondaq. “These costs and expenses are in addition to the insurance amount and are therefore not subject to the coverage limits provided for in the insurance contract.”

That caused a crisis in the Quebec D&O insurance market, where the number of class action lawsuits and their related defence costs escalated over the years, as did disputes arising over evolving securities regulation. The rising insurance costs to defend these lawsuits were, by law, not subject to any policy limits.

Insurers started to raise rates to compensate, and several withdrew from the D&O insurance market altogether.

That may change Wednesday when the province’s Bill 82 (Section 86) comes into effect. The bill allows three main exemptions from insurers being forced to insure defence costs above the policy limits.

• Drug manufacturers and their directors and officers or trustees
• Certain corporations and capital investment funds, such as the C.R.C.D., Fondaction, the F.T.Q., their subsidiaries and their directors and officers or trustees, and
• Large businesses under the Québec Sales Tax Act, reporting issuers and their subsidiaries under the Securities Act, foreign corporations under the Québec Tax Act or the Canadian Income Tax Act, and their directors and officers or trustees.

“In a nutshell, the regulation applies to civil liability insurance contracts for large businesses and sophisticated insureds with sufficient financial strength to meet the costs of defending major litigation beyond the limits of insurance afforded by a civil liability insurance policy,” as Durocher explains. “The public order protection offered under sections 2500 and 2503 [of the Quebec Civil Code] to individuals, small and medium-sized businesses in Québec, and injured third parties, remains.”

There are conditions for these exemptions, Durocher adds. Among them:

• For large businesses, reporting issuers and foreign corporations wishing to benefit from the exemptions, the total coverage of the eligible civil liability insurance contracts must meet a threshold of at least $5 million.
• Eligible Insurance civil liability contracts may not have a duration of more than 12 months and must meet all the conditions of the regulation at the time of renewal to benefit.

Durocher says this may affect how insurers may choose to structure their civil liability contracts. For example, for larger civil liability contracts covering multi-year projects — in construction, for example — the emphasis may be on one-year contract renewals in order for the insureds to benefit from the exemptions.

“Maybe there will be a little more work for brokers and for insurers,” Durocher said, commenting on the fact that brokers and insurers would typically bind coverage for longer periods in these instances, instead of renewing each year. “But at least this will have [a beneficial] effect on the market, because it will reduce premiums, and we will have a better balance [of duty to defend legislation] across the country.”

Other legislative conditions include:

• For civil liability insurance subject to a statutory minimum amount of coverage requirement, the proceeds of insurance shall be applied first to the payment of indemnities to injured third parties before the payment of defence costs, other legal fees and disbursements.
• When directors, officers or trustees covered by the regulation also pursue activities as members of a pension committee, those activities must be covered by an insurance contract that doesn’t deviate from the rules in Articles 2500 and 2503 of Civil Code.

Feature photo courtesy of iStock.com/dk_photos