I think what could theoretically happen is that insurer pays for injury to child, but finds the insured to be failing to apply due diligence in keeping their child safe and could potentially look to the driver personally to be reimbursed. I forget what the technical term for due diligence is called now, but it's a fancy term for doing what is good practice and common sense to the average person.
I've never actually heard anything happen like that, and I don't know what insurance laws are like in other provinces, but this is the only situation that I can see an insurer not paying for injuries to the child - although they would be paying, just turning around and claiming the amount paid back from the parent. I don't think there's ever been a precedent set for that though, and it's purely theoretical and highly unlikely.
I think the more important thing might be that the manufacturer probably wouldn't warranty the seat - and if on some chance the car seat failed, it wouldn't be under the jurisdiction of Transport Canada either because it wasn't a CMVSS stickered seat. :twocents: