Duty to defend – Significant step in relaxing the rules applicable to certain civil liability insurance contracts for large businesses in Québec
On April 20, 2022, the regulation entitled Categories of insurance contracts and insured parties that may derogate from the rules of articles 2500 and 2503 of the Civil Code of Québec was published in the Gazette officielle du Québec, Part II, following its adoption by the office of the Minister of Finance on April 6, 2022 (the Regulation).
This Regulation follows the enactment of a significant legislative amendment providing for possible derogations from articles 2500 and 2503 of the Civil Code of Québec (C.C.Q.), articles of public order specific to Québec.
It represents a notable change in the provisions applicable to the duty to defend in Québec, which will have a significant impact on the Québec insurance market, especially regarding contracts covering the civil liability of large businesses and sophisticated entities in Québec. The Regulation comes into effect on May 5, 2022.
More particularly, the Regulation establishes a new framework that substantially relaxes the rules applicable to the Insurers’ duty to defend and assume the costs of defence over and above the limits of insurance, which prevails under Article 2503 C.C.Q., by granting exemptions for certain categories of insurance and categories of insureds.
Here is an overview of the proposed changes:
As of May 5, 2022, civil liability insurance contracts of the following three (3) main categories of insureds may derogate from the rules set out in articles 2500 and 2503 C.C.Q., in accordance with the conditions set out in the Regulation:
- 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.
The contracts and conditions set out in the Regulation can be summarized as follows:
- The liability insurance contracts of the companies referred to in points 1 and 2 above may derogate from the rules set out in articles 2500 and 2503 C.C.Q., without any other condition than qualifying under article 1 of the Regulation.
- For a company referred to in point 3 above, when the total coverage under all civil liability insurance contracts it subscribes is at least $5,000,000 at the time of subscription.
- Insurance civil liability contracts delivered to companies referred to in point 1, 2 and 3 above that derogate from the rules set out in articles 2500 and 2503 C.C.Q. may not have a duration of more than 12 months and must meet all the conditions of the Regulation at the time of renewal in order to benefit, once again, from the derogation provided for in the Regulation.
- Directors, officers or trustees covered by the Regulation who are members of a pension committee must be covered under a contract that does not depart from the rules set out in articles 2500 and 2503 C.C.Q.
- 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.
In a nutshell, the Regulation applies to civil liability insurance contracts for large companies 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. The public order protection offered under sections 2500 and 2503 C.C.Q. to individuals, small and medium-sized businesses in Québec, and injured third parties, remains.
This is an important step forward and a breath of fresh air for the Québec insurance industry, which is facing significant premiums pricing and underwriting issues. We see the application of this Regulation as a positive step and as an encouraging initiative to relax and harmonize the rules applicable to civil liability insurance in Québec with those prevailing in other Canadian provinces.
It also demonstrates that 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.
Should you have any questions or comments, feel free to contact us.
Nathalie Durocher is a senior lawyer specialized in insurance law in Quebec. She can assist you with legal opinions on insurance coverage, litigation and dispute resolution, drafting and translation of insurance products and regulatory compliance matters.
The sole purpose of this article is to provide general information. It does not constitute a legal opinion or advice, and must not be construed as such.