On October 31, 2017, Carlos Leitão, Quebec’s Minister of Finance (Minister), tabled in the National Assembly Bill 150 (Bill) which aims to implement certain measures that had been announced in the Minister’s budget speeches in March 2016 and 2017. More than 80 acts would be amended by the Bill. We will be taking a look here at some of the changes targeting Quebec’s insurance industry, as the proposed amendments in this area are significant with respect to the current state of the law.
Overview of the proposed legislative amendments
Act respecting the distribution of financial products and services
A few weeks ago, the government announced its Bill 1411 whose main objective is to replace the Act respecting insurance2 (with the Insurers Act), and to amend the Act respecting the distribution of financial products and services3 (ADFPS). The purpose of these recent changes has been, among other things, to group together the Chambre de la sécurité financière and the Chambre d’assurance de dommages (ChAD) within the AMF, in addition to integrating certain easing measures to facilitate the distribution of insurance products via the Internet. The Minister had nevertheless chosen not to immediately address in Bill 141 the complex issue of business ties that may exist between brokerage firms and insurers and other financial institutions, announcing instead that this reform would be introduced in the coming months.
Bill 150 addresses this issue directly by abolishing section 148 of the ADFPS, which provides that no more than 20% of the shares or voting rights connected to a brokerage firm may be held, directly or indirectly, by financial groups or financial institutions (including insurers). This prohibition would be replaced by the notion of "significant interest" by a financial group or a financial institution in the decisions or the equity capital of the damage insurance brokerage firm. "Significant interest" can be defined as a shareholder’s ability to exercise 20% or more of the voting rights over shares issued by that firm. The holding of shares issued by that firm representing 20% or more of its equity capital also constitutes a "significant interest" in a firm’s equity capital.
It is specified that this amendment does not have the effect of prohibiting any financing agreement or any service contract between a financial institution (or a financial group) and a brokerage firm. Finally, it should be noted that a "significant interest" will also be considered to be in place when voting rights or shares are held by legal persons related to the financial institution or the financial group.
The Bill also distinguishes between two types of damage insurance brokerage businesses, thereby aligning the Quebec regulation with that generally found in other Canadian provinces.
The amended ADFPS would distinguish between "damage insurance brokerage firms," whose role is to offer products from several different insurers, and "damage insurance agencies," which would be limited to the sale of insurance products originating with a limited number of insurers or a single insurer.
Both damage insurance agencies and damage insurance brokerage firms will be required to register with the AMF as one of these two designations. In both cases, "a damage insurance agency" or "a damage insurance brokerage firm" will be required to disclose, on its website and in its communications with its clients, the names of the insurers for which it offers insurance products. If they are bound by an exclusive contract with one insurer in particular, this information as well as the products included in the contract must also appear on the website of the agency or in its communications with clients.
Furthermore, any damage insurance brokerage firm will now be required (in order to maintain the "brokerage firm" designation) to offer clients products from at least four (4) insurers who do not belong to the same financial group, for each insurance proposal received. If it cannot disclose to the AMF the information demonstrating that it made every effort to comply with this provision, it may be required by the AMF to change its registration from "brokerage firm" to "agency" and even be required by the AMF to enter into an exclusive contract with an insurer. The AMF may also require the agency to comply with the publication requirements on its website and in its communications with clients regarding its new status.
Civil Code of Quebec
The Bill amends the Civil Code of Quebec4 (Code) with respect to the insurance of divided co-ownerships (commonly known as condominium buildings), group damage insurance, and the specific issue of the assignment of individual life insurance contracts by the holder.
The changes with respect to the insurance of divided co-ownerships introduce, among other things, a new obligation for the syndicate of the building to establish a fund (designated by the Bill as being a "self-insurance" fund) which would be separate from the contingency fund and would be used to pay the deductibles provided for by the insurance policy taken out by the syndicate. This fund would be established through contributions made by the co-owners, and the government would determine by regulation the terms based on which the minimum amount of such contributions would be established. In addition, the Bill would amend the Code in such a way as to now impose an obligation on each co-owner to take out civil liability insurance for its unit (an obligation that is generally provided in co-ownership agreements) of which the minimum amount would also be determined via a government regulation. Codification of this obligation would nevertheless alleviate any possible conflict in the event of damage covered both by the insurance of the co-ownership and that of the co-owner, since the Bill states that it is the insurance of the co-ownership syndicate that will first apply in a similar situation, since it now constitutes primary insurance.
The Bill also addresses the issue of fairness between the syndicate and the co-owner responsible for the damage caused, as the payment of the deductible and the increased insurance premium would be assumed by all the co-owners rather than by the one at fault. The Bill also provides that the premium provided for in the co-ownership insurance contract must be reasonable, and the government is now empowered to determine by regulation the criteria according to which a deductible may be considered unreasonable in this regard. When a loss occurs which falls under the coverage provided for by a property insurance contract entered into by the syndicate and the syndicate decides not to avail itself of the insurance, it will be required to ensure without delay that the damage caused to the insured property is repaired.
In addition, in the evaluation of the amount of insurance needed by the syndicate to cover the immovable, the indemnity on the basis of the "replacement cost" is replaced by a sufficient amount to "cover the reconstruction of the immovable in accordance with the standards, usage and good practice applicable at that time," which amount must be evaluated at least every five years by a member of a professional order designated by government regulation.
The Bill also incorporates within the Code a provision stating that unless the injury is due to an intentional or gross negligence by a director, a co-owner or a person who is a member of the co-owner’s household, the insurer of a syndicate may not be subrogated to the rights of a syndicate in this respect.
Aside from the changes to co-ownership insurance, the Bill introduces the notion of group damage insurance, covering, under a master policy, the patrimony of participants in a specified group. The Bill does not expand further on the topic and seems, for the time being, to leave the door open to a variety of insurance products likely to be offered in this area. The planned amendments also ensure that group damage insurance complies with the rules applicable to misrepresentation, concealment and failure to notify the insurer of any circumstances that increase the risks stipulated in the policy, by explicitly providing a new section.
New provisions are also introduced to amend the plan for the assignment of life insurance policies. Based on the Bill, the clause preventing the holder of a contract from assigning a life insurance contract or discharging the insurer from liability in the event of assignment of the insurance has effect only in the first two years of the insurance and with regard solely to an assignment by onerous title to an assignee who has no insurable interest in the life or health of the insured. Accordingly, two years and a day following the validity of the insurance, such a clause no longer has effect and these assignment restrictions will no longer apply despite any clause indicating otherwise.
Bill 150 provides for the establishment of a series of ambitious measures intended to align Quebec law with the practical reality of the insurance industry. It remains to be seen how the industry will react to the proposed changes. Please do not hesitate to contact a member of our team to discuss the scope of this Bill and its potential impacts on your organization.
1 See our Legal Update entitled “Bill 141: the most significant changes for Quebec’s financial sector in decades”.
2 R.S.Q., c. A-32.
3 R.S.Q., c. D-9.2.
4 SQ 1991, c. 64.