By Me Karine Lizotte, Assistant Syndic, Personal Lines Insurance Broker
The Facts of the Case1
The insureds were owners of a hotel that was destroyed by fire during the night of January 8-9, 2009. Although the building was not a total loss, considerable damages totalling approximately $560,000 were incurred.
The insurer refused to compensate the insureds, based, amongst other things, on an aggravation of risk that had not been declared. By May 2013, the claim had still not been settled, the insurer having paid the insureds’ hypothecary creditor (mortgagee) only $282,000. The mortgagee was also their insurance broker.
The Formal Complaint
After the Syndic’s Office conducted its investigation, a formal complaint was lodged before the Discipline Committee. The complaint alleged that the broker “had not avoided placing himself, directly or indirectly, in a situation in which he would have a conflict of interest.” Information gathered during the investigation revealed that from May 2005 to 2009, the broker had obtained insurance coverage for the clients’ building through his damage insurance firm and that he had become their mortgagee through his management company. According to the Syndic, this situation violated section 10 of the
Code of ethics of damage insurance representatives
(the Code of Ethics) and section 16 of the
Act respecting the distribution of financial products and services (ARDFPS).
Section 10 of the
Code of Ethics:
10. A damage insurance representative must avoid placing himself, directly or indirectly, in a situation in which he would have a conflict of interest. Without limiting the generality of the foregoing, a representative would be in a situation of conflict of interest where:
(1) the existing interests are such that he might favour some of them over those of his client or his judgment and loyalty towards his client might be adversely affected;
(2) he obtains a current or future personal benefit, directly or indirectly, for a given act.
Section 16 of the ARDFPS:
16. All representatives are bound to act with honesty and loyalty in their dealings with clients.
They must act with competence and professional integrity.
The Discipline Committee’s Analysis
The Discipline Committee determined that a conflict of interest exists, in particular in cases where a damage insurance representative finds himself in a situation where his own interests are in opposition to those of his clients; where he may favour some of his own interests over those of his client; or where his judgement or loyalty may be affected. The Discipline Committee recognized that a representative may continue to act if he obtains informed consent from his client. However, in no case may a representative act if his professional independence is at stake, even if the client is aware of and agrees to the situation.
Where a financial benefit is concerned, the representative cannot carry out the mandate, since he cannot safeguard his professional independence. In this particular case, by loaning money to the insureds, the broker earned interest. In the opinion of the Discipline Committee, “signing several mortgages totalling $600,000 risked placing him in a situation where his professional independence could clearly be viewed as questionable.”
In addition, the Committee clarified that under section 10 of the
Code of Ethics, it was not necessary to specifically indicate the words “professional independence” to arrive at the conclusion that an offence had occurred. “The Committee believes that a broad, liberal interpretation of section 10 of the
Code of Ethics must inevitably include the obligation to safeguard one’s professional independence, in order to ensure that the objective of the Act—that of protecting the public—is met.”
Since the broker had acted as a lender through his management company rather than through his firm, the Discipline Committee also asked itself the following question: Can a professional be found personally guilty of an offence when the lender—the management company—is a corporation, of which the broker is a shareholder? The Committee’s response cited
Chauvin v. Beaucage, 2008 QCCA 922 (CanLII).
In this judgement, the Court of Appeal recognized that the “alter ego” theory applied to ChAD members. This theory makes it possible to recognize the personal responsibility of a professional who delegates duties that should be performed by a certified individual to a person who is not certified. For example, a broker who asks his assistant to renew an automobile insurance policy will be held responsible for the acts performed by the assistant. Thus, not only has the broker allowed someone to illegally practice the profession, but if the assistant fails to add a coverage to the renewal, the Discipline Committee may, in addition, find him guilty of not having done so. This theory also applies if the broker performs any duties through companies “in which he is the main shareholder and officer.”
In the wake of this analysis, the Discipline Committee found the broker guilty “of placing himself in a situation of conflict of interest and failing to maintain his professional independence since he obtained a personal, present and perhaps even future benefit from a specific act.”
During the hearing to determine the sanction, the parties made a joint recommendation to the Discipline Committee that a $10,000 fine be levied ($2,000 for each of the five charges). This amount was reduced to $8,000 by applying the “principle of globality” to the sanction, according to which the sanction should not be devastating to the respondent. The Committee approved this recommendation, noting that the sanction should not be punitive, but rather should ensure that such a situation would not re-occur. Furthermore, if the recommended sanctions are fair and reasonable, the Discipline Committee must accept them.
1. Chambre de l’assurance de dommages c. Lareau, 2013 CanLII 33424.