A ruling that ordered an insurance company to pay $460,000 to a Quebec couple after their financial advisor invested their retirement nest egg in promissory notes in scandal-plagued Montreal financial group Mount Real Corp. has raised questions over the scope of professional liability insurance coverage in the province and ostensibly broadened investor’s protection.
Quebec’s financial and insurance sectors are now worried over the impact of a Quebec Court of Appeal unanimous decision that declared inoperative clauses excluding gross negligence in professional liability insurance policies under the Act respecting the distribution of financial products and services (ADFPS). Law insurance experts are speculating that the finding may have a reach beyond the ADFPS, and affect professional liability insurance policies held by the indemnity funds of Quebec’s 44 professional corporations, including the Barreau du Québec. The Quebec legal society declined to comment.
“Indemnity funds have reason to worry,” said André Bois, an insurance lawyer with the Quebec City law firm Tremblay Bois Mignault Lemay. “They have the same kind of clauses cited in the ruling. This will have an enormous financial impact because by excluding gross negligence insurers face higher exposure to risk” which in turn will lead to higher costs that will ultimately be passed on to professionals who need liability coverage to practice.
Questions have also surfaced over whether the Autorité des marchés financiers, Quebec’s securities regulator, will now accept professional liability insurance policies that contain clauses that exclude gross negligence. AMF spokesperson Cathy Beauséjour said in an email that while the regulator is ensuring that all professionals who operate under the ADFPS are covered by liability insurance, it is too early “to appreciate the impact” the ruling will have. A lawyer who used to work for the AMF said he doubts the financial watchdog will now scrutinize insurance policies to determine if they have the exclusionary clause because it would be a moot exercise. “The court has already established that the exclusion doesn’t apply,” said the lawyer.
Grocery store operators Denis Guillemette and France Mercier lost $232,000 when scandal-plagued Mount Real was shut down by the AMF in 2005, leaving 1,600 investors holding an estimated $130-million worthless promissory notes. The couple, who had little knowledge about financial markets, had entrusted their life savings to financial advisor and planner Yves Tardif and gave him instructions to invest only in secured assets which he did not do. The couple then sued Tardif, his firm iForum Financial Services Inc. and their liability insurer Lloyd’s Underwriters. (Tardif was fined $104,000 last year after pleading guilty to acting illegally as a dealer, aiding with illegal distributions and making misrepresentations in securities transactions. In 2010, he was fined $453,000 for similar violations in connection with the Mount Real matter).
Lloyd’s argued that the couple were partly to blame for their financial woes, and that the financial advisor acted outside the areas of professional responsibility covered by the insurance policy. But in a 36-page ruling that upheld a lower court ruling, the Quebec Court of Appeal in Souscripteurs du Lloyd’s c. Alimentation Denis & Mario Guillemette Inc. 2012 QCCA 1376 dismissed those arguments, and seemingly broadened the scope of what constitutes “professional activities” covered by professional liability insurance policies.
Willful blindness was not an issue in this case, wrote Justice Marie-France Bich in her reasons. The appeal court found, based on the lower court’s appreciation of the evidence against Tardif, that the financial planner had breached his legal and professional obligations under the ADFPS. Informed by the oft-cited Supreme Court of Canada ruling in Laflamme v. Prudential-Bache Commodities Canada Ltd. 2000 SCC 26,  1 SCR 638, Justice Bich said that given the complexity of the investment sector and its inherent risks, “it must be recognized that if a person entrusts such decisions to a financial advisor or intermediary because he or she has little investment knowledge, that person is not under an obligation to constantly check and double check when, rightly so, the person has deferred to a professional in order to avoid” doing that.
Serge Létourneau, who successfully plead the case for the couple, said that allowing an investor with little investment know-how to “lower his vigilance” and defer to a professional is an important finding because Quebec courts often have interpreted the relationship between investor and financial advisor as a business relationship. That means that investors had to demonstrate that they paid the same attention and care as they would in a business relationship in their dealings with financial advisors. “The essence of a professional relationship is confidence, and this confidence allows an individual to defer to a professional,” said Létourneau, founder of the Quebec City law firm Létourneau Gagné.
But Yan Paquette, a Quebec City litigator specializing in financial markets, warns that investors with limited knowledge do not have a free pass. Last October the Quebec Court of Appeal in Immeubles Jacques Robitaille inc. c. Financière Banque Nationale 2011 QCCA 1952 held that “even less seasoned” investors must be prudent, collaborate with the financial advisor and make a minimum effort to understand financial markets. Coupled with the Lloyd’s decision, Paquette says the appeal court is clearly stating that a financial advisor’s duty to inform is directly proportional with an investor’s knowledge. “The Lloyd’s decision places a burden on financial advisors to respect its duty to inform, said Paquette of Langlois Kronström Desjardins in Quebec City. “The less an investor understands the financial markets the greater burden a financial advisor faces to inform the client, and the reverse is true.”
The Lloyd’s ruling has also drawn concerns over what constitutes “professional activities” under liability insurance policies. Lloyd’s argued that since Tardif illicitly procured financial products governed by the Québec Securities Act, his actions were outside the scope of professional activities covered by the insurance policy. But the appeal court held that Tardif’s actions should be viewed as a whole, and that his unauthorized actions were the manifestation of improper financial planning. Since “the harm suffered by the couple stems directly from his bad financial planning,” the fault arose out of services governed by the ADFPS and therefore meets the definition of professional activities covered by the insurer.
“This ruling says that there can very well be a link between offering advice while performing financial planning and the act of selling financial products,” remarked Létourneau. “Each should not be examined separately. That finding has plainly overturned conclusions reached by Superior Court judges in other cases.”
Létourneau now wonders whether the provincial financial regulator will compel financial professionals to obtain insurance coverage that will encompass all activities as opposed to coverage that is limited to professional activities they are authorized to perform.
At the very least the finding will lead insurers and professionals to closely examine professional liability insurance coverage, says Bernard Larocque of Lavery, de Billy in Montreal. Thanks to the ruling, the scope of professional activities must be considered in light of the specific circumstances surrounding the case and all of the actions taken by the financial professional to determine if the fault is covered by the insurance contract, added Larocque.
Lawyers representing Lloyd’s declined to comment.