Advisor lying about income on a life app, negligence or fraud?

You should answer this question before reading this text. I would guess that most informed people would answer it is a fraudulent act that jeopardizes the insurable interest that is required for the legal formation of a life insurance contract.

However the answer to this question is not obvious in Quebec. In fact, in one case, the Courts in Quebec have labeled this as an act of negligence creating a very dangerous precedent.

The Thibault case

As a story and a legal case, the Thibault case is far from its final conclusion. First, this case represents the 3rd largest bankruptcy in Quebec in the last 10 years. Jacques Andre Thibault, a financial advisor declared a bankruptcy of $75.4 million on assets of $2.1 million.

The Thibault case has also generated a legal challenge to the gross negligence clause found in Error and Omissions insurance contracts whereby ultimately the Supreme Court of Canada will have to decide whether an insurer can refuse to pay a claim if the covered advisor has committed an act of gross negligence despite the fact that the provincial laws require the advisor to be covered for such act of negligence with the law making no differences between act of regular negligence or gross negligence.

Negligence or Fraud?

In the decision of the disciplinary committee against Thibault, we learn that Thibault wrote an income of more than $700,000 for a client who had no income at all on a life insurance application In fact, the client stated under oath that Mr. Thibault justified putting this income on the life application by stating it was a common practice in the insurance industry and sold the client a $9 million permanent insurance contract with a premium of more than $250,000.

Thibault made more than $220,000 of commission for this policy alone.
In reviewing the actions of Mr. Thibault, the disciplinary committee found that Thibault had committed a negligent act and not a fraudulent act. There are no explanations as to how the committee arrived at this decision. Instead the decision kind of forgets about the insurance to focus solely on the investment strategy that was implemented to fund these policies.

Since Thibault had to adopt a very aggressive strategy with the investment of the client to pay for the premium of the policy because the client had no income and this investment strategy did not meet the risk tolerance of the client, Thibault was found to be negligent.

The disciplinary committee gave Thibault a fine of $18,000 and a suspension of 1 year. Since this sanction was based on negligence, this allowed Thibault to appeal the sanction and to reduce the suspension to 6 months.

It is ironic that if the disciplinary committee had called the actions of Thibault a fraud, it would not have allowed Thibault to make this appeal and to make a claim under his Error and omission insurance for the wrongs he had caused the client. The insurer would not have had to decline the claim using gross negligence as a reason and we would have no challenge as to the legality of the gross negligence clause.

Ironic isn’t it when you call a dog that walks like a dog and barks like a dog, when you call it a cat, you end up with a mess and a lot of confusion.

The results

So now we have a mess. Is a declaration of income now needed to form a legal insurance contract? If an advisor or client makes a false declaration about income, is this a material misrepresentation? The Thibault case and the fact that the court of appeal did not challenge the decision of the disciplinary committee in calling the actions of Thibault a negligence instead of a fraud opens a door that should have remained close.


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