Bill 82 and the duty to defend of Quebec insurers: the beginning of a solution

On December 10, 2020, Mr. Éric Girard, Minister of Finance, tabled in the Quebec National Assembly a bill (Bill) titled An Act respecting mainly the implementation of certain provisions of the Budget Speech of 10 March 2020 proposing, among other things, to address the long-standing challenges surrounding Article 2503 of the Civil Code of Quebec (Civil Code) which provides for the uncapped duty of liability insurers to pay the defense costs of their insureds over and above policy limits. Combined with the development of procedural vehicles and Quebec securities legislation, this obligation specific to Quebec civil law has led to an unprecedented hardening of the insurance market regarding certain lines of insurance. The Bill itself does not yet provide a clear solution; however, by allowing regulatory exemptions, it lays the groundwork to get out of the deadlock and probably tries to bring a favourable solution to the various stakeholders in the insurance area - a considerable challenge. 

Proposed changes

Section 86 of the Bill proposes to amend Article 2503 of the Civil Code by adding a new paragraph allowing for exemptions to this provision for the categories of insurance contracts and classes of insureds that may be referred to therein as determined by regulation. This regulation may also provide for "any standard applicable to those contracts."  The newly amended article would read as follows:

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. [Amendment emphasized]

Although light, this amendment still marks the beginning of a solution as it refers to a regulation that would remain to be formulated and adopted if the Bill itself makes it through to adoption. The government is giving itself time to determine the exact scope of the appropriate exemptions and bypass the rigidity of the Civil Code, a text that evolves only slowly and in which an excessively detailed amended article would risk quickly becoming obsolete again. 

Quebec peculiarity

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. 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. With the provisions providing for these requirements being of public order, no contractual limits or derogations can modulate these rules and adapt them to the needs of policyholders and to the risk appetite of insurers. This legislative particularity is specific to Quebec and does not have an equivalent in the other Canadian provinces.

Despite the clear objective of Article 2503 to protect insureds, as consumers, by granting them more rights, the provision as it currently stands applies indiscriminately to individual insureds as well as to commercial insureds of all sizes. Although the additional protection provided may prove beneficial to individuals or small businesses, it presents a significant restriction to the contractual freedom of commercial stakeholders that would sometimes have preferred to be able to waive this coverage and negotiate the terms and conditions of their policies. Although the categories of contracts and insureds, which can evade application of Article 2503 under a new regulation, remain to be determined, in the event that the Bill would be passed, the portrait of the situation in recent years outlines the categories that could in principle prove to be possible candidates.

In fact, over the last few years, various factors affecting mainly large Quebec companies, such as the growing popularization of class action and the development of securities legislation, have profoundly changed  and rendered these companies’ risk profile increasingly complex. Disputes have grown in number and complexity and are therefore longer and more costly to defend. As a result of several costly disputes involving large Quebec companies in which commercial insurers were expected to assume the defense costs for amounts sometimes exceeding the insurance limits provided for in the applicable policies, the Quebec market for liability insurance covering certain commercial risks has been thrown into a major crisis, with insurers leaving, sharp increases in premiums, significant coverage restrictions and, of course, challenges for companies to obtain adequate insurance products. Quebec companies must therefore deal with more complex and more costly risk management and are at a significant disadvantage compared to their Canadian and international competitors. Large companies facing major commercial risks could therefore hope to benefit from an exemption under the potential regulation.

Next steps

It is, however, too early  to jump to conclusions. In fact, the regulation providing for contracts and categories, which can depart from Article 2503 has not yet been presented and the Bill providing for the possibility of adopting one still has to go through several steps¹. If all the stars are aligned, the Bill could receive assent from the Lieutenant-Governor and come into effect over the coming months. Drafting and adopting the regulation would still likely take months.