How Proposed Legislation Could Impact Risk Managers’ Approach to D&O Insurance
For years Quebec has been alone as a province in mandating that costs associated with the duty to defend be over and above policy limits. As a result, organizations in Quebec have benefited from D&O coverage with unlimited defence costs, referred to as Defence Outside the Limit (DOL).
However, that also put a strain on insurers, which passed increased costs incurred by DOL to their insureds, leading to a hard market in lines such as D&O. In recent years, as litigation has increased in both numbers of lawsuits filed and their complexity, defence costs have become more expensive.
In some cases, these costs exceeded policy limits. Starting in mid-2019, the Quebec D&O insurance market saw sharp increases in premiums and significant coverage restrictions, and some insurers even left the Quebec market completely. Risk managers are now facing a lack of capacity, when D&O insurance was almost a commodity two years ago.
Draft Regulation Proposes Revised Framework
Change is in the air and could alter risk managers’ approach to D&O insurance. In Q3 2021 the Quebec Minister of Finance released a long-anticipated draft regulation intended to supplement Bill 82. It outlines the categories of insurance and insured parties that are able to deviate from the rules set out in Articles 2500 and 2503 of the Civil Code of Canada. Both articles provide the legal base for DOL.
Article 2500 states that a liability insurance policy’s limits must be used solely to pay an injured third party’s claims.
Article 2503 stipulates that the liability insurer must actively defend the insured with respect to covered claims and must pay defence costs, interest, and third-party costs outside of the policy limits.
Article 2503 essentially restricts the contractual freedom of commercial parties that may have otherwise preferred to negotiate certain terms and agreements and/or waive this type of coverage.
The draft regulation contains a lengthy set of exempted classes of insureds that still must be finalized. The draft also states that insurance proceeds that are not applied exclusively to the payment of injured third parties may not exceed 50% of the proceeds, unless the insured is found not to be liable or unless the payments to injured third parties do not reach such 50%.
The draft regulation applies to civil liability insurance contracts of four main classes of insureds:
Drug manufacturers and their directors and officers or trustees (pharmaceuticals).
Certain companies 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.
Large businesses, public corporations, foreign corporations, companies that carry on business outside Canada and their directors and officers or trustees.
Health services and social services organizations covered by the Act (S. 4.2), intermediate resources to support the autonomy of the elderly, private residences for the elderly (R.P.A.), health and social services institutions operating residential and long-term care or rehabilitation centres and their directors and officers or trustees.
These draft regulations are intended to supplement Bill 82, which was introduced in late 2020. That legislation first introduced provisions that would, among other things, permit the government to create regulations to exempt certain “categories of insurance contracts” and “classes of insureds” from the Civil Code of Quebec requirements that provided for the uncapped duty of liability insurers to pay the defence costs of their insureds over and above policy limits. These are the regulations that have now been introduced.
Risk Managers Have a Voice
With the draft regulations introduced the government has a 45-day period to consult with various stakeholders prior to finalizing the ultimate version of the regulations. While the 45 days have passed, the government is still taking opinions. Comments and observations may be sent to the Minister of Finance regarding both wording the draft regulation and its impact on the Quebec insurance market, coverages offered and practices and feasibility of the proposed framework.
Many stakeholders in the insurance industry are hopeful that any exemptions that are finalized will mark the beginning of a move toward addressing the current challenging state of the market in Quebec.
The official version of the regulation will come into effect within 15 days of publication in the Gazette officielle du Quebec, Part 2. Contact your broker is you have any questions about the changes and what they mean for your organization.