Insurance & Reinsurance
The Quebec government has published a draft regulation that spells out the "categories of insurance contracts" and "classes of insureds" it proposes to exempt from the Civil Code of Quebec (CCQ) requirements that defence costs in liability insurance policies not erode policy limits, that the limits be eroded only by the payment of "injured third persons", and even that liability insurers defend their insureds.
We previously discussed the legislative amendments to Articles 2500 and 2503 of the CCQ, which set out the above requirements. As a refresher, here are the articles, with the amendments underlined:
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 legislative amendments, which were adopted in May 2021, allow the government to enact regulation exempting certain categories of contracts and classes of insureds from Articles 2500 and 2503 of the CCQ.
The draft regulation contemplated by the legislation was published on September 8, 2021. We summarize the highlights from the draft regulation below.
First, the following three classes of insureds are exempt from the mandatory application of Articles 2500 and 2503 of the CCQ:
Second, the following five classes of insureds are also exempt, but only if their total liability insurance coverage is $5 million or more:
Lastly, the following classes of insureds are exempt as it pertains to the obligation to reserve the proceeds of the insurance for the payment of injured third persons and pay legal costs and expenses over and above the insurance proceeds. Even so, the insurer still has a duty to defend actions against those insureds under Article 2503 of the CCQ:
The draft regulation provides that, even if the insured does not fit within the above classes, a contract of insurance may derogate from Articles 2500 and 2503 of the CCQ if the legal costs and expenses resulting from actions against the insured and interest on the insurance proceeds are already covered by another primary civil liability insurance contract.
If the exempted contract provides that the insurer is not required to assume the defence of the insured, it must state that:
Also, payments for purposes other than the indemnification of injured third persons under exempted contracts (including defence costs) cannot exceed 50% of the proceeds of the insurance except in the following two scenarios:
That said, where a minimum amount of civil liability insurance coverage is required by law, that amount must be applied entirely to the payment of injured third persons before any other payment (the English version of the draft regulation refers to the insurance proceeds rather than the minimum amount; this discrepancy remains to be clarified).
The draft regulation was published on September 8, 2021. It stipulates that the government may enact the regulation within 45 days of this date. Interested parties may comment on it in the meantime. The regulation will come into effect 15 days after publication of the final version in the Gazette Officielle du Québec.