Life insurance broker’s liability is upheld by Quebec Court of Appeal

The obligations of an insurance broker to his client and to a third party were the subject of a recent unanimous ruling of the Quebec Court of Appeal.¹ On a more general note, the Court also confirmed when prescription (the limitation period) in a third party claim starts to run.
 

The original transaction

The facts of the case are quite complicated. André Lefebvre purchased a property from Douglas Robinson in 1992. In partial payment of the property, Lefebvre proposed to purchase an insurance policy on Robinson’s life, with the proceeds being payable to Robinson’s estate. The life insurance proceeds were to rise over time to a total of $1,200,010 in 2010. In order to set up the policy and the payment of the premiums, Lefebvre sought the assistance of Pierre Roy, a life and health insurance broker. Roy informed Lefebvre and Robinson that Lefebvre simply had to purchase an annuity for $256,690 that would completely cover the insurance premiums. Based on Roy’s representations, Lefebvre purchased the annuity and a hypothec in favour of Robinson that was initially proposed in the offer to purchase was dropped from the deed of sale.

The ensuing litigation

Litigation arose because Roy, acting as Lefebvre’s agent, misinformed the parties. The “one-time premium” was based on a projected annual return of 7.8% and therefore the policy was not “fully prepaid” as Roy had told Lefebvre and Robinson.

In June 2005, Roy’s firm informed Lefebvre that additional premiums would probably have to be paid in light of poor market returns. Meanwhile, Robinson did not discover that there were problems with the insurance policy until August 19, 2008. He then served notice on Roy and Lefebvre requiring them to take all necessary steps to ensure that the policy would not lapse. Neither Roy nor Lefebvre took any action and Robinson filed an action against both of them on August 19, 2011. From June 25, 2013, Robinson paid the premiums himself to avoid having the policy lapse. Lefebvre, for his part, brought a third party claim against Roy.
 

The findings of the lower court

At trial, Michaud J² first considered the matter of prescription. Since Robinson was not told about the issues affecting the insurance policy until August 19, 2008, Michaud J found that Robinson’s action exactly three years later was not prescribed (time barred). As for Lefebvre’s action in warranty, Michaud J found that since it was a recursory action, prescription started to run from the date of the final judgment against Lefebvre, even though Lefebvre had been aware of the problem as early as 2006. The Court of Appeal agreed with this reasoning, noting that the principle had already been clarified ten years earlier by the Court of Appeal in SDV Logistiques (Canada) inc.³

On liability, Michaud J found that Lefebvre was contractually liable and Roy extracontractually liable towards Robinson. The 1992 deed of sale provided that Lefebvre would pay all the premiums of the policy on Robinson’s life. Meanwhile, Roy knew that the parties’ had agreed that the policy issued would be completely prepaid. He had also given Robinson to understand that the policy was indeed fully prepaid, thereby engaging his extracontractual liability.

As a life and health insurance professional, Roy had both a duty to inform and a duty to act in good faith even though he had no contractual relationship with Robinson. The Court of Appeal upheld the finding of liability for each of the defendants and ordered them in solidum to indemnify Robinson.
 

The damage award

It is worth noting that in awarding damages, instead of ordering Roy and Lefebvre to pay the insurance premiums required to maintain the policy in force (which would quickly have exceeded the policy amount), Michaud J ordered that Robinson be paid the anticipated proceeds of the life insurance policy ($1,200,010). In consideration of this payment, Robinson assigned all rights in the insurance policy to the defendants. By proceeding in this manner, the trial judge took the special circumstances of the case into consideration, i.e., the amount of the premiums required to maintain the insurance in force and concerns about the defendants’ solvency. The Court of Appeal welcomed this unusual but fair solution.
 

Takeaway

Various aspects of the Court of Appeal’s decision are noteworthy. First, the Court has clarified the liability of an insurance broker not only to his client but also to a third party whom he misled by his representations. The Court has also confirmed the principle whereby prescription for a third party claim starts to run from the date of the final judgment on the principal action, rather than from the date when the facts giving rise to the third party claim first became known.
 

Footnotes

¹ Roy c Lefebvre, 2016 QCCA 660.
² Robinson c Lefebvre, 2014 QCCS 3045.
³ SDV Logistiques (Canada) inc. c SDV Logistique internationale, 2006 QCCA 750, para. 43; following Paterson & Sons Ltd. v St. Lawrence Corp. Ltd., [1974] 1 SCR 31, 40.