Exceptions to mandatory costs-exclusive policy limits in Québec

July 4, 2022 | Jasmine de Guise, Stephanie Massé

Up until the adoption of Bill 82 and its regulations, Quebec was the only Canadian province where an insurer was legally obligated to take up the defence of its insured and cover legal fees over and above the limits of insurance set out in the policy, notwithstanding a policy provision providing for a costs-inclusive limit.

Bill 82

On May 21, 2021, Bill 82, titled An Act respecting mainly the implementation of certain provisions of the Budget Speech of 10 March 2020 (the ‘‘Act’’), was adopted. The Act modifies article 2503 of the Civil Code of Québec (the ‘‘CCQ’’), which previously 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.

The Act adds a third paragraph to article 2503 CCQ:

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.

Which refers to article 2500 CCQ:

2500. The proceeds of the insurance are applied exclusively to the payment of injured third persons.

The new paragraph added to 2503 CCQ provides that the Government may introduce regulations to exempt certain categories of insurance contracts from the blanket costs-in-addition legal requirement, which was, until now, without any exceptions in Quebec law.

Which categories of insureds may derogate from the costs-in addition rule?

On May 5, 2022, 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 (the “Regulation”) came into effect.

Through this Regulation, the following categories of insureds may now negotiate policy terms departing from the previous legal requirement for all policy limits to be exclusive of costs in Quebec:

  • drug manufacturers;
  • Capital régional et coopératif Desjardins;
  • the Fonds de développement de la Confédération des syndicats nationaux pour la coopération et l’emploi;
  • the Fonds de solidarité des travailleurs du Québec; and
  • the directors, officers or trustees of those entities.

The Regulation also applies to the following insureds, as long as their total coverage under the civil liability policy subscribed is at least CAD $5,000,000:

  • a large business for the purposes of the Act respecting the Québec sales tax;
  • a person related to a 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; and
  • the directors, officers or trustees of those entities can also be subject to those changes.

For this derogation to be possible, the duration of the policy period cannot exceed one (1) year. In the case of a renewal, the insured must again meet the conditions for exemption at the time of renewal.

What does this mean for insurers doing business in Québec?

These new legislative changes will certainly lead to a new way of negotiating insurance contracts for large businesses in Québec.

These exemptions are likely to have an effect on writing excess insurance in Québec. The issue of whether defence costs must be entirely borne by the primary insurer up until settlement or judgment, or whether these costs must be shared with excess insurers, is one that causes much disagreement within the Québec legal community and is currently being debated before the courts. The new possibility of costs eroding policy limits for these categories of insureds is likely to provide more predictability to all insurers participating in large insurance towers.

It is important for insurers to keep in mind that it is possible to negotiate costs-inclusive policy limits with these categories of insureds, but the limits on policies emitted to these categories of insureds are not automatically inclusive of costs. If no provision within the policy expressly provides for costs eroding policy limits, the policy will fall under the general CCQ rule of the limits being costs-exclusive.

We will be following the effects this Regulation has on the insurance market in Québec and will be sure to provide any relevant updates through future newsletters.

This article was written with the collaboration of Jérôme Coderre, Summer Student.

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