This summary does not constitute a legal opinion. The information it contains may not reflect the current state of the law.
By Me Henri Renault and Me Vincent Lemay, Stein Monast LLP Attorneys
Two judgments handed down by the Quebec Court of Appeal in 2012 have raised concerns in the financial services industry: the Guillemette case1, in which Justice Marie-France Bich ruled that an insurer could not exclude gross fault from its insurance policy, and the Audet case2, where Justice Pierre Dalphond considered that this conclusion had no bearing on the case before him, describing it simply as an obiter, in other words, an incidental opinion that, in of itself, did not constitute grounds for the judgment rendered. In April 2013, the Supreme Court of Canada dismissed the application for leave to appeal in both cases. The Court of Appeal is once again looking at this concept in the Larrivée v. Murphy judgment3, filed on February 19, 2014.
The Facts of the Case
The insureds lost their entire portfolio after making some high-risk investments on the advice of their financial planner, René Proteau. Since Mr. Proteau and his company had made an assignment of their property for the benefit of their creditors, the only possible chance the appelants had of recovering their losses was to sue Lloyd’s, Mr. Proteau’s and his company’s insurer.
The Judgment of the Superior Court
Superior Court Justice Line Samoisette agreed with Lloyd’s, holding that Mr. Proteau had committed a gross fault, which was excluded from the coverage offered by the insurance policy in question.
The Judgment of the Court of Appeal
The Court of Appeal, however, sentenced Lloyd’s to pay compensation to the investors. In light of the
Audet cases, it came to the following conclusion: “As was seen above, we now know that a professional fault attributable to an agent--even when it is gross—compels the principal of the agent to compensate for the injury thus caused, but makes the principal’s insurer liable for this compensation. […]”. [unofficial translation]
Section 2464 of the
Civil Code of Québec (C.C.Q.) reads as follows:
The insurer is liable to compensate for injury resulting from superior force or the fault of the insured, unless an exclusion is expressly and restrictively stipulated in the policy. However, the insurer is never liable to compensate for injury resulting from the insured's intentional fault. Where there is more than one insured, the obligation of coverage remains in respect of those insured who have not committed an intentional fault.
Where the insurer is liable for injury caused by a person for whose acts the insured is liable, the obligation of coverage subsists regardless of the nature or gravity of the fault committed by that person.
Through this second paragraph, the Court confirms that the insurer of a principal cannot plead a defense based on the absence of insurance coverage by citing the gross fault of the agent at fault. However, in a case where it is the insured himself who commits the wrongful acts and not the person for whom the insured is liable, the clause excluding gross fault could be considered valid. We may have to wait for further jurisprudence to see whether it is reasonable to reach this conclusion.
The Concept of Gross Fault
The Court also questioned whether or not Mr. Proteau had committed a gross fault. It recalled the precept of the 18th century French jurist, Pothier, who said that gross fault is “not tending to the business of others with the same care that the least careful and most stupid people would unfailingly take in respect of their own business”4. [unofficial translation]
The Court concluded that, as a financial planner, Mr. Proteau had committed a fault in the course of carrying out his professional activities. However, the Court held that he had not committed a gross fault. As Justice Yves-Marie Morissette said, “Section 1474 of the C.C.Q. specifies that a gross fault shows ‘gross recklessness, gross carelessness or gross negligence.’ In his dealings with the appelants, Mr. Proteau clearly showed himself to be in many respects a poor financial planner, however it was a pronounced form of incompetence rather than something that deserved to be called a gross fault.”5 [unofficial translation]
In this case, the evidence showed that at the time he was advising his clients on investment choices, Mr. Proteau believed that the banks would guarantee the appelants’ capital—thus fulfilling their objectives. The Court saw this as gullibility and an unfortunate lack of experience, neither of which are equal to a gross fault.
It is interesting to note that in its analysis of the characterization of the fault, the Court took into consideration how much Mr. Proteau had benefited from the investments. It thus took into account that, contrary to the
Audet judgment, in which the advisor had earned over $425,000 for ill-advised investments, Mr. Proteau only earned approximately $5,000.
The test the Court of Appeal used to define a “gross fault” may seem quite severe. However, this ruling was made in a context where numerous investors are cheated by insolvent advisors and where the Court of Appeal has ruled valid the exclusion for gross fault against them. It only remains to be seen whether the courts will use the same interpretation in other contexts, since each case is unique.
With respect to professional liability insurance, one could come to the conclusion that a firm’s insurer cannot claim a policy exclusion related to a gross fault committed by a financial planner in the firm’s employ, but that a financial planner’s insurer could claim such a clause as long as it demonstrates convincing evidence of a level of recklessness, carelessness or negligence that could be characterized as “gross”.
1 Lloyd’s Underwriters v. Alimentation Denis et Mario Guillemette, 2012 QCCA 1373.
2 Audet v. Transamerica Life Canada, 2012 QCCA 1746.
3 Larrivée v. Murphy, 2014 QCCA 305.
4 Id., par. 43.
5 Id., par. 43.