On March 29, 2011, Judge Line Samoisette of the Quebec Superior Court rendered a decision1 received in great tumult by the legal community and particularly by professional liability insurers.This decision, which rejected a claim against the insurer E&O of a financial planner on the grounds of gross fault, has been overturned in appeal.
More particularly, the Quebec Court of Appeal2 refused to assimilate gross fault to significant incompetence. Setting the record straight, it overturned the decision of the Superior Court and ordered the professional liability insurer to compensate a couple having no knowledge of investments, who suffered considerable losses due to questionable advice they received from their financial planner.
We will review the facts of this case before proceeding to analyse the Superior Court and Court of Appeal decisions.
The Facts
The financial planner first met with the Plaintiffs in 1992. At that time, the Plaintiffs had a low risk tolerance as well as very little knowledge of investments. Their investment profile type was conservative.
Over the years, the financial planner offered them various types of investments, including leveraged loans. These investments were made by using the couple’s personal assets as well as liquidity from their businesses.
For several years, the Plaintiffs relied entirely on the advice they received from their financial planner to ensure them with a comfortable retirement.
The financial planner advised them to invest in the Balance Return Fund (BRF) whose emitter is Norshield International (Norshield) and whose registered office is located in the Bahamas. He told the Plaintiffs that he knew this investment company and reassured them by saying that the capital and returns were guaranteed.
The financial planner also advised them to withdraw funds from their RRSP portfolios and to invest it into MRACS Management Ltd. (MRACS), a company related to Mount Real group.
Plaintiffs do not know that MRACS and BRF were interrelated companies and that they made high-risk investments.
During the spring of 2006, MRACS went bankrupt. As for BRF, it did not go bankrupt, but the Plaintiffs are still trying to recover their investments.
Having suffered considerable losses, the Plaintiff’s brought an action for the amount of 600 000$ against the financial planner, the firm that employed him and their insurer under an E&O policy.
However, only the insurer could be ordered to pay the damages as the financial planner and the firm made an assignment for bankruptcy.
Judgment of the Superior Court
Justice Line Samoisette concluded that the financial planner was at fault considering that he did not act in a prudent and diligent manner. Indeed, she ruled that the financial planner did not consider the Plaintiffs’ investment profile in choosing products that did not suit them, he did not properly inform them of the returns and risks associated with their investments. Moreover, he would have committed another fault, namely to exceeded the limits of his financial planner certificate.
Although the financial planner committed two competing faults, one of which was covered by the insurance policy, the judge concluded that it was the bad advice which caused the Plaintiffs’ loss.
The judge considered that the financial planner used the Plaintiffs’ trust to pressure them into investing nearly all of their assets in high-risk investments, all the time knowing that they had no financial knowledge and a low tolerance for risk. By doing so, the financial planner ignored the Plaintiffs’ investment profile and misled them by declaring that their investments would be guaranteed. The trial judge concluded that the financial planner grossly and inexcusably violated his obligations in this regard.
Therefore, the Superior Court rejected the claim against the insurer applying the exclusion for gross fault found in the policy.
Judgment of the Court of Appeal
The Quebec Court of Appeal unanimously overturned the decision in first instance in concluding that the financial planner’s fault was covered by the E&O insurance policy.
Although it is clear to the Court that the financial planner practiced his profession in a wrongful manner, it ruled that the financial planner’s conduct consisted of a significant incompetence and not a gross fault.
The Court would have concluded to the gross fault of the financial planner should he had not provided to the Plaintiffs’ affairs the care that even the least careful person and dumbest one would have provided to his. A gross fault is a slightly better behaviour than the one of an irresponsible person lacking judgment.
According to the Court of Appeal, to attenuate the concept of gross fault by associating it to a behaviour that does not reach the degree of carelessness, recklessness and gross negligence would be contrary to the principle that the insurance guarantee should be interpreted broadly and the exclusions strictly.
Given that, when he advised his clients, the financial planner was trying to maximize their earnings. Therefore, the Court considered that the trial judge erred in concluding to the existence of a gross fault.
This decision of the Quebec Court of Appeal underlines the importance of the intensity of a fault at the time an action is instituted.
Indeed, many insurance policies provide for an exclusion of coverage for this type of fault, especially in relation with professional liability insurance. Thus, a decision that would retain the gross fault of a party is likely to deprive the latter of insurance coverage, which may result in difficulties when enforcing the judgment.