Insurance

Introduction In 2023, where do we stand in terms of liability where smart products are concerned? The rules governing product liability set out in the Civil Code of Québec were introduced early in the 20th century in response to the industrial revolution and the growing number of workplace accidents attributable to tool failures.1 Needless to say, the legislator at the time could not have anticipated that, a century later, the tools to which this legislation applied would be equipped with self-learning capabilities enabling them to perform specific tasks autonomously.  These “smart products,” whether they are intangible or integrated into tangible products, are subject to the requirements of general law, at least for the time being. For the purposes of our analysis, the term “smart products” refers to products that have: Self-learning capabilities, meaning that they can perform specific tasks without being under a human being’s immediate control. Interconnectivity capabilities, meaning that they can collect and analyze data from their surroundings. Autonomy capabilities, meaning that they can adapt their behaviour to perform an assigned task more efficiently (optional criterion).2 These capabilities are specific to what is commonly referred to as artificial intelligence (hereinafter referred to as “AI”). Applying general law rules of liability to smart products Although Canada prides itself on being a “world leader in the field of artificial intelligence,”3 it has yet to enact its first AI law. The regulation of smart products in Quebec is still in its infancy. To this day, apart from the regulatory framework that applies to autonomous vehicles, there is no legislation in force that provides for distinct civil liability rules governing disputes relating to the marketing and use of smart products. There are two factors that have a major impact on the liability that applies to smart products, namely transparency and apportionment of liability, and both should be considered in developing a regulatory framework for AI.4  But where does human accountability come in? Lack of transparency in AI and product liability When an autonomous product performs a task, it is not always possible for either the consumer or the manufacturer to know how the algorithm processed the information behind that task. This is what researchers refer to as “lack of transparency” or the “black box” problem associated with AI.5 The legislative framework governing product liability is set out in the Civil Code of Québec6 and the Consumer Protection Act.7 The provisions therein require distributors, professional sellers and manufacturers to guarantee that the products sold are free from latent defects. Under the rules governing product liability, the burden of proof is reversed, as manufacturers are presumed to have knowledge of any defects.8 Manufacturers have two means to absolve themselves from liability:9 A manufacturer may claim that a given defect is the result of superior force or a fault on the part of the consumer or a third party; or A manufacturer may argue that, at the time that the product was brought to market, the existence of the defect could not have been known given the state of scientific knowledge. This last means is specifically aimed at the risks inherent to technological innovation.10 That being said, although certain risks only become apparent after a product is brought to market, manufacturers have an ongoing duty to inform, and how this is applied depends on the evolution of knowledge about the risks associated with the product.11 As such, the lack of transparency in AI can make it difficult to assign liability. Challenges in apportioning liability and human accountability There are cases where the “smart” component is integrated into a product by one of the manufacturer’s subcontractors.In Venmar Ventilation,12 the Court of Appeal ruled that the manufacturer of an air exchanger could not be exempted from liability even though the defect in its product was directly related to a defect in the motor manufactured by a subcontractor. In this context, it would be reasonable to expect that products’ smart component would be likely to result many similar calls in warranty, resulting in highly complex litigation cases, which could further complicate the apportionment of liability. Moreover, while determining the identity of the person who has physical custody of a smart product seems obvious, determining the identity of the person who exercises actual control over it can be much more difficult, as custody and control do not necessarily belong to the same “person.” There are two types of custodians of smart products: The person who has the power of control, direction and supervision over a product at the time of its use (frontend custody); The person who holds these powers over the algorithm that gives the product its autonomy (backend custody)13. Either one of these custodians could be held liable should it contribute to the harm through its own fault. As such, apportioning liability between the human user and the custodians of the AI algorithm could be difficult. In the case of a chatbot, for example, determining whether the human user or the AI algorithm is responsible for defamatory or discriminatory comments may prove complex. C-27: canadian bill on artificial intelligence Canada’s first AI bill (“Bill C-27”) was introduced in the House of Commons on June 16, 2022.14 At the time of publication, the Standing Committee on Industry and Technology was still reviewing Bill C-27. Part 3 of Bill C-27 enacts the Artificial Intelligence and Data Act. If adopted in its current form, the Act would apply to “high-impact AI systems” (“Systems”) used in the course of international and interprovincial trade.15 Although the government has not yet clearly defined the characteristics that distinguish high-impact AI from other forms of AI, for now, the Canadian government refers in particular to “Systems that can influence human behaviour at scale” and “Systems critical to health and safety.”16 We have reason to believe that this type of AI is what poses a high risk to users’ fundamental rights. In particular, Bill C-27 would make it possible to prohibit the conduct of a person who “makes available” a System that is likely to cause “serious harm” or “substantial damage.”17 Although the Bill does not specifically address civil liability, the broad principles it sets out reflect the best practices that apply to such technology. These best practices can provide manufacturers of AI technology with insight into how a prudent and diligent manufacturer would behave in similar circumstances. The Bill’s six main principles are set out in the list below.18 Transparency: Providing the public with information about mitigation measures, the intended use of the Systems and the “content that it is intended to generate”. Oversight: Providing Systems over which human oversight can be exercised. Fairness and equity: Bringing to market Systems that can limit the potential for discriminatory outcomes. Safety: Proactively assessing Systems to prevent “reasonably foreseeable” harm. Accountability: Putting governance measures in place to ensure compliance with legal obligations applicable to Systems. Robustness: Ensuring that Systems operate as intended. To this, we add the principle of risk mitigation, considering the legal obligation to “mitigate” the risks associated with the use of Systems.19 Conclusion Each year, the Tortoise Global AI Index ranks countries according to their breakthroughs in AI.20 This year, Canada ranked fifth, ahead of many European Union countries. That being said, current legislation clearly does not yet reflect the increasing prominence of this sector in our country. Although Bill C-27 does provide guidelines for best practices in developing smart products, it will be interesting to see how they will be applied when civil liability issues arise. Jean-Louis Baudouin, Patrice Deslauriers and Benoît Moore, La responsabilité civile, Volume 1: Principes généraux, 9th edition, 2020, 1-931. Tara Qian Sun, Rony Medaglia, “Mapping the challenges of Artificial Intelligence in the public sector: Evidence from public healthcare”, Government Information Quarterly, 2019, 36(2), pp. 368–383, online EUROPEAN PARLIAMENT, Civil Law Rules on Robotics, European Parliament resolution of 16 February 2017 with recommendations to the Commission on Civil Law Rules on Robotics (2015/2103(INL)), available online at  TA (europa.eu). GOVERNMENT OF CANADA, The Artificial Intelligence and Data Act (AIDA) – Companion document, online. EUROPEAN COMMISSION, White Paper on Artificial Intelligence:  a European approach to excellence and trust, COM. (2020), p. 3. Madalina Busuioc, “Accountable Artificial Intelligence: Holding Algorithms to Account”, Public Administration Review2020, online. Civil Code of Québec (CQLR, c. C-1991, art. 1726 et seq. Consumer Protection Act, CQLR c. P-40.1, s. 38. General Motors Products of Canada v. Kravitz, 1979 CanLII 22 (SCC), p. 801. See also: Brousseau c. Laboratoires Abbott limitée, 2019 QCCA 801, para. 89. Civil Code of Québec (CQLR, c. CCQ-1991, art. 1473; ABB Inc. v. Domtar Inc., 2007 SCC 50, para. 72. Brousseau, para. 100. Brousseau, para. 102. Desjardins Assurances générales inc. c.  Venmar Ventilation inc., 2016 QCCA 1911, para. 19 et seq. Céline Mangematin, Droit de la responsabilité civile et l’intelligence artificielle, https://books.openedition.org/putc/15487?lang=fr#ftn24; See also Hélène Christodoulou, La responsabilité civile extracontractuelle à l’épreuve de l’intelligence artificielle, p. 4. Bill C-27, An Act to enact the Consumer Privacy Protection Act, the Personal Information and Data Protection Tribunal Act and the Artificial Intelligence and Data Act and to make consequential and related amendments to other Acts, Minister of Innovation, Science and Industry. Bill C-27, summary and s. 5(1). The Artificial Intelligence and Data Act (AIDA) – Companion document, Government of Canada, online. The Artificial Intelligence and Data Act (AIDA) – Companion document canada.ca. Bill C-27, s. 39(a). AIDA, Companion document Bill C-27, s. 8. TORTOISE MEDIA, The Global AI Index 2023, available at tortoisemedia.com.

Introduction On June 1, 2023, the Minister of Justice, Simon Jolin-Barrette, tabled and presented Bill 29 entitled An Act to protect consumers from planned obsolescence and to promote the durability, repairability and maintenance of goods 1 (hereinafter the “Bill”) before the National Assembly. The Bill mainly provides for amendments to the Consumer Protection Act 2 (“CPA”) and reaffirms the government’s desire to protect consumers, in particular by improving the legal warranties available to them and introducing the notion of planned obsolescence into Quebec law. The date on which the new provisions will come into force has not yet been set, but the Bill is nonetheless worthy to consider right now. Proposed amendments to the Consumer Protection Act Purpose of the amendments to the CPA The main purpose of the Bill is to put an end to the business of trading in goods subject to planned obsolescence, defined as a “technique aimed at reducing the normal operating life” of a good3. Warranties The CPA already provides a framework for the legal warranty of quality that may apply to goods forming the object of a contract between a consumer and a merchant. This warranty supplements the warranty provided for in articles 1726 and following of the Civil Code of Québec. Under section 38 of the CPA, goods “must be durable in normal use for a reasonable length of time, having regard to their price, the terms of the contract and the conditions of their use4.” That being said, the Bill would further protect consumers by introducing “a warranty of good working order” for certain new goods that are the object of a contract of sale or long-term contract of lease5. The duration of such warranty would be determined by regulation6. If left unchanged, the warranty would apply to the following goods: Refrigerator; Dishwasher; Washing machine; Dryer; Television set; Desktop or laptop computer; Electronic pad; Cellular telephone; Video game console; Air conditioner; Heat pump. As for additional warranties, commonly referred to as “extended warranties,” merchants would now be required to inform consumers of the terms of their right to resolve a contract that includes an additional warranty7, adding to their obligation to inform consumers of the legal warranty before offering an additional warranty8. Merchant and manufacturer's obligations The Bill would impose a number of new obligations on merchants and manufacturers, particularly as regards display. For example, merchants would have to indicate the duration of the warranty of good working order near the goods concerned, in a manner as equally prominent as their price9. The Bill introduces a warranty of “availability” for goods of a nature that requires maintenance work. Merchants or manufacturers bound by the warranty of availability would have to make the replacement parts, repair services and information necessary to maintain or repair the goods available for a reasonable length of time and at a reasonable price after the contract has been concluded10. Seriously defective vehicles Under the Bill, automobiles would be declared “seriously defective” in the following circumstances, in particular11: After one or more unsuccessful repair attempts for defects under the manufacturer’s conventional warranty, including three unsuccessful repair attempts for the same defect; If the defects appear within three years of the first sale or long-term lease of the automobile where it has not covered more than 60,000 kilometres; The defects render the automobile unfit for the purposes for which it is ordinarily intended. Where all of the above apply, the automobile in question would be deemed to be affected by a latent defect. Penalties As concerns penal fines, the Bill provides for a significant increase in the amounts involved and introduces new offences, such as the following: Failure to meet the obligation to disclose the legal warranty of good working order. This could give rise to a fine of $3,000 to $75,000 in the case of a legal person and of $1,500 to $37,50012 in the case of a natural person. Trading in goods for which obsolescence is planned. Offending companies could be fined a minimum of $5,000 or an amount equal to twice the pecuniary benefit derived from the commission of the offence, whichever is greater. The maximum fine will be $125,000, or an amount equal to four times the pecuniary benefit derived from the commission of the offence, whichever is greater13. The Bill also proposes administrative monetary penalties for “objectively observable” failures to comply with the CPA14. The maximum penalty for a legal person will be $3,500 for each day the failure continues15. Moreover, the Bill provides that officers and directors of a company having committed an offence under the CPA would be presumed to have committed the offence themselves. It would be possible to rebut this presumption insofar as the person concerned is able to establish either that they exercised due diligence or that they took “all necessary precautions” to prevent the commission of the offence16. Conclusion The Bill aims to put a stop to planned obsolescence. The obsolescence of goods is planned where a “technique aimed at reducing its normal operating life is used on them17.” The proposed amendments to the CPA establish a new warranty of “good working order.” It will be interesting to see whether it will tie in with the teachings of the Supreme Court of Canada on the legal warranty of quality in the landmark Domtar decision18. How the notion of planned obsolescence will be applied in practice will also be something to watch closely, as the Courts will be confronted with it for the first time. Certain issues could arise, especially with the burden of proof and evidence aspects. The amendments to the CPA will also entail new obligations for manufacturers and merchants, particularly in terms of disclosure and information regarding the warranty of good working order and the additional warranty. The proposed amendments in the Bill also include a legal warranty of availability of parts and services for goods of a nature that requires maintenance work. The severity of the fines applicable to goods for which obsolescence is planned will be something to consider. In short, this Bill is definitely one to watch!  An Act to protect consumers from planned obsolescence and to promote the durability, repairability and maintenance of goods, Bill29 (Introduction – June 1, 2023), 1st Sess., 43rd Legis. (Qc) (“B.”) Consumer Protection Act, CQLR c. P-40.1 B., s. 14; CPA, s. 227.0.4, para. 2 CPA, s. 38 B., s. 3; CPA., s. 38.1 B., s. 3; CPA, s. 38.1, para. 2 Current obligation under the CPA, s. 228.1., para. 1 B., s. 15; CPA, s. 228.3 B., s. 3; CPA, s. 38.8 B., s. 3; CPA, s. 39, para. 1; s. 39.3, para. 1 B., s. 5; CPA, s. 53.1 B., s. 19; CPA, s. 277 Id. B., s. 18; CPA, s. 276.1 B., s. 18; CPA, s. 276.1, para. 2; s. 276.2 B., s. 19; CPA, s. 282.1 B., s. 14; CPA, s. 227.0.4, para. 2 ABB Inc. v. Domtar Inc., 2007 SCC 50

On June 7, 2023, the Minister of Finance of Quebec tabled and presented Bill 30 before the National Assembly, an omnibus bill entitled An Act to amend various provisions mainly with respect to the financial sector (hereinafter the “Bill”).  The Bill includes certain amendments to the provisions of the Insurers Act (“IA”) and the Act respecting the distribution of financial products and services (“DA”).  Although the Bill may evolve through the stages of the legislative process as Parliament resumes, here is an overview of the main amendments that are expected to have implications for the insurance industry. Proposed legislative changes As indicated, the legislative changes will affect both the IA and the DA. Below are the main amendments that will be made to each of these Acts should the Bill be assented to: Insurers Act The Bill proposes that associations constituted under the Civil Code of Québec be allowed to apply for authorization to carry on insurer activities among their members as a reciprocal union,1 and it sets out several provisions relating to the organization and governance of such an entity. The Bill clarifies the meaning of a reciprocal union, defining it as a group of parties that, under the terms of the contract constituting the union, join together to pool sums enabling them to be reciprocally bound by damage insurance contracts.2 The restriction preventing reciprocal unions from accepting a risk that would require them to pay, after reinsurance, an amount that exceeds 10% of the net value of their assets will also be lifted and replaced with a more general obligation to reserve sufficient sums to carry on their insurer activities.3 Life and health insurers will become subject to a new obligation to take the necessary means (which may be specified by regulation) to obtain certain information in order to determine whether an amount they have committed to pay under a life insurance contract is payable.4 As such, life and health insurers that know that a sum is payable will be bound, for a period of three years from the date the sum is payable, to take the necessary means (which may be specified by regulation) to inform beneficiaries that a sum is payable and provide them with support in making their claim. Act respecting the distribution of financial products and services Under the Bill, a person employed by a firm, an independent partnership or a claims adjuster will be allowed to carry out activities under the supervision of a claims adjuster in certain situations.5 The restriction preventing claims adjusters from acting in a sector other than claims adjustment will also be lifted.6 Section 424 of the ARDFPS will be amended to remove vehicle replacement insurance from products that can be distributed without a representative, which will particularly affect vehicle dealers.7 The directors and officers of a regulated entity will become solidarily liable with that entity for the payment of a monetary administrative penalty, unless they establish that they exercised due care and diligence. It will be possible to secure the payment of such monetary administrative penalty by a legal hypothec on the debtor’s movable and immovable property.8 What to expect It is important to note that the Bill is in its first stage of the legislative process and may be subject to change. Anyone wishing to comment on it may do so online on the National Assembly website. We will continue to follow the progress of this Bill. Do not hesitate to contact a member of Lavery’s insurance team if you have questions on the subject matter of this article. Section 1 of the Bill, amending section 6 of the IA Section 2 of the Bill, amending section 7 of the IA Section 21 of the Bill, amending section 188 of the IA Section 74 of the Bill, introducing section 72.1 in the IA Section 90 of the Bill, amending section 10 of the ARDFPS Section 92 of the Bill, striking out section 45 of the ARDFPS Sections 105 and 106 of the Bill, amending section 424 of the ARDFPS Section 71 of the Bill, introducing sections 115.2.1 and 115.2.2 in the ARDFPS

On January 30, 2023, the Court of Appeal of Quebec rendered a decision in Commission scolaire De La Jonquière c. Intact Compagnie d’assurance.1 The key issues in this case are the potential for conflicts arising from liability insurance policies and the obligation to disclose documents where insurers’ duty to defend conflicts with their duty to indemnify insureds. The facts This case is part of a class action in which all Quebec school boards—now referred to as school service centres (SSCs)—were accused of violating the right to free elementary and secondary education. As part of this class action, the SSCs brought an action in warranty against their insurers, seeking compensation for any amount they may be required to pay. The insurers acknowledged their obligation to defend the appellants in the main proceedings; however, they argued that the claim was not covered by the insurance contract. Following negotiations, the parties to the class action reached a settlement. The action in warranty against the insurers is still pending. At the examination for discovery stage of the action in warranty, the insurers asked to obtain a copy of all communications exchanged between the appellants and their counsel since the beginning of the main proceedings. The SSCs objected to this request on the basis of professional secrecy and litigation privilege. The Court therefore had to rule on the merits of the objection. The trial Drawing on the decision in Domtar2, the Superior Court dismissed the SSCs’ objection, holding that they had waived their right to assert solicitor-client privilege regarding anything relating to the reasonableness of the settlement. It appears that the Court inferred this waiver from certain allegations made and from the disclosure of certain documents as part of the action in warranty. The Court concluded that the appellants had to provide the insurers with the documents, risk analyses, letters, exchanges with the appellants and expert opinions having related to the reasonableness of the settlement since the beginning of the main proceedings. However, according to the Court of Appeal, the Court failed to provide a framework for such disclosure of information and to grant the SSCs the right to raise new objections in relation to said documents. The appeal The Court of Appeal considered the conflicts that may arise from the dual responsibility of insurers: their duty to defend insureds and their duty to indemnify them. In this regard, it described liability insurers and their role as follows: [20] The liability insurer is effectively a two-headed hydra: A type of two-headed creature with a single corporate identity, but where one head handles the insured’s defence and the other protects the insurer’s financial interests by ensuring that it only pays out for covered losses.[21] Each head must base its decisions on the interest it is defending and the information available to it. The two heads must remain separate in order to give effect to the insurance contract. […] The risk of a conflict of interest is therefore very real, which is why the insurer must put measures in place to ensure that it complies with the coverage provided by the policy, while also ensuring the full and complete defence of the insured.] As for the ethical obligations of the lawyer mandated by the insurer to represent the insured, the Court stated that the lawyer becomes the insured’s counsel in all respects and owes the insured absolute loyalty. As such, the right to professional secrecy in the insured’s relationship with the lawyer can be set up against the insurer. That being said, the lawyer must report on the progress of the case to the head of the hydra handling the insured’s defence. The Court then stated that it was essential in this context that the information thus obtained be accessible only to that head, and that the insurer put in place the necessary measures to keep the two heads separate. The Court of Appeal found that the trial judge did not err in concluding that the SSCs were required to provide the evidence necessary to examine the reasonableness of the settlement reached with the insurers. However, in order to do so, an exemption mechanism could be implemented, giving the SSCs the possibility to object to the disclosure of certain information. The Court also confirmed that there was no basis for concluding that the appellants had waived solicitor-client or litigation privilege with respect to all of their exchanges with their counsel. This information must remain protected by professional secrecy and therefore cannot be disclosed to the person at the insurer’s office in charge of the compensation file. The same goes for the accounts for fees, reports, opinions and other documents sent to the person at the insurer’s office handling the defence, unless the insured waives this right. Conclusion This case highlights the conflicts that can arise from the duality of insurers’ responsibilities and the distinction between insurers’ obligation to defend insureds and their obligation to indemnify them. Although the Court ruled that evidence aimed at verifying the reasonableness of a settlement from a qualitative and quantitative standpoint should be disclosed, it concluded that certain information and documents that are strictly relevant to insureds’ defence need not be disclosed. In so doing, it reiterated insurers’ dual responsibility and the importance of keeping the two heads separate when an insurer agrees to take on an insured’s defence, but maintained its refusal to indemnify the insured. Commission scolaire De La Jonquière c. Intact Compagnie d’assurance, 2023 QCCA 124. Chubb Insurance company of Canada c. Domtar, 2017 QCCA 1004.