Big changes under Quebec law as to insurers’ duty to defend: Government adopts a new regulation

In December 2020, we published an update regarding Bill 82. Section 86 of Bill 82 allowed the Quebec government to adopt a regulation identifying the various categories of insurance contracts allowed to depart from Article 2503 of the Civil Code of Quebec (C.c.Q.), which provides that interest and defence costs are borne by the insurer over and above the insurance proceeds.

The rigidity of the rule provided under Article 2503 C.c.Q., the fact that this rule has no equivalent in the other Canadian provinces and the important rise of defence costs relating to certain claims had led to a crisis in the civil liability insurance market in Quebec. 

On April 20, 2022, the Quebec government, however, published the Regulation respecting categories of insurance contracts and classes of insureds that may derogate from the rules of articles 2500 and 2503 of the Civil Code (Regulation). 

Practically speaking, the Regulation allows certain businesses to enter into insurance contracts providing that the payment of defence costs by the insurer automatically reduces the available policy limits. For example, if a contract of insurance provides for a policy limit of $1 million and the insurer incurs $50,000 in defence costs, the insurance proceeds available for the injured third party will be reduced to $950,000.

The Regulation provides for various categories of insurance contracts that may now depart from the strict rule of Article 2503 C.c.Q. For example, drug manufacturers under the Act respecting prescription drug insurance as well as their directors and officers are now allowed to enter into insurance contracts departing from Article 2503 C.c.Q. 

More importantly, the following businesses are now allowed to enter into insurance contracts providing that the payment of defence costs may erode the policy limits if the total coverage under all the civil liability insurance contracts subscribed by that insured is at least $5 million:

• A “large business” within the meaning of the Act respecting the Québec sales tax or a person related to such large business within the meaning of the Taxation Act;
• A reporting issuer or a subsidiary of such a reporting issuer within the meaning of the Securities Act;
• A foreign business corporation within the meaning of the Taxation Act or the Income Tax Act; 
• A director, officer or trustee of any entity referred to in paragraphs 1 to 3 above, even if such entity is not insured under such a contract.

The Regulation also provides that the duration of a contract departing from Article 2503 C.c.Q. may not exceed one year and that, in the case of a renewal, the insured must meet the conditions set out in the Regulation at the time of renewal.

The Regulation will come into force on the fifteenth day following the date of its publication in the Gazette officielle du Québec. There is no doubt the application of the Regulation will lead to numerous reactions within the insurance industry in Quebec.