2012 QCCA 1746, 2012 QCCA 1746

Unofficial English Translation Audet c. Transamerica Life Canada 2012 QCCA 1746 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL Nos. 500-09-021042-106 ; 500-09-021044-102; 500-09-021045-109 (500-17-018137-037 and 500-17-018355-035) DATE: September 27, 2012 CORAM: THE HONOURABLE PIERRE J. DALPHOND, J.A. FRANÇOIS DOYON, J.A. JACQUES A. LÉGER, J.A. No. 500-09-021042-106 PIERRE AUDET MARIE AUDET APPELLANTS – Plaintiffs v. TRANSAMERICA LIFE CANADA NICHOLAS SMITH, legal agent in Canada for Lloyd’s Underwriters RESPONDENTS – Defendants and 9073-5671 QUÉBEC INC.

JACQUES-ANDRÉ THIBAULT IMPLEADED PARTIES – Defendants ______________________________________________________________________ No. 500-09-021044-102 JACQUES-ANDRÉ THIBAULT APPELLANT – Defendant v. MARIE AUDET RESPONDENT – Plaintiff and NICHOLAS SMITH, legal agent in Canada for Lloyd’s Underwriters RESPONDENT – Defendant and 9073-5671 QUÉBEC INC. TRANSAMERICA LIFE CANADA IMPLEADED PARTIES – Defendants ______________________________________________________________________

No. 500-09-021045-109 JACQUES-ANDRÉ THIBAULT APPELLANT – Defendant v. PIERRE AUDET RESPONDENT – Plaintiff and NICHOLAS SMITH, legal agent in Canada for Lloyd’s Underwriters RESPONDENT – Defendant and 9073-5671 QUÉBEC INC. TRANSAMERICA LIFE CANADA IMPLEADED PARTIES – Defendants JUDGMENT [ 1 ] The appellants Pierre Audet and Marie Audet appeal from a judgment rendered on August 30, 2010, by the Superior Court, District of Montreal (the Honourable Mr. Justice Marc De Wever), dismissing their recourse against the respondents Transamerica and Nicholas Smith in his capacity as representative of Lloyd’s Underwriters.

In separate appeals, Jacques-André Thibault appeals from the orders to pay Pierre and Marie Audet $1,491,745.23 and $974,419.01, respectively, and various other conclusions [ 2 ] For the reasons of Dalphond J.A., to which Doyon and Léger JJ.A. subscribe: THE COURT: In file 500-09-021042-106 [ 3 ] ALLOWS the appeal of Pierre and Marie Audet against Lloyd’s, with costs; [ 4 ] DECLARES that Lloyd’s Underwriters must compensate Marie Audet in the amount of $500,000 and Pierre Audet in the amount of $500,000; [ 5 ] ALLOWS the appeal in part with regards to Transamerica in order to eliminate the order for the Audets to pay costs to Transamerica, without costs; In file 500-09-021044-102 [ 6 ] DISMISSES the appeal of Jacques-André Thibault against Marie Audet, with costs, but ALLOWS his appeal from the dismissal of the call in warranty against Lloyd’s, without costs; In file 500-09-021045-109 [ 7 ] DISMISSES the appeal of Jacques-André Thibault against Pierre Audet, with costs, but ALLOWS his appeal from the dismissal of the call in warranty against Lloyd’s, without costs. (

s) PIERRE J. DALPHOND, J.A. (

s) FRANÇOIS DOYON, J.A. (

s) JACQUES A. LÉGER, J.A. Mtre. Douglas Mitchell Mtre. Catherine Elizabeth McKenzie IRVING, MITCHELL, KALICHMAN For Pierre Audet and Marie Audet Mtre. René Vallerand DONATI, MAISONNEUVE For Transamerica Life Canada

Mtre. Richard R. Provost FRATICELLI, PROVOST For Nicholas Smith Mtre. Yves Robillard MILLER, THOMSON, POULIOT For Jacques-André Thibault Mtre. Maria De Michele Professional Liability Insurance Fund of the Barreau du Québec Mtre.

Mireille Brosseau Mireille Brosseau, attorney Date of hearing: June 4, 2012 REASONS OF DALPHOND, J.A. [ 8 ] Pierre Audet and his sister Marie [1] appeal from an August 30, 2010, judgment, rendered by De Wever J. of the Superior Court, maintaining their respective actions against a life insurance and investment broker, Jacques-André Thibault, and awarding $1,491,745.23 to Pierre Audet and $974,419.01 to Marie Audet.

However, the judgment dismissed their actions against Thibault’s professional liability insurer, certain Lloyd’s underwriters (represented by Nicholas Smith, their legal agent in Canada), and Transamerica Life Canada, the insurance company whose products were sold to the Audets.

Through their joint appeal, the Audets, who fear that they will be unable to enforce their judgments against Thibault, are seeking condemnations against Lloyd’s and Transamerica, two solvent insurers. [ 9 ] In two separate appeals, Thibault is contesting the merits of the condemnations ordered by the Superior Court in the Audets’ separate actions, as he believes that they stem from the illegal admission of certain disciplinary decisions.

In the alternative, he argues that, whether he committed one fault or several faults, they are covered by the applicable liability insurance policy, and the trial judge was wrong to dismiss his calls in warranty against Lloyd’s. CONTEXT [ 10 ] Thibault has been selling insurance since 1969. At first, he sold the products of the life insurance companies La Maritime and Aetna, on commission.

In 1981, he began to sell Colonia life insurance policies underwritten by the insurance company La Concorde (which became the Empire Life Insurance Company) and, in 1997, he began offering some products of Transamerica Life Canada, including index funds. At one point, he did business through the intermediary of 9073-5671 Québec Inc., a company he controlled, which is now bankrupt.

At all relevant times, Thibault or his company held professional liability insurance underwritten by Lloyd’s, which excluded, among other things, gross fault and gross negligence; the coverage limit was $500,000 per loss. [ 11 ] On August 16, 1998, a client of Thibault, Catherine Audet, died tragically. The Audets each inherited about $1,500,000 from their mother. A significant portion of those amounts (more than $2,000,000) was from two Colonia life insurance policies taken out by their mother through Thibault, her long-time advisor.

The mother had also taken out a Colonia policy for $2,000,000 on the life of her daughter, Marie, and another for $1,000,000 on the life of her son, Pierre. [ 12 ] Marie was 30 years old at the time. She has a BA in administration, management option, and was working for Quebecor, where she was earning $38,000 a year. She had just separated from her spouse and had custody of their two children, who were 2 and 4 years old. She had a $160,000 house with a hypothec of about $36,000, and some small investments.

[ 13 ] Pierre was 38 years old. He has a technical degree in administration, marketing option, and was running a tobacconist’s shop in Sherbrooke that earned him $40,000 a year.

In the 1980s, he unsuccessfully played the stock market on margin and promised himself that he would never do so again. [ 14 ] In her will, the mother expressed the wish that her children take out a life insurance policy [TRANSLATION] “for the benefit of their own children in an amount equal to the value of the inheritance they will receive from my succession, if, of course, the level of the premium is acceptable, given their state of health”.

She also suggested that they use Thibault’s services, which they did. [ 15 ] On Thibault’s advice, out of their inheritance, the Audets gave him $63,472.50 and $80,000, respectively, in order to release them from the Colonia insurance policies on their lives, believing, though erroneously, that this would free them from having to pay the annual premiums paid by their mother until her death.

For these [TRANSLATION] “releases”, Thibault received $11,525.56 in commissions. [ 16 ] Also on the advice of Thibault,, one might say at his insistence, the Audets each took out a life insurance policy for $2,000,000 from Aetna. The new policies generated high commissions for Thibault (about $25,000 in all); the Audets each paid $45,000 in annual premiums in 1998 and 1999, amounts well above the minimal annual premiums. He dangled the prospect of accumulating tax-free capital before them. [ 17 ] In October 1998, Thibault told them about the index funds of two insurers, Transamerica and NN.

The Audets opted for Transamerica’s index funds, since they guaranteed the principal 100% after 10 years. Thibault, who was selling the new Transamerica products for the first time, told them that the return on the funds would essentially be a capital gain, and indicated to Marie, who had no liquid assets, that she could withdraw up to 10% of the amounts invested, without penalty, on an annual basis. However, he did not tell her about the consequences of the withdrawals on the guarantee of the principal, which was reduced by any withdrawal before term.

Thibault also mentioned a freeze option that made it possible, at any time, to lock in any gains, but did not insist on the fact that the [TRANSLATION] “locked-in” amounts had to remain invested with Transamerica for 10 years. [ 18 ] At Thibault’s suggestion, the Audets invested in a new index fund of Japanese stocks, called the Nikkei Fund. Marie invested $1,100,000 and her brother, $1,000,000.

In the months that followed, the Audets contributed additional amounts from the liquidation of certain assets from their mother’s succession to the Nikkei Fund and to the U.S. 21st Century Index Fund, also offered by Transamerica. Those investments in Transamerica’s index funds yielded commissions of $156,188 for Thibault. [ 19 ] In 1999, Thibault insisted that the Audets each take out an individual leveraged loan from TD Bank so as to have access to liquid assets in order to buy new financial products. He dangled the prospect of significant gains compared with the cost of the loans, and they finally agreed.

On July 22, 1999, Marie borrowed $650,000, $610,000 of which she invested in the Transamerica funds, while keeping $40,000 for her personal needs. Pierre also borrowed $650,000, which he invested in two Transamerica funds, the Nikkei Fund and the Nasdaq Fund. Those loans generated the following interest: Marie: $19,361.64 in 1999, $68,662.30 in 2000, $14,160.24 in 2001; Pierre: $19,361 in 1999, $59,403.73 in 2000 and $13,164.48 in 2001. [ 20 ] On September 3, 1999, Marie left her job in order to devote herself to her family responsibilities.

That same month, Thibault recommended that she take out life insurance policies from Transamerica on her children’s lives. She initially refused but ended up agreeing. She took out one policy for $2,000,000 per child with an annual premium of $10,000 for 10 years. She paid for the first two years with the leveraged loan. Thibault received commissions of $8,375 for those two new policies. [ 21 ] The Nikkei Index Fund performed better than expected in 1999, which reinforced the Audets’ trust in Thibault.

As for the capital requirements, they were replaced with the option to partially cash in up to 10% of the value of the funds, without penalty, not to mention the use of the leveraged loan, which Thibault considered to be without risk since the return on the funds would exceed the interest owed, and which he even recommended be left to accrue for 10 years, until the funds matured. [ 22 ] In February of 2000, Thibault convinced Marie to take out a Transamerica insurance policy on her life for $9,000,000. To pay the premiums, she withdrew $269,532.90 from the Transamerica funds.

In March, Thibault convinced Pierre to take out an insurance policy on his life for $7,000,000; he withdrew $250,000 from the Transamerica funds to pay the premiums. In both cases, Thibault exaggerated the Audets’ income he reported to the insurer; when the Audets pointed that out to him, he responded that it was normal to do so. Thibault received commissions of $228,508 on the two new policies.

In other words, the operation paid off handsomely for him. [ 23 ] During the same period, the Audets received the first T3 tax forms from Transamerica related to the index funds and dealing with the increased value of the investments for 1999. To their great surprise, most of the substantial increase in the value of their investments constituted income, not capital gains subject to a lower taxation rate, contrary to what Thibault had told them. Marie’s T3 form for 1999 indicated a [TRANSLATION] “capital gain” of $135,910.52 and [TRANSLATION] “other taxable income” of $653,200.96.

Pierre’s T3 form indicated a [TRANSLATION] “capital gain” of $131,943.84 and [TRANSLATION] “other taxable income” of $592,042.49. Clearly, the recommended funds performed superbly. But the catch was that they now had to pay several hundreds of thousands of dollars (Pierre Audet: $359 052; Marie Audet: $377 000) in federal and provincial income tax. [ 24 ] The Audets’ first reaction was to complain that not all the returns were treated as capital gains, which would have reduced the taxes owed. Thibault responded that this was a mistake and that he was going to contact Transamerica.

In the end, he did not obtain the correction requested such that the Audets filed their tax returns using the T3 forms they received. [ 25 ] Their second reaction was to find the cash required to pay the taxes. The Audets wanted to withdraw a portion from the funds, but Thibault recommended that they increase their loans with TD Bank instead, which they did. As a result, they were each about a million dollars in debt. The loss in value of the funds during the summer of 2000 correlated with a drop in the stock markets added to their concern.

In addition, new premiums came due on the many life insurance policies. [ 26 ] Thibault reassured them and made myriad transactions and transfers in the Transamerica funds, opting for funds that generated capital gains instead of other income, but never notified the Audets of the tax consequences of the operations or their impact on the guaranteed amounts, aspects that were likely beyond his grasp.

[ 27 ] The Audets were increasingly worried; they feared that the loans would be called and they would lose the assets given in warranty, including their homes. Despite Thibault’s exhortations not to do so, on February 22, 2001, Pierre repaid his loan to the TD Bank—which totalled $1,146,527 at that point—and with the amounts from the Transamerica funds that he had cashed in, he paid the premiums of $240,000 on his $7,000,000 life insurance policy. His professional relationship with Thibault ended at that point.

His investment in the index funds was henceforth limited to $10 000, an amount he left in the funds in the vain hope that he would qualify to receive his invested principal after 10 years. Those withdrawals cost him $50,922.29 in surrender charges. As for Marie, on February 23, 2001, she repaid the TD loan by withdrawing $1,206,755.82 from the Transamerica funds. The surrender charges were $29,937. Her balance in the Transamerica funds then totalled about $600,000. [ 28 ] In March of 2001, the Audets received the T3 forms for 2000.

Pierre’s T3 form indicated [TRANSLATION] “capital gains” of $327,991.01, [TRANSLATION] “other income” of $13,503.66 and [TRANSLATION] “capital losses on the insurer’s segregated funds” of $915,923.02. Marie’s T3 form indicated [TRANSLATION] “capital gains” of $443,981.46, [TRANSLATION] “other income” of $25,968.49 and [TRANSLATION] “capital losses on the insurer’s segregated funds” of $1,004,925.75. [ 29 ] Marie met with Mr. Di Girolamo and his superior Mr.

Bissonnette, two representatives of Transamerica, to discuss the tax treatment of the fluctuations in the funds, but they did not give her what she considered a satisfactory response. Subsequently, Transamerica sent her a letter showing the many deposits and withdrawals of funds in order to explain the 2000 T3 form. Marie called Thibault to complain. He hung up on her, which put an end to their professional relationship.

In March of 2002, dissatisfied with the solutions proposed by Transamerica over the last year, she transferred the money she still had in the funds, i.e., $650,000, to a money market product offered by another company. This resulted in surrender charges of $28,089.59. [ 30 ] Subsequently, Marie filed a complaint with the Chambre de la sécurité financière, which gave rise to a complaint by the syndic against Thibault. On December 18, 2003, the disciplinary committee of the Chambre de la sécurité financière found Thibault guilty of the four offences alleged, namely: [TRANSLATION] 1.

In Sherbrooke, on or about October 6, 1998, the respondent Jacques-André Thibault falsely or erroneously explained to his client Marie Audet that, by depositing $60,000 in policy number 191467 of the company Concordia, her policy would be released, and reiterated that information the following year upon receipt of a notice of premium, even though that information was incorrect and, in doing so, violated sections 130, 131, 133 and 134 of the BCAP ; 2.

In Sherbrooke, on or about October 26, 1998, the respondent Jacques-André Thibault, when having his client Marie Audet subscribe to a segregated fund contract offered by the Transamerica company and bearing number M04144986, falsely represented to his client regarding the product he had her subscribe to that her investment would generate capital losses or gains, that the guarantee of the segregated fund contract was applicable to the total amount of the investment, whereas it was proportionate, and that the contract surrender charges were minimal, whereas that information was incorrect and, in doing so, violated sections 130, 133, 134, 135, 137 and 157(2) of the BCAP ; 3.

In Sherbrooke, . . . in the winter of 2000 . . . at the time his client Marie Audet paid her taxes, the respondent Jacques-André Thibault placed undue pressure on her to increase the amount of the loan he had her take out from the Toronto Dominion Bank and, in doing so, the respondent violated sections . . . 8, 11 and 19 of the Code of ethics of the Chambre de la sécurité financière ; 4.

In Sherbrooke, on or about October 4, 1998 and on or about January 22, 2000, the respondent Jacques-André Thibault failed to seek full knowledge of the situation and financial needs of his client, and prioritized his personal interests over those of his client Marie Audet by having her take out the following policies: – Maritime-Architect policy number F2256545, face value of 2 million, anticipated premium of $45,000 annually – Transamerica policy number 080139415, face value of 9 million, anticipated premium of $200,000 annually – Transamerica policy number 080126138, face value of 2 million, anticipated premium of $10,000 annually – Transamerica policy number 0800126148, face value of 2 million, anticipated premium of $10,000 annually – Transamerica segregated funds contract number M04144986, initial deposit of 1.1 million

whereas the said transactions were not justified in the client’s interest and were not suitable for her objectives, which were, in particular, to stay at home and raise her children, and in so doing, the respondent violated sections 131, 132, 136, 140 and 145 of the By-law of the Conseil des assurances de personnes respecting market intermediaries in insurance of persons (hereinafter referred to as the “ BCAP ”, adopted pursuant to the Act respecting market intermediaries then in force, as well as sections 10 , 11 , 15 , 19 and 24 of the Code of ethics of the Chambre de la sécurité financière . [ 31 ] The committee found in particular that Thibault did not analyze Marie’s needs and that the financial structure he set up did not reflect the profile of that investor.

Furthermore, Thibault should not have assumed that the returns on the investments would be treated as capital gains. On July 26, 2004, the committee ordered him to pay $6,000 on each of the first three charges and, as regards the last charge, the committee ordered that he be temporarily struck from the organization for one year. [ 32 ] On November 29, 2007, the Court of Quebec, sitting on appeal , upheld the conviction, and the sanction for the first three charges, i.e., Thibault being ordered to pay $18,000.

However, it reduced the suspension under the fourth charge from one year to six months. [ 33 ] Simultaneously, the Audets each sent Thibault and 9073-5671 Québec Inc. a formal notice. Then, Marie instituted an action for civil liability against Thibault and 9073-5671 Québec inc. on November 24, 2003, while Pierre instituted his own action for civil liability against the same parties on December 9, 2003. Both suits alleged that Thibault and 9073-5671 Quebec Inc. had committed various professional faults.

They also sued Transamerica for the difference between the taxes paid and those that would have been owed if the returns had been considered a capital gain. Thibault called Lloyd’s in warranty and the Audets added Lloyd’s as a defendant. [ 34 ] As part of the civil cases, Thibault asked that the disciplinary committee decision be excluded from the evidence. On February 28, 2008, that motion was dismissed by Hélène Langlois J. of the Superior Court ( Audet v. 9073-5671 Québec inc. , Montreal 500-17- 018137-037 (Sup. Ct.)). Thibault then sought leave to appeal from that decision ( 2008 QCCA 712 ), but in vain.

JUDGMENTS A QUO A. Interlocutory judgments [ 35 ] At trial, counsel for Thibault again asked to exclude from the evidence the disciplinary committee decision and the judgment of the Court of Quebec in appeal. De Wever J. dismissed these motions, as he considered that these documents were relevant and did not interfere with the right to a trial before an impartial court ( Audet v. 9073-5671 Québec inc. , (May 21, 2009) Montreal 500-17-018137- 037 (Sup. Ct). B.

Judgment on the merits [ 36 ] In a judgment rendered on August 30, 2010 ( 2010 QCCS 3980 ), De Wever J. concluded that Thibault had committed numerous civil faults incurring his liability toward the Audets. Firstly, he failed to complete his clients’ investor profiles and the analysis of their financial needs. Secondly, he encouraged them to invest in a single Transamerica fund rather than diversify away from the Nikkei Fund, which was, in addition, highly volatile.

Thirdly, he convinced the Audets to take out myriad life insurance policies without ensuring that they had the liquid assets required to pay the annual premiums.

Lastly, he did not inform them correctly about the tax treatment of the returns realized by the funds, or about the consequences withdrawals would have on the guarantee of the principal invested. [ 37 ] As for Transamerica, after pointing out that it brought to market a product for which the general agents had received sufficient and adequate information, the judge noted that it had no obligation to provide the Audets with information, in contrast to Thibault. [ 38 ] Going on to damages, he established them according to the value of the investments, plus a 5% annual return, the percentage that was claimed by the Audets and that seemed reasonable to him, for a period up to March of 2002.

He quantified the losses as follows: [TRANSLATION] Marie Audet Amount invested as of October 30, 1998 $1,397,885.37 Loss of earnings calculated at 5% from October 30, 1998, to March 1, 2002 + $232,853.23 $1,630,738.60 Amount recovered on March 1, 2002 - $656,319.59 total loss $974,419.01 Pierre Audet

Amount invested as of October 30, 1998 $1,278,738.87 Loss of earnings calculated at 5% from October 30, 1998, to March1, 2002 + $213,006.36 $1,491,745.23 Amount recovered on March 1, 2002 niltotal loss $1,491,745.23 [39] He then focused on the action in warranty against Lloyd’s, which he dismissed, as he considered that there were gross faults orgross negligence on Thibault’s part, which excluded the coverage. He also felt that the exclusions were not contrary to public order andtherefore could be set up against the Audets.

In obiter, the judge expressed the opinion that the Audets’ claims were related to one andthe same loss, since the paths taken and the decision made by each of the Audets stemmed from the same faulty recommendations byThibault. The total compensation payable by Lloyd’s to the Audets could therefore not exceed $500,000. [40] Lastly, he ordered Thibault to pay the expert costs of Lloyd’s, and the Audets to pay those of Transamerica.

GROUNDS OF APPEAL [41] According to the Audets, the judge erred in concluding that Transamerica was not liable for the increase in taxes they sustained,whereas the evidence showed that it failed to adequately inform brokers and clients about the tax aspects of the investments offered, andin ordering them to pay costs, including the unreasonable cost of experts ($24,715.68).

They asked the Court to order Transamerica topay the lost tax benefit, i.e., $244,995 in the case of Marie Audet and $274,044 in the case of Pierre Audet, or in the alternative, todismiss their action against Transamerica without costs, given the circumstances. [42] Furthermore, they contend that the judge was wrong to set up against them the exclusions in the professional liability insurancepolicies issued by Lloyd’s, which was tantamount to depriving the clients—the co-insured within the meaning of the policies—of thecoverage that the legislator intended.

Lastly, if the coverage applies, it there were two distinct losses. They therefore ask the Court toorder Lloyd’s to pay $500,000 to each of them. [43] According to Thibault, the judge erred in allowing the decision of the disciplinary committee on guilt and the judgmentrendered in appeal upholding it to be filed. That deprived him of a fair, equitable and impartial trial. He added that the otherwiseadmissible evidence did not establish any fault whatsoever, but an investment strategy adapted to the financial needs and expectations ofthe Audets, which, furthermore, proved very lucrative.

Subsidiarily, if damages must be awarded, they must be much less than thoseordered by the trial judge, who did not take into consideration the Audets’ failure to minimize them, and the call in warranty againstLloyd’s must be allowed since the exclusion provided for in the insurance contracts was void because it was contrary to public order. ANALYSIS I. Thibault’s grounds regarding the disciplinary decisions [44] I am of the opinion that the judge could admit the decisions as evidence. Since Ali v.

Compagnie d’assurance Guardian duCanada, (QC CA), [1999] R.R.A. 427 (C.A.), it has been well established that a penal judgment is a juridical factadmissible as evidence and relevant to a civil dispute dealing with the same acts. This is aimed at preventing contradictory judgmentsfrom being rendered. Thibault J. wrote the following in that ruling: [TRANSLATION] Thus, because of the analogy highlighted by the foundations of articles 610, 893 and 2563 of the Civil Code of Lower Canada, I am ofthe opinion that, in this case, the criminal conviction of Mr. Ali is admissible as evidence.

It is, in this case, a fact relevant to the civildispute and a material evidentiary element. Adducing evidence of a guilty verdict may, depending on the circumstances, enable a civil judge to draw the proper conclusionsregarding the fact that the act alleged was indeed committed.

Given a substantiated penal judgment, as is the case here, establishing thatthe Alis deliberately set fire to their building to receive the insurance, I find it difficult, in the absence of new evidentiary elements, for acivil judge, who is wholly unaware of that fact, to reassess the evidence, which is, moreover, strictly identical, in order to arrive at a

clearly contradictory solution. I cannot see how a civil judge, before whom fraud need be proven only on a simple balance of probabilities, can conclude that two people found guilty of arson following a trial in which their guilt had to be proven beyond a reasonable doubt can “rejudge”, so to speak, on the basis of identical evidence and have two contradictory decisions arrived at . The Alis are criminals who deliberately set fire to a building because they wanted to defraud their insurance company, but ultimately they did not deliberately set fire to the building for payment of the insurance. That is the result!

Of course, there are theories where the accused, even if innocent, may plead guilty, particularly to avoid the cost of a trial. In that case, the civil judge can obviously and without contradiction, place the guilty plea in its context and draw the required conclusions. A penal judgment is a juridical fact that no one may disregard, that is relevant and that can be adduced because of its probative value.

Hence, a civil judge, without giving the penal conviction the authority of res judicata or of fact, is free, according to the circumstances, to draw the appropriate conclusions and presumptions of fact. [Emphasis added.] [ 45 ] As the judge decided, that principle also applies to disciplinary decisions.

Authors Jean-Louis Baudouin and Patrice Deslauriers wrote the following in their treatise, La responsabilité civile , 7th ed., Vol. 2 (Cowansville, Qc.: Éditions Yvon Blais, 2007) No. 2-3 at 5– 7: [TRANSLATION] 2-3 Authority of a disciplinary judgment over a civil trial – A penal judgment does not have the authority of law over a civil judgment, but does have de facto authority. The question also arises as to the impact of a professional’s disciplinary conviction on that professional’s civil liability .

From a procedural standpoint, a number of decisions refuse to admit this type of evidence and order that the allegations of a verdict or a plea in a disciplinary matter be struck. Others, in contrast, admit it as an evidentiary element on the ground that it is relevant evidence, while deferring to the trial judge to assess that relevance. From the standpoint of the merits, case law also appears divided. For some, a disciplinary judgment has an impact on a civil trial, whereas for others, it adds nothing to the merits of a civil dispute.

The admissibility into evidence of a disciplinary judgment finding a professional guilty must be approved for three reasons . First, the burden of proof in disciplinary matters is identical to that in civil matters. Second, the fact of having been judged by one’s peers, in a matter where it is difficult to make a judgment without the adequate technical knowledge, gives a disciplinary judgment great legitimacy. Third, a number of decisions refusing to admit the evidence of a disciplinary conviction, base their reasoning on a Court of Appeal judgment dealing with the impact of a coroner’s report.

That aspect considerably limits its scope, particularly since the question warrants a re-examination in light of the principles and limits set forth in Ali . In our opinion, a disciplinary judgment, as a relevant evidentiary element, has an undeniable de facto authority. Given that, in the two instances (disciplinary and civil), the burden of proof is similar, the same should apply to an acquittal.

Conversely, an investigation by a syndic or the institution of disciplinary proceedings does not constitute relevant evidentiary elements. [Emphasis added.] The Court has expressed its agreement with that opinion in Hamel v. J.C ., 2008 QCCA 1889 , J.E. 2008-1999 at para. 57 . [ 46 ] It is undeniable that the decision of the disciplinary committee and the appeal judgment of the Court of Quebec are facts relevant to the dispute. Was it nevertheless necessary to exclude them to avoid making the civil trial unfair?

I do not think so. [ 47 ] The committee’s decision does not demonstrate the facts mentioned therein, but merely states that, if the facts exist, they constitute an ethical fault. But a breach of a code of conduct by a professional or an intermediary may be indicative of a civil fault, without necessarily constituting one. [ 48 ] In this case, Thibault had a public, impartial hearing of his case by an independent tribunal that analyzed the evidence as a whole, all in accordance with

section 23 of the Charter of human rights and freedoms , R.S.Q., c. C-12. I consider his ground in this regard to be without merit.

II. Grounds of the Audets relating to Transamerica [ 49 ] In 2000, when the Audets received their T3 tax forms from Transamerica for 1999, they were surprised to see that most of the income from their investments was, according to the fund manager, in the category of [TRANSLATION] “other income”, not that of [TRANSLATION] “capital gains”. Thibault had, however, told them that such products generated mainly capital gains, which are more advantageous from a tax standpoint.

This was, in fact, in keeping with the tax treatment reserved for that type of investment by other insurers with which Thibault had previously done business, including the NN company’s index funds. [ 50 ] I find it undeniable that any company offering investment vehicles to the public must inform potential investors of all the relevant facts to help them make an informed decision.

This duty to inform extends, of course, to the consequence of any withdrawal and to the tax treatment of gains or losses. [ 51 ] When the product is marketed by third parties, all relevant information must therefore be communicated, first to the intermediaries, so that they can properly advise potential investors, and then to the investors themselves, when they buy the product.

If, at any point in time, the company that designed the product realizes that the intermediaries do not appear to understand it well, the company has an obligation to inform them again. [ 52 ] In this case, Transamerica did not fully meet this obligation, which was particularly high since, from a tax standpoint, it did not treat the product in the same way as a number of competitors. Its prospectus and the other documents given to the Audets do not explain clearly the way in which the returns are treated in regard to taxes.

Thus, the brochure given to the Audets mentions that the index funds selected produce capital gains and interest income, which is very vague. Thibault, who cut corners, therefore erroneously assumed that the returns would be treated as capital gains, and the Audets understood that this would be the case. [ 53 ] In reality, the vagueness respecting the treatment of the returns on the funds appears to stem from hesitation at Transamerica over uncertainty as to the tax treatment a new product would receive. In March of 2000, Transamerica had to produce a document containing frequently asked questions.

The first question deals with the tax treatment of the funds and reads as follows: “Why do I have so much ‘other income’ on my (insert name here) Index Fund? I expected capital gains”.

In his examination, Richard Sachs, one of Transamerica’s vice-presidents, explained that this was an internal document developed for the call centre to respond to the many questions of brokers and general agents after tax documents were sent to investors. [ 54 ] In addition, in a document entitled “GROWSafe Taxation Tip”, it is written that the company had noted that not everyone was familiar with the tax treatment, and it provided additional information about it. Mr.

Sachs said he thought it was a draft and he added that that lack of knowledge did not worry him unduly since, if large amounts were owed, that was because the funds were performing well. The absence of concern can be justified in the case of an investor with access to the required liquid assets, but not necessarily in everyone’s case. [ 55 ] The following year, in an internal memo dated March 12, 2001, Mr. Di Girolamo, Transamerica’s sales manager, wrote to the company’s vice-presidents to tell them that there was a problem with one of Thibault’s clients, probably Marie Audet, who had just contacted Mr.

Di Girolamo. He wrote that Thibault did not know that most of the returns would be considered income, not capital gains. He defended Thibault by saying that the company had poorly informed its brokers: As far as Mr Thibault is concerned, he too was not aware of this . His dealings with NN and Maritime Life led him to believe that index fund returns were capital gains. In Mr. Thibault’s defense, Transamerica did not do a very good job in educating its brokers as to its

interpretation of the ITA as far as index funds are concerned . Our research resulted in finding only two articles in the past two years regarding this subject. These articles were communicated to MGAs via tax issues in “This Week’s News”. This information does not necessarily filter its way down to the individual brokers. [Emphasis added.] [ 56 ] Given such evidence, only one conclusion is possible: Transamerica did not adequately meet its obligation to inform intermediaries and investors when it launched its new index funds, including the Nikkei Fund.

The trial judge’s conclusion to the contrary constitutes a palpable error in assessing the evidence. [ 57 ] Yet, does that error, aggravated as it is by the failure to recognize a broad legal obligation to inform intermediaries and investors on all the material aspects of the products offered, including their tax treatment, prevail over the trial judge’s conclusion to the extent that Transamerica is exonerated from liability?

I do not think so. [ 58 ] The judge noted that, in any case, there was no causal link between the inadequate information about the tax treatment of the funds and the Audets’ decision to invest in them.

He said the following: [TRANSLATION] [255] The Court believes that the key element that led the Audets to follow Thibault’s recommendation to invest in the Transamerica funds was the 100% guaranteed principal protection after 10 years, not the requirement of capital gains alone. [256] The Court notes the fact that Marie and Pierre understood and agreed that, regardless of the investment vehicle, there would be taxes to pay, although they would be less in the case of capital gains.

[ 59 ] That conclusion is sufficiently supported by the evidence. Marie testified that she never required that increases in the value of her investments be treated as capital gains: [TRANSLATION] Q- Was it discussed that you absolutely wanted the returns to be treated as gains, not as income? A- No. As I told you, I never … I never asked him for anything. He was the one who told me: “That’s it, you must not pay too much tax, so it must be taxed at the lowest rate, and the lowest rate is on capital gains”.

Rather, she stated that what she asked of Thibault was to grow the unexpected capital she had received from her mother: [TRANSLATION] A- As I’ve already said, I was really surprised to have those amounts. I didn’t know how to manage such a sum. I asked that the principal be protected and that it grow. Q- And by doing . . . A- I had no other expectations besides that. . . . Q- And who raised the question of capital gains? A- It was Mr. Thibault. Q- In what circumstances? A- But it was a sales argument for the segregated funds; it was an advantage of the product. Q- Do you see it as an advantage?

A- For that product, yes. Yes, it was an advantage. [ 60 ] It is true that Pierre appeared more affirmative on that point: [TRANSLATION] A- We talked about the tax treatment because, well, what we wanted was to have capital gains, not interest income, for the simple reason that a capital gain is taxed less than interest income. He also said, however, that at first his expectations were that the principal was protected and would grow, without insisting on the tax treatment: [TRANSLATION] Q- Now, you yourself mentioned that you went to Mr. Thibault to talk about protecting your principal and seeing it grow.

For you,

what did “see your principal grow” mean? A- I knew that Mr. Thibault had knowledge, extensive investment knowledge, and I expected that he would see to it that the money grew, but I did not have expectations of five (5), ten (10), twenty percent (20%). What was important was to protect the principal and make it grow. But my expectations were not . . . I had no expectations. Q- O.K. And were you the one who raised the question of capital gains? A- No. When we arrived with . . . when we arrived with . . . at Mr. Thibault’s, I did not say: hey, I absolutely want capital gains. I think that was understood. Mr.

Thibault invested in the stock market. To my mind, it was understood that the money would be invested in the stock market and the returns would be capital gains. Q- Did you require that the returns be capital gains? A- No, I didn’t require that. [ 61 ] Given such evidence, I cannot conclude that the judge committed a dominant error in deciding that the tax treatment was not a determinative element in the Audets’ decision to invest in the Transamerica funds. [ 62 ] As for the consequences of the premature withdrawals of part of the funds from the guaranteed principal, Transamerica’s documents explained them.

Of course, the calculation formula may seem complex, but nothing indicates that the intermediaries were incapable of understanding its scope and adequately advising their clients. [ 63 ] In these circumstances, the Audets did not demonstrate that the trial judge erred in concluding that Transamerica caused them no injury. Nonetheless, I am of the opinion that, but for his error in law regarding the scope of the obligation to inform and his resulting error in interpreting the evidence, the judge would not have ordered the Audets to pay Transamerica’s costs.

Rather, given the circumstances described above, he would have concluded that the cause of action against Transamerica should be dismissed without costs . I find that singularly obvious with respect to the costs of an expert whose report deals particularly with Transamerica’s tax treatment of the returns on the funds. [ 64 ] Hence, it is appropriate to allow, without costs, the alternative conclusion sought by the Audets against Transamerica. III.

Grounds related to Lloyd’s [ 65 ] For the purpose of these proceedings, Thibault was working through the intermediary of his company 9073-5671 Québec Inc., a firm within the meaning of the Act respecting the distribution of financial products and services , R.S.Q., c. D-9.2 (ADFPS), which had to subscribe for civil liability insurance:

76. Legal persons who register as firms must establish that they have subscribed for liability insurance that is consistent with the requirements determined by regulation . They must also establish that every representative acting on their behalf without being an employee has liability insurance that is consistent with the requirements determined by regulation. Where an insurance fund has been established, such legal persons and every representative acting for them without being an employee must, instead, pay the insurance premium fixed by the Authority. . . . 83.

A firm must, while registered, maintain liability insurance that is consistent with the requirements determined by regulation or, if an insurance fund has been established, pay the insurance premium fixed by the Authority. The firm must also ensure that every representative acting on its behalf without being an employee carries liability insurance that is consistent with the requirements determined by regulatio n or, if an insurance fund has been established, has paid the insurance premium fixed by the Authority. [Emphasis added.] 76.

La personne morale qui s’inscrit comme cabinet doit démontrer qu’elle a souscrit une assurance conforme aux exigences déterminées par règlement pour couvrir sa responsabilité . Elle doit aussi démontrer que tout représentant qui agit pour son compte sans être un des employés est couvert par une assurance conforme aux exigences déterminées par règlement pour couvrir sa responsabilité. Lorsqu’il existe un fonds d’assurance, la personne morale et le représentant qui n’est pas un de ses employés doivent plutôt acquitter la prime d’assurance fixée par l’Autorité. […] 83.

Un cabinet doit, tant qu’il est inscrit, maintenir une assurance conforme aux exigences déterminées par règlement, pour couvrir sa responsabilité ou, s’il existe un fonds d’assurance, acquitter la prime d’assurance fixée par l’Autorité à cette fin.

Il doit aussi s’assurer que tout représentant qui agit pour son compte sans être un de ses employés est couvert par une assurance conforme aux exigences déterminées par règlement pour couvrir sa responsabilité ou, s’il existe un fonds d’assurance, qu’il a acquitté la prime d’assurance fixée par l’Autorité à cette fin. [je souligne] Furthermore, Thibault acted as an independent representative and as such had to have civil liability insurance:

131. Representatives who register as independent representatives must establish that they have subscribed for liability insurance that is consistent with the requirements determined by regulation . Where an insurance fund has been established by the Authority, the representatives must, instead, pay the insurance premium fixed by the Authority. Partnerships that register as independent partnerships must do likewise with respect to their partners and the representatives employed by them. . . . 136.

Independent representatives must, while registered, maintain liability insurance that is consistent with the requirements determined by regulation or, if an insurance fund has been established, pay the insurance premium fixed by the Authority. Independent partnerships must do likewise with respect to their partners and the representatives they employ. [Emphasis added.] 131. Pour s’inscrire comme représentant autonome, un représentant doit démontrer qu’il a souscrit une assurance conforme aux exigences déterminées par règlement pour couvrir sa responsabilité .

Lorsqu’il existe un fonds d’assurance, le représentant doit plutôt acquitter la prime d’assurance fixée par l’Autorité. Une société qui s’inscrit comme société autonome doit faire de même à l’égard de tous ses associés et de tous les représentants qui sont à son emploi. […] 136. Un représentant autonome doit, tant qu’il est inscrit, maintenir une assurance conforme aux exigences déterminées par règlement pour couvrir sa responsabilité ou, s’il existe un fonds d’assurance, acquitter la prime d’assurance fixée par l’Autorité à cette fin.

Une société autonome doit faire de même à l’égard de tous ses associés et de tous les représentants qui sont à son emploi. [je souligne] [ 66 ] In this case, it is undeniable that the policies issued by Lloyd’s, both to 9073-5671 Québec Inc. and to Thibault, were aimed at meeting the obligation to maintain insurance that complies with the regulatory requirements and that they constituted liability insurance policies for the benefit of Thibault’s clients. [ 67 ] Pursuant to

article 2501 of the Civil Code of Québec , the Audets could therefore sue Lloyd’s, not as co-insured, [2] but as injured third persons: 2501. An injured third person may bring an action directly against the insured or against the insurer, or against both. The option chosen in this respect by the third person injured does not deprive him of his other recourses. 2501. Le tiers lésé peut faire valoir son droit d’action contre l’assuré ou l’assureur ou contre l’un et l’autre.

Le choix fait par le tiers lésé à cet égard n’emporte pas renonciation à ses autres recours. [ 68 ] I hasten to add that we have two distinct injured third persons in this case. Indeed, the Audets were two separate clients of Thibault, not a single client. In fact, they did not invest jointly.

At all relevant times, their investments were kept separate and their relations with Thibault were not of the same duration or for the same products. [ 69 ] In these circumstances, Lloyd’s argument that it was a matter of two claims stemming from the same loss and, therefore, that its liability, if it is liable, is limited to $500 000 for the two of them, rather than for each of the Audets, is not convincing. [ 70 ] It is true that Thibault’s liability insurance contract provides for a coverage limit of $500 000 per loss, an expression broadly defined in clause 5 of the contract: [TRANSLATION]

(

g) the word “loss” means one or more claims resulting from the same circumstances or the same losses when professional services are rendered or should have been rendered to one or more people. [ 71 ] The contract characterizes a claim as follows: [TRANSLATION] (

f) The words “claim” and “claims” mean any oral or written monetary request, as well as any oral or written allegation received by the Insured and relating to the failure to render professional services or to a fault, error, negligence or failure in providing such services; [ 72 ] In short, a claim is a monetary request alleging a fault in the services that were provided or those that the professional failed to provide.

A single loss can give rise to a number of claims (for example, if the client is a partnership, each of the partners could assert a claim stemming from the same loss, i.e., a failure to render adequate services resulting in a loss). [ 73 ] To consider Marie and Pierre, who each submitted a claim in separate actions, as victims of the same investment strategy does not in any way mean that there was only one loss. It is not enough to repeat the same fault in regard to different clients in order to conclude that a single loss occurred.

The word “loss” cannot be interpreted so broadly without distorting the coverage associated with that type of professional liability insurance. [ 74 ] Contrary to the trial judge, who committed an error in law in this regard, it should be accepted that there were two separate losses, each giving rise to a right to compensation of a maximum of $500,000, if there is coverage. [ 75 ] As regards Lloyd’s, the debate then boils down to defining the nature of the faults committed, if any, since the policy excludes gross faults and gross negligence, and, if necessary, to determining the validity of the exclusions. IV.

Thibault’s faults and their nature [ 76 ] The trial judge found fault with Thibault for failing to complete the investor profile in writing, improperly individually analyzing the needs of each of the Audets and proposing investments, policies and loans that were not suitable to his clients’ needs and capacities. The trial judge concluded that these faults were committed based on, in particular, the relevant provisions of the ADFPS and the Code of ethics of the Chambre de la sécurité financière , R.R.Q., c. D-9.2, r. 3. [ 77 ]

Section 27 of the ADFPS provides that representatives must gather all the information required from clients to identify their needs in order to propose to them the appropriate products: 27. Insurance representatives must personally gather the information that is necessary to assess a client’s needs, in order to propose the insurance product that best meets those needs . [Emphasis added.] 27.

Un représentant en assurance doit recueillir personnellement les renseignements nécessaires lui permettant d’ identifier les besoins d’un client afin de lui proposer le produit d’assurance qui lui convient le mieux . [je souligne] [ 78 ] The Code of ethics of the Chambre de la sécurité financière supplements that obligation. First, it states in sections 12 and 13 that a representative must act with integrity, in the client’s interest, not his own, by providing the client with all necessary or useful information, after inquiring about the characteristics of the products offered . As regards that last point,

section 15 requires that the representative have a complete understanding of the facts . These provisions are worded as follows:

12. A representative must act towards his client or any potential client with integrity and as a conscientious adviser, giving him all the information that may be necessary or useful. He must take reasonable steps so as to advise his client properly. 13. A representative must fully and objectively explain to his client or any potential client the type, advantages and disadvantages of the product or service that he is proposing to him and must refrain from giving information that may be inaccurate or incomplete. . . . 15.

Before providing information or making a recommendation to his client or to any potential client, a representative must seek to have a complete understanding of the facts. 12. Le représentant doit agir envers son client ou tout client éventuel avec probité et en conseiller consciencieux, notamment en lui donnant tous les renseignements qui pourraient être nécessaires ou utiles. Il doit accomplir les démarches raisonnables afin de bien conseiller son client. 13.

Le représentant doit exposer à son client ou à tout client éventuel, de façon complète et objective, la nature, les avantages et les inconvénients du produit ou du service qu’il lui propose et s’abstenir de donner des renseignements qui seraient inexacts ou incomplets. […] 15.

Avant de renseigner ou de faire une recommandation à son client ou à tout client éventuel, le représentant doit chercher à avoir une connaissance complète des faits. [ 79 ] Thus, knowledge of the investor’s profile, an objective analysis of the investor’s needs and a thorough understanding of the products offered are required to properly advise the client. [ 80 ] In this case, Pierre testified that Thibault asked them no questions about their needs, expectations or sources of income.

Since nothing was written, it was up to Thibault to convince the trial judge that he nonetheless seriously sought to know the financial and personal situation of each of the Audets, as well as their needs. When he testified, Thibault said that, at the start, he knew that Pierre had a home with a hypothec and that he earned about $50 000 a year. He added that Pierre told him that he did not need the money from the inheritance, he wanted it to be guaranteed and he wanted it to grow.

As for Marie, he knew that she had two children, a B.A. in administration and a house with a small hypothec, and that she earned about $36 000. She also reportedly told him that she did not need the money from the inheritance in order to live. He claimed that he did not need to know anything else in order to properly advise these two clients, whose sole objective was to protect the amount inherited and to have it grow. [ 81 ] I agree with Thibault that this did indeed appear to be their objective.

The purchase of the Transamerica funds, which under certain conditions guaranteed at term the principal invested, made it possible at first glance to achieve the first objective. As for obtaining a return, there is no doubt that the purchase of the index funds, particularly the Nikkei Fund, more than met the second objective, at least in 1999.

The absence of diversification at certain times in the funds selected, for example, in 1998 when units of the Nikkei Fund alone were purchased, does not constitute a fault generating an injury in this case, for two reasons: the principal was guaranteed and the results showed an impressive return. The absence of diversification may be considered a risky strategy, and perhaps even an ethical fault, but it did not cause an injury in this case, as compared with a diversified portfolio.

Much to the contrary. [ 82 ] The cause of the setbacks experienced by the Audet investors is found elsewhere: an exceptional performance in 1999 of the recommended funds resulted in taxes that exceeded the available liquid assets of each of the Audets. Marie had taxable income of over $700,000 in 1999, whereas she had annual own-source income of $30,000 a year.

Pierre had investment income on paper of about $700,000 for the same period, whereas he had income from other sources of about $40,000. [ 83 ] In these circumstances, the Audets had only two options to discharge their tax burden: borrowing the amounts required or disposing of part of their investment in the funds in order to recover liquid assets. The two options each had their share of negative consequences.

Borrowing substantial amounts annually to pay one’s taxes implies the accumulation of significant liabilities and the provision of guarantees (leveraged loans), not to mention the interest payable on the loans, which also requires liquid assets, a problem that Thibault proposed to bypass through the accrual of interest over 10 years.

The other option, namely, to cash in part of the investments, would proportionately reduce the guaranteed principal and thus the second objective, i.e., to protect the whole of the principal invested, would not be achieved. [ 84 ] What is more, the liquid assets issue was exacerbated by Thibault’s repeated insistence, which the Audets finally complied with, that they take out life insurance policies that required the annual payment of considerable premiums of up to $279,000 in 2000 in Marie’s case and $309,600 in Pierre’s.

The evidence shows that the Audets did not have the resources to take out these multiple insurance policies and that it was only at Thibault’s repeated insistence that he managed to convince them to take them out. In fact, the disciplinary committee’s decision criticizes Thibault for having Marie take out those insurance policies and for having unduly pressured her.

In reality, Thibault’s sustained insistence regarding the life insurance policies is explained only by the substantial commissions that he derived from the sale of that type of product. [ 85 ] In these circumstances, further loans then became the only possible option, with the result that Pierre found himself with a loan of $1,146,527 on February 22, 2001, and Marie, with a loan of $1,206,755.82, on February 23, 2001. [ 86 ] All things considered, the evidence in the record shows that the investment strategy that Thibault proposed to each of the Audets was not suitable for their situation because of his poor knowledge of their situation, the products recommended and his desire to

receive the most in commissions as possible. The trial judge’s conclusion that faults were committed in that regard is amply supported bythe evidence (the judge also noted other faulty acts, but they were incidental to the two faults I have just described). [87] How then should these two faults be characterized? According to the trial judge, they were gross faults or gross negligence, adefinition that suited Lloyd’s, which could thus invoke the exclusions set out in the policy. Therefore, it must be determined whetherthese faults constitute gross faults or gross negligence within the meaning of the policies.

Since these expressions are not defined inLloyd’s liability insurance policies, we must rely on the law in force in Quebec. [88] Commenting on gross negligence, Professor Didier Lluelles, in Précis des assurances terrestres, 5th ed. (Montreal: Thémis,2009), wrote at 197: [TRANSLATION] It is positive conduct or a particularly serious absence of care that the most reckless of reasonable people would not have adopted. Theconduct of the insured is so unbelievable that, if the insured had wanted to cause the injury, he or she would not have acted otherwise. [89] As for a gross fault, according to

article 1474 of the Civil Code of Québec, it is a fault showing recklessness, gross carelessnessor gross negligence: 1474. A person may not exclude or limit hisliability for material injury caused to anotherthrough an intentional or gross fault; a gross faultis a fault which shows gross recklessness, grosscarelessness or gross negligence. He may not in any way exclude or limit hisliability for bodily or moral injury caused toanother. [Emphasis added.] 1474.

Une personne ne peut exclure ou limiter saresponsabilité pour le préjudice matériel causé àautrui par une faute intentionnelle ou une fautelourde; la faute lourde est celle qui dénote uneinsouciance, une imprudence ou une négligencegrossières.

Elle ne peut aucunement exclure ou limiter saresponsabilité pour le préjudice corporel oumoral causé à autrui. [je souligne] Jean-Louis Baudouin and Pierre-Gabriel Jobin, Les obligations, 6th ed., by Pierre-Gabriel Jobin, with the collaboration of NathalieVézina (Cowansville, Qc.: Yvon Blais, 2005) No. 929 at 951, commented on that provision as follows: [TRANSLATION] By gross fault, the legislator means, in its own words, a fault “which shows gross recklessness, gross carelessness or gross negligence”and therefore a complete disregard for the interests of others.

That is a more or less successful attempt to codify the jurisprudentialconcept of gross fault, which therefore continues to apply today.

To be more specific, it can be said that, although it is not malicious,such a fault would not be committed [TRANSLATION] “even by the least careful person”—a concept that is nonetheless a little lessrestrictive than Pothier’s ([TRANSLATION] “a fault that consists in not giving the interests of others the attention that the most carelessand stupid of people would give their own interests”). [90] In short, a gross fault – gross negligence being nothing more than one form of such, like recklessness even when consideredrash – stems from abnormally deficient, even inexcusable, behaviour that shows complete disregard for others (Empire Cold Storage Cov.

Cie de volailles Maxi ltée, [1995] R.R.A. 846, J.E. 95-1986 (C.A.)). Such behaviour is so shocking that the law does not allow itsauthor to exclude his or her liability (art. 1474 C.C.Q.). [91] Moreover, a gross fault differs from an intentional fault. An intentional fault is characterized by conduct that seeks not only therealization of the risk, but also the realization of the injuries thereby caused, that is, the consequences of such conduct (Professor Sébastien Lanctôt and Mtre. Paul A.

Melançon, Commentaires sur le droit des assurances : textes législatifs et réglementaires, 2nd ed.(Montreal, LexisNexis, 2011) at 142; Goulet v. Cie d’assurances-vie Transamerica, 2002 SCC 21 , [2002] 1 S.C.R. 719). [92] In my opinion, there is, in this case, incompetence as regards the index funds, and a conflict of interest as regards the lifeinsurance policies. Thus, the lack of knowledge about the tax impact is explained by a failure to check with Transamerica and an ill-founded presumption that Transamerica’s index funds were dealt with, from a tax standpoint, like those offered by other insurers.

In thisregard, Thibault’s behaviour does not appear to have differed from that of other intermediaries who sold the index funds, asdemonstrated by the testimony of certain Transamerica representatives following receipt by a great many investors of tax formsindicating investment income, not capital gains.[3] So there was no gross fault, but rather incompetence.

It’s characterization by the trialjudge as a gross fault is an error in law concerning the nature of a fault. [93] As for the Audets taking out enormous life insurance policies at the repeated insistence of Thibault, it is characterized byThibault’s interest in earning commissions and an inexcusable recklessness regarding the consequences that could result for the client.Like the trial judge, I find that such conduct constitutes a gross fault.

I see no indication, however, of an intent to cause the disastrousconsequences for the client or to cause the client injury, which could be indicative of an intentional fault.

V. Causal link [ 94 ] The judge did not explicitly discuss the causal link between the faults described above and the damage sustained. He did write, however, that the Audets’ situation stemmed from Thibault’s faulty recommendations: [TRANSLATION] [348] It is the Court’s opinion that the paths taken by Marie and Pierre between October of 1998 and March of 2002 and the decisions they made during that period stem from the same faulty recommendations of Thibault.

In any event, since the judge awarded the Audets damages after concluding that Thibault committed faults, he necessarily concluded that there was indeed a causal link. I agree. [ 95 ] In reality, we have here two series of faulty acts that constitute concurrent causes of the alleged injuries. The first concerns a lack of knowledge of the tax treatment of the returns generated by the index funds that were sold, which resulted in major cash shortfalls and of the terms of partial withdrawals, which interfered with the objective of guaranteeing the initial principal.

The second shows a conflict of interest that prompted the purchase of policies that were inappropriate for the clients’ situation, which exacerbated their liquidity problem. [ 96 ] The combination of these two series of faulty acts required the Audets to take out enormous loans. The leverage loans then became threatening when the markets fell. Fearing that the loans would be recalled, the Audets had to resign themselves to withdrawing money from the funds to repay the loans.

In short, Thibault’s faults resulted in a situation that became untenable for the Audets and culminated in the liquidation of their investments and substantial losses. [ 97 ] There is indeed a logical, direct and immediate causal link therefore between Thibault’s faults and the losses alleged by the Audets VI. Damages [ 98 ] Pursuant to art. 1611 of the Civil Code of Québec , damages compensate the creditor for the gain of which he was deprived, amongst other things: 1611. The damages due to the creditor compensate for the amount of the loss he has sustained and the profit of which he has been deprived.

Future injury which is certain and able to be assessed is taken into account in awarding damages. 1611. Les damages dus au créancier compensent la perte qu’il subit et le gain dont il est privé. On tient compte, pour les déterminer, du préjudice futur lorsqu’il est certain et qu’il est susceptible d’être évalué. [ 99 ] The trial judge decided to compensate the Audets for the loss of the amounts invested and the gains of which they were deprived. His calculation was based on the amounts invested in October of 1998, plus a rate of return of 5%.

As indicated earlier, that resulted in an amount of $974,419.01 for Marie Audet and $1,491,745.23 for Pierre Audet. [ 100 ] Thibault argued that the Audets caused part of the losses by suddenly liquidating their investments. The judge discussed that aspect convincingly when he wrote the following: [TRANSLATION] [291] It is the opinion of the Court that these losses should not be reduced on the grounds that the Audets did not minimize their damage. [292] Indeed, the evidence shows that Thibault himself abandoned his clients when he realized they no longer wanted to follow his advice unconditionally.

The most striking example of that abandonment was his refusal to accompany and support Marie when she decided to meet with a Transamerica representative to discuss the problems related to taxation of the gains. [ 101 ] Thibault also contended that the judge did not take into account the withdrawals by the Audets for their own purposes, i.e., to pay the premiums of the life insurance policies and for their personal expenses. This is true, but I do not see in that a reviewable error. First, the amounts used for personal expenses were modest.

Second, there is no reason to consider the amounts used to invest in the life insurance policies, which have been forfeited because the insured could not pay the premiums. [ 102 ] Thibault also argued that Marie acknowledged in her re-amended motion to institute proceedings that she recovered $680,000,

whereas, in his calculation, the judge used $656,319.59 as the amount recovered. First, at the hearing, Marie did say that she was leftwith a balance of $656,000, Second, the Audets alleged that they provided the judge with the spreadsheets, which were not submitted tous. Therefore, the Court is not in a position to vary the judge’s conclusion on that point. [103] Thibault also contended that in March of 2000, after the amounts were frozen, the value of Marie’s investment was set at$2,886,621, which means that in March of 2010, she could have withdrawn that amount.

This is hypothetical and the judge was right notto take it into account since Marie had to repay the leveraged loan that Thibault pressured her into taking out and she did not have accessto other sources of liquid assets to do so. [104] Lastly, Thibault argued that the judge should not have based his calculation on a return of 5% that would have been obtainedwith an investment certificate when the Audets knew about that product and chose not to invest in it.

The argument is not convincing.The Audets did not choose that product because Thibault dangled the prospect of better returns with other products. [105] All things considered, I am of the opinion that the judge did not err in awarding damages. VII. Insurer’s liability [106]

Article 2464 of the Civil Code of Québec applies to damage insurance, i.e., property insurance and liability insurance (art. 2396C.C.Q.). It sets forth the basic rules for exclusions from those policies: 2464. The insurer is liable to compensate forinjury resulting from superior force or the fault ofthe insured, unless an exclusion is expressly andrestrictively stipulated in the policy. However,the insurer is never liable to compensate forinjury resulting from the insured’s intentionalfault.

Where there is more than one insured, theobligation of coverage remains in respect ofthose insured who have not committed anintentional fault. Where the insurer is liable for injury caused by aperson for whose acts the insured is liable, theobligation of coverage subsists regardless of thenature or gravity of the fault committed by thatperson. [Emphasis added.] 2464. L’assureur est tenu de réparer le préjudicecausé par une force majeure ou par la faute del’assuré, à moins qu’une exclusion ne soitexpressément et limitativement stipulée dans lecontrat.

Il n’est toutefois jamais tenu de réparerle préjudice qui résulte de la faute intentionnellede l’assuré.

En cas de pluralité d’assurés,l’obligation de garantie demeure à l’égard desassurés qui n’ont pas commis de fauteintentionnelle.

Lorsque l’assureur est garant du préjudice quel’assuré est tenu de réparer en raison du faitd’une autre personne, l’obligation de garantiesubsiste quelles que soient la nature et la gravitéde la faute commise par cette personne. [je souligne] [107] In the case of a civil liability insurer, the following principles must be noted: – the insured cannot take out insurance covering his intentional fault (art. 2464(1)); – the parties to the policy can agree on exclusions (arts. 2464 and 2499); – when there are several insured, the intentional fault of one does not result in the loss of coverage of the others (art. 2464(1)); – the specific exclusions in the policy are null and void in regard to the liability of the insured stemming from the acts of people forwhich the insured is responsible, such as a child, an agent or servant, a principal or an employee, even though the acts can becharacterized as an intentional fault or a fault in the nature of those excluded by the policy (art. 2464(2)). [108]

Article 2464 of the Civil Code of Québec decrees the exclusion of intentional fault because it distorts insurance contracts, whichare based on the random nature of the risk insured (Odette Jobin-Laberge, “La faute intentionnelle : approche objective et subjective”, inService de la formation continue, Barreau du Québec, Développements récents en droit des assurances, Vol. 147 (Cowansville, Qc.:Yvon Blais, 2001) 139 at 145; Goulet v.

Cie d’assurances-vie Transamerica, supra). [109] Case law teaches that this exclusion is interpreted strictly and the burden of establishing its existence rests with the insurer(Royale du Canada, compagnie d’assurance v. Québec (Curateur public), [2000] R.R.A. 594 (C.A.)). That is not the case here whereLloyd’s did not argue the exclusion. [110] In passing, I would like to point out that the exclusion cannot be set up against anyone but the insured who committed anintentional fault, not against the co-insured, as indicated at the end of the first paragraph of

article 2464 of the Civil Code of Québec(Caisse populaire des Deux Rives v. Société mutuelle d’assurance contre l’incendie de la Vallée du Richelieu, (SCC),[1990] 2 S.C.R. 995). In addition, in liability insurance matters, the insurer must repair the injury resulting from the intentional faultcommitted by a person whose insured is liable, such as an employee or a child who are insured (named or unnamed within the meaningof the policy) as indicated in article 2464(2) in fine of the Civil Code of Québec. [111] Subject to what I have just said, an intentional fault is therefore not covered by an insurer. This means that the victim’s recourse

is in principle limited to an action against the author of the fault. To more adequately protect the clients of some service providers should they commit an intentional fault, the legislator requires, in many cases, that a compensation fund be established. In the case of financial service providers, that is the case under

section 258 ADFPS , which reads as follows: 258. A financial services compensation fund is hereby established under the name “Fonds d’indemnisation des services financiers”. The fund shall be assigned to the payment of indemnities payable to victims of fraud, fraudulent tactics or embezzlement for which a firm , an independent representative, an independent partnership or a mutual fund dealer or scholarship plan dealer registered in accordance with Title V of the Securities Act (chapter V-1.1 ) is responsible. [Emphasis added.] 258. Est institué le “Fonds d’indemnisation des services financiers”.

Ce fonds est affecté au paiement des indemnités payables aux victimes de fraude, de manœuvres dolosives ou de détournement de fonds dont est responsable un cabinet, un représentant autonome, une société autonome ou un courtier en épargne collective ou en plans de bourses d’études inscrit conformément au

titre V of the

Loi sur les valeurs mobilières (chapitre V-1.1 ). [je souligne] As we can see, most of the possible intentional faults, if not all, can give rise to compensation by the fund (to the extent provided for by regulatory oversight, which can lay down limits and exclusions). [ 112 ] In this case, Lloyd’s alleged that Thibault committed one or more gross faults, which brings me to discuss the second principle set forth earlier, namely, that concerning exclusions. As indicated above, the parties to a policy can, pursuant to

article 2464 of the Civil Code of Québec , agree on the scope of a liability policy, particularly by excluding certain categories of fault by the insured. Therefore, in principle, Lloyd’s could agree with Thibault, in regard to himself or his company, to certain exclusions in the policy. This was what was done, in particular, for gross faults and gross negligence, in clause 6 (l): [TRANSLATION] 6. EXCLUSIONS This policy does not apply to claims based on, attributable to or stemming from: . . . (

l) a gross fault, gross negligence, willful blindness or the taking of a calculated risk. [ 113 ] For the reasons given earlier, I am of the opinion that, in this case, with respect to the sale of the index funds by Thibault, it is not a question, in law, of a gross fault or gross negligence but of Thibault’s incompetence instead.

The injury stemming from that fault is therefore covered by Lloyd’s applicable policy, up to $500,000, for each of the Audets. [ 114 ] In addition, the obligation to compensate cannot be cancelled by the fact that the injuries result in part from a fault excluded by the policy ( La Sécurité nationale v. Éthier , [2001] R.R.A. 614 (C.A.) ). In that regard, Quebec law seems to differ from common law.

Lloyd’s is therefore obliged to compensate the Audets for the injury stemming from Thibault’s professional faults. [ 115 ] As for the injury resulting from the purchase of the life insurance policies, it is the consequence of a gross fault, a risk that the policy excludes. So it must be determined whether the exclusion is valid and, if so, whether it can be set up against the Audets. [ 116 ] In my opinion, it is valid, since it is authorized by

article 2464 of the Civil Code of Québec , a provision applicable to all damage insurance contracts that is not otherwise excluded by the particular legislation applicable here, namely, the ADFPS . Although the ADFPS, in its provisions cited above, does in fact oblige the holders of a licence to have liability insurance in accordance with the requirements determined by regulation, it in no way excludes the application of

article 2464 of the Civil Code of Québec. [ 117 ] As for the regulation adopted pursuant to the ADFPS , it cannot repeal or amend

article 2464 of the Civil Code of Québec . Of course, it can provide that, to register, a firm or an independent representative must hold coverage of $100,000 or $1,000,000 per loss or require it to hold a policy that does not exclude gross fault or gross negligence. If the policy obtained does not comply with those requirements, the firm or representative should not be allowed to register or the registration should be revoked, as the case may be. However, the contract entered into between the firm or the representative and the insurer, in accordance with the requirements of the

Civil Code of Québec , including

article 2464, must take precedence. Thus, if the regulation requires coverage of $1,000,000 per loss and the policy agreed upon is limited to $100,000, I cannot conceive of a third-person victim suing the professional liability insurer for $1,000,000, unless there is a finding that, despite its name, the contract is actually an underwriting deposit. [ 118 ] Pursuant to the regulations currently in force, a firm, an independent representative and an independent partnership must be covered by a professional liability policy covering liability resulting from faults, errors, negligence and omissions committed in the performance of their activities, as stipulated in

section 29 of the Regulation respecting firms, independent representatives and independent partnerships , R.R.Q., c. D-9.2, r. 2: 29. Except regarding the category of claims adjuster employed by an insurer, the insurance contract covering the liability of an independent representative, firm or independent partnership must satisfy the following conditions : . . .

(3) The insurance contract must also contain provisions to the following effect: (

a) in the case of a firm, that the coverage shall extend to the liability arising from the fault, errors, negligence, or omissions committed in the pursuit of the firm’s activities and from those committed by its mandataries, its employees or the trainees of its representatives, in the performance of their duties, regardless of whether or not such persons are still so engaged on the date of the claim; (

b) in the case of an independent representative, that the coverage shall extend to the liability arising from the fault, errors, negligence, or omissions committed in the performance of his duties and those committed by his mandataries, his employees or his trainees in the performance of their duties, regardless of whether or not such persons are still so engaged on the date of the claim; (

c) in the case of an independent partnership, that the coverage shall extend to the liability arising from the fault, errors, negligence, or omissions committed in the pursuit of activities of his partners and the representatives in his employ and from those committed by their mandataries, their employees or the trainees of the partners and representatives in his employ, currently or in the past,

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