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| By Kurt Johnson |
Fraud in the financial services industry has been prevalent in
recent years in Quebec. Think Norbourg, Mount Real, Earl
Jones…the not so illustrious list is a long one. And so is the line of
investors queuing up to the Courts in the hopes of recouping at least some of
their hard-earned savings, lost forever as one Ponzi scheme
after the next seems to vapourize the nest eggs of unsuspecting investors.
But as quickly as those savings may disappear, so too may the
insurance coverage investors are counting on when they hand their portfolios
over to financial services representatives and firms duly registered with the Autorité
des marches financiers (“AMF”).
On May 16th, 2016, the Court of
Appeal weighed in on what it qualified as a new question in this area: whether
mandatory insurance contracted pursuant to the provisions of the Act
respecting the Distribution of Financial Products and Services (“DFPSA”)
can be annulled on the basis of misrepresentations or concealment of material
facts.
The case of Brunet v. AXA Assurances Inc. 2016 QCCA 832[1] presented a
somewhat unique set of facts where the Appellants had the misfortune of dealing
with a financial services representative, Themis Papadopoulos, who also
happened to own 50% of the firm where the Appellants’ savings were being
managed. As the directing mind of Triglobal Capital Management Inc. (“Triglobal”),
Papadopoulos was responsible not only for managing the Appellants’ investments,
but also for seeing to the renewal of Triglobal’s comprehensive liability
insurance policy required under the mandatory provisions of the DFPSA and
its regulations.
Like so many of the other cases of fleeced investors, the
Appellants were lured into investing a significant portion of their portfolios
into what turned out to be a Ponzi scheme orchestrated by none
other than Papadopoulos. As news of the possible fraudulent scheme began to
creep into the media, Papadopoulos was aggressively seeking the renewal of his
firm’s mandatory insurance, at which time he misrepresented the affairs of
Triglobal, and not surprisingly concealed information regarding the Ponzi scheme
he himself had been running.
The policy was ultimately renewed, but less than six months later
Papadopoulos’ scheme was fully revealed and Triglobal was eventually shut down
by the regulators. The Appellants lost over two million dollars and sought
indemnity under Triglobal’s recently renewed insurance policy. Not so fast,
said AXA. Just as the Appellants had been duped by Papadopoulos, so too had the
insurer. Hence, AXA invoked the nullity of its policy on the basis of
Triglobal’s misrepresentations and concealment of material facts pursuant to
Article 2410 CCQ.
The Superior Court agreed with AXA, and the Court of Appeal framed
the question on appeal as follows:
[19] (…) Le juge de première instance a-t-il erré en droit en déclarant
nul ab initio pour
cause de fausses déclarations du preneur-assuré le contrat d’assurance requis
en vertu de la Loi sur la
distribution de produits et services financiers (la LDPSF)?
Relying on the public order nature of the DFPSA and
its recognized purpose of consumer protection[1],
the Appellants argued that allowing an insurer to retroactively invoke nullity
of what is an otherwise mandatory insurance policy runs afoul the very logic
and purpose of the legislative scheme. As such, the general insurance
provisions of the CCQ, including notably Article 2410, must be read
together in such a manner as to permit injured third persons access to the
coverage.
While acknowledging the novelty of the question, the Court of
Appeal took little time to dispose of Appellants’ argument, framing the issue
as essentially one of statutory construction:
[23] L’assurance, on le sait, est un contrat qualifié d’uberrima fides (maxime latine
que l’auteur Albert Mayrand traduit par « la plus abondante (grande)
confiance »). Cette idée est codifiée par un article du Code civil du Québec compris
dans les Dispositions générales du Chapitre XV consacré aux assurances. Il
prévoit ce qui suit :
2410. Sous réserve
des dispositions relatives à la déclaration de l'âge et du risque, les
fausses déclarations et les réticences du preneur ou de l'assuré à révéler
les circonstances en cause entraînent, à la demande de l'assureur, la
nullité du contrat, même en ce qui concerne les sinistres non rattachés au
risque ainsi dénaturé.
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2410. Subject to the provisions on
statement of age and risk, any misrepresentation or concealment of material
facts by either the client or the insured nullifies the contract at the
instance of the insurer, even with respect to losses not connected with the risks
so misrepresented or concealed.
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Or, rien dans les règles particulières qu’édictent LDPSF et du RCRASA n’écarte expressément, ni
même implicitement, ce principe fondamental qui régit les relations entre
assureur et assuré.
[24] Les appelants prétendent que
l’article 80 de la LDPSF doit prévaloir sur l’article 2410 C.c.Q., mais
cette disposition de la LDPSF ne saurait à elle-seule écarter
le principe qu’énonce le Code civil du Québec (il faudrait un
texte beaucoup plus spécifique pour
parvenir à ce résultat). (…) [internal citations
omitted].
Previous decisions of the Court have circled around a similar
issue, notably the validity of certain exclusions under mandatory insurance
policies issued pursuant to the DFPSA. And despite some
contradiction and apparent tension between two of these decisions, the Court
chose not elaborate on the issue. Instead, it simply reiterated that the
insurance provisions of the CCQ trump the DFPSA. To hold otherwise would require far more
clear language:
[31] Par ailleurs, rien dans les récents arrêts Guillemette, Audet c. Transamerica Life Canada et Larrivée c. Murphy n’est susceptible
d’appuyer la thèse des appelants sur l’interaction entre le Code civil du Québec d’une part,
et d’autre part la LDPSF et
le RCRASA. Ces textes
doivent évidemment s’interpréter les uns avec les autres de manière à les
rendre compatibles entre eux, mais il n’existe nulle part dans la législation
et la réglementation sur les produits et les services financiers de règle
susceptible de supplanter le principe de l’article 2410 C.c.Q., une pierre angulaire du droit
des assurances. [internal citations omitted]
The result may very well leave investors in Quebec more nervous
than ever. Because while they may think they are covered when dealing with a
representative and firm licensed under the DFPSA, the CCQ may
say otherwise. Now you’re covered…now you’re not!
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