Supreme Court of Canada rules against Sovereign General, upholding convictions in Quebec over commercial insurance policy

The Supreme Court of Canada ruled Thursday against The Sovereign General Insurance Company, upholding a 2008 conviction in a Montreal court 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. The lower court had ordered Sovereign General to pay $560,000, or $10,000 per count.

In its decision, the highest court in the land upheld a ruling released in January 2012 by the Quebec Court of Appeal, which had restored Sovereign General’s conviction, overruling a 2009 Quebec Superior Court decision that had quashed the conviction.

The case arose in 2005 when Calgary-based Sovereign General wrote a floor plan policy for a Canadian unit of General Electric Capital Corp. that provides financing for the recreational vehicle inventory of hundreds of Canadian dealers.

Sovereign General wrote the policies for GE Capital through a Winnipeg-based broker, Flanders Insurance Management and Administrative Services Ltd., which was not licensed at the time in Quebec. However, dozens of dealers reimbursing GE Capital for premiums on the policy were in Quebec. Under its business arrangement with those recreational vehicle dealers, GE Capital “retains title to the goods, and requires that the floor plan goods be insured in order to protect its interests,” according to a letter from Sovereign General to the Quebec regulator entered into court records.

Another Winnipeg broker, HED Arcand Hayhurst Associates Inc., had previously offered the coverage. It filed complaints against Flanders and Sovereign General with Quebec’s Autorités des marches financiers (AMF) and regulators in other provinces.

AMF officials approached Sovereign General during an investigation and Sovereign General wrote a letter, dated June 10, 2005, to the AMF. In that letter, Sovereign General explained to AMF that it had written policies for GE in Ontario through Flanders. Sovereign General contended that “there is no licensing issue” because GE Capital is Flanders’ client and that the head office for GE Commercial Distribution Finance is in Ontario.

“Each GE-CDF dealer has the option to participate in the floor plan insurance program,” Sovereign General wrote at the time. “Alternatively, dealers may supply evidence of insurance otherwise placed, which confirms that GE-CDF’s goods are properly insured. A brochure is supplied to the dealers, either by the GE-CDF representative arranging the financing, or by Flanders.”

Sovereign General noted at the time that the floor plan insurance, for GE Capital, is “all that we currently insure as far as any Quebec locations,” and that Sovereign General does not write coverage for Flanders clients in Quebec for other lines, such as property, liability, auto, life or health.

Court records indicate AMF did not respond to Sovereign General’s letter and that Sovereign General renewed GE Capital’s floor plan policies after June of 2005. The following January, AMF laid 56 charges against Sovereign General under section 482 of the Quebec Act respecting the Distribution of Financial Products and Services (ADFPS).

That section states: “Every insurer that helps or, by encouragement, advice or consent or by an authorization or order, induces a firm or an independent representative or independent partnership through which it offers insurance products or an executive officer, director, partner, employee or representative of such a firm or independent partnership to contravene any provision of this Act or the regulations is guilty of an offence.”

In a separate case, Flanders pleaded guilty in April 2007 to 210 counts of “selling an insurance product without being registered with the AMF as a damage insurance firm.”

Then in November 2008, Sovereign General was convicted of 56 counts of violating ADFPS Section 482.

That conviction, by Mr. Justice Serge Boisvert of the Court of Quebec (criminal and penal division), District of Montreal, was overturned in October 2009 by Mr. Justice Fraser Martin of the Superior Court, District of Montreal.

Justice Fraser concluded that the carrier “mistakenly relied” on the lack of an answer from AMF to its June 2005 letter “as an indication that its proposed conduct was legal,” according to background information provided with the Quebec Court of Appeal ruling. He concluded that Sovereign General made an error but it “was a mixed error of law and fact.”

AMF successfully appealed Justice Martin’s ruling. In January 2012, the Quebec Court of Appeal restored the original conviction against Sovereign General.

In 2012 Sovereign General applied for leave to appeal to the Supreme Court of Canada. The highest court granted leave, heard the appeal in early 2013 and published its ruling Nov. 21, 2013.

Six of the nine Supreme Court of Canada judges ruled against Sovereign General. Three dissented.

The majority ruled that Sovereign General’s “failure to object in a timely manner to its broker’s actions constituted consent and/or authorization within the meaning” of section 482 of ADFPS. Because that regulation is a strict liability law, the majority ruled, Sovereign General could only avoid liability by showing it acted with due diligence.

However, the defence of due diligence cannot be used if the defendant “relies solely on a mistake of law to explain the commission of the offence,” wrote Mr. Justice Richard Wagner on behalf of the majority.

“No matter how reasonable a mistake of law may be, it cannot – unlike a mistake of fact or an officially induced error – serve as a valid defence in the case of a strict liability offence,” Justice Wagner wrote. “The objective of public protection that underlies the creation of regulatory offences militates strongly against accepting a general defence of reasonable mistake of law in this context.”

Two separate dissenting opinions were included.

One was from Madam Justice Rosalie Silberman Abella, who dissented while the other was written by Mr. Justice Louis LeBel and Mr. Justice Morris J. Fish, who dissented in part.

Justice Abella noted that Sovereign General “set out its understanding of the relevant legal requirements and the basis for its understanding in an unambiguous letter” to AMF, and the regulator did not respond.

“The regulatory body had a duty to be diligent in performing its statutory role,” she wrote.  “Had that body responded in any way, let alone in a timely one, (Sovereign General) could have brought itself in conformity with the law.”