1 13 TH Malaysian Law Conference The 1 st Malaysian Professional Indemnity Insurance Workshop A Short History of a Canadian Lawyers Insurance Program Susan I. Forbes, Q.C. Director of Insurance Lawyers Insurance Fund Law Society of British Columbia, Canada November 17 and 18, 2005
2 A Short History of a Canadian Lawyers Insurance Program Introduction In British Columbia, one of the ten provinces and three territories that constitute Canada, the government has charged its Law Society with the paramount duty of upholding and protecting the public interest in the administration of justice. The Society is also responsible for protecting the interests of its lawyer members. In 1969, the Law Society faced a challenge in meeting its duties to the public and the profession, brought about by a crisis in the professional liability insurance market. As a result of an unwillingness to pay the required premiums or an inability to obtain insurance on reasonable terms, too many B.C. lawyers were either under-insured or practising without any insurance whatsoever. When a lawyer suffered a loss for which he was not adequately insured, he was not alone in his misfortune. Often, his client suffered adversely because she was unable to collect her loss from the negligent lawyer. In response to this crisis, the Law Society began to consider implementing a compulsory liability insurance program. During 1969, program proposals from various insurance brokers were evaluated, and in June, 1970, the Law Society appointed its insurance consultant, now known as Jardine Lloyd Thompson Canada Inc ( Jardines ), to implement the program. On January 1, 1971 the first compulsory professional liability insurance program of its kind in North America was introduced. The Law Society arranged for an amendment to its governing legislation to make the program compulsory. Objectives Eight objectives were initially set for the program: 1. all lawyers to be insured All B.C. practising lawyers would be compelled into the program and the insurer obligated to provide insurance, virtually eliminating the possibility of uninsured losses. 2. all lawyers to be insured by the same insurer With a single insurer underwriting the entire program, the Law Society could choose insurers capable of responding to incidents that developed into claims in later years. 3. all lawyers to be insured under the same policy A single policy would allow the Law Society to provide coverage with scope and limits it found acceptable.
3 coverage and cost control The economies of scale inherent in the program would allow the Law Society to offer its members the best possible premium and coverage. 5. introduction of self-insurance The program allowed the introduction of a self-insured retention (S.I.R.), further reducing the premium, as no profit would be required and investment income could be earned on the portion of premiums allocated to pay losses within the S.I.R. 6. professional claims management The Law Society would control a claim service that was efficient and ensured that the public was protected as meritorious claims would be settled on reasonable terms. 7. loss prevention The program would fund and facilitate risk management initiatives to help reduce the likelihood of loss. 8. collection of meaningful statistics With a single insurer, accurate underwriting and claims data for all B.C. lawyers would be available to ensure premiums would be based on accurate data and actuarially justified. Although the program has grown in size and scope since it was established, the long-term objectives initially set for the program have either been met or surpassed in its 34-year history. Structural Changes From 1971 through 1983, the program continued as it was first developed. Underwriting requirements were met by commercial insurers, the Law Society maintained varying levels of S.I.R, and claims management services were outsourced. The policy limits of $100,000 1 per claim and $300,000 in the annual aggregate provided sufficient protection both for lawyers and their clients. 1983, however, marked the beginning of a difficult three-year period. The new commercial insurer underwriting the program suffered significant losses in each of those years. The losses were caused, in part, by a disproportionately high frequency and severity of real estate claims? the unfortunate aftermath of an overly active real estate market that suddenly collapsed, and inordinately high interest rates. The program s ability to attract affordable insurance was in jeopardy. In an effort to stabilize losses, the Law Society took control of the claims management process. In 1986, a claims management company, PLI Claims, was incorporated to provide claims 1 All a mounts in the paper are expressed in Canadian dollars. One Canadian dollar currently equals approximately three Malaysian Ringgits.
4 - 3 - management services in respect of all claims and potential claims (incidents) reported by the Law Society s insured members. PLI Claims was initially incorporated as a subsidiary of Jardines, but in September 1992, the Law Society acquired its shares and brought the claims management operation in-house and integrated it with the Law Society s existing regulatory functions. Today, the Lawyers Insurance Fund continues the operation. With claims management well in hand, the Law Society next turned its attention to determining the best means of ensuring long-term price and program stability. In 1989, after an exhaustive review of various underwriting alternatives, the Law Society decided that a captive insurance company would most effectively meet its needs. Rather than continuing to underwrite with a commercial insurer, a captive could be used to completely control coverage and claims handling, and as a vehicle to access the reinsurance market. On April 4, 1989, the LSBC Captive Insurance Company Ltd was incorporated for these purposes. The other Canadian jurisdictions that now also required their members to carry malpractice insurance achieved similar ends, although through slightly different means: Seven provincial and two territorial law societies in Canada are members of the Canadian Lawyers Insurance Association, or CLIA. Created in 1988, CLIA is a reciprocal insurance exchange that acts as a reinsurer for the mandatory insurance programs of these jurisdictions and also markets voluntary excess insurance to lawyers in other provinces. Ontario, Canada s largest province, created its own insurance company, LawPRO, in 1990 to provide lawyers in Ontario with both insurance and claims management services. LawPRO also provides comprehensive title insurance and legal services coverage for residential purchase and mortgage-only/refinance transactions handled by lawyers. Quebec, Canada s second largest? and primarily French-speaking? province created the Professional Liability Insurance Fund of the Barreau du Québec in The Fund holds an insurer s license and offers both insurance and claims management services to its members. For the next few years, the Law Society continued to use reinsurers to varying degrees to assume a portion of the risk. By 1997, however, the program s strength was such that the Law Society decided not to renew its reinsurance arrangements and to self-fund the full primary limits. Limits of $1 million per error and $2 million in the annual aggregate were set in 1992, and remain unchanged today. Coverage Expansion Over the years, the scope of coverage has expanded. Since 1993, we have implemented: 1. Initiatives to Respond to the Needs of the Profession and the Public To encourage lawyers to give pro bono services to the poor, we provide free insurance coverage to lawyers who are not otherwise insured for mistakes made in providing certain pro bono services. Lawyers who are not otherwise insured include in-house counsel, non-practising and retired lawyers.
5 - 4 - To support lawyers in their real estate ventures, we have extended coverage for errors made by lawyers acting in solicitor property sales, and by adopting a protocol that allows lawyers to accept the risk to lender clients of not obtaining up-to-date building location surveys. To protect both union lawyers and their employee clients, we offer optional insurance coverage to in-house counsel if those lawyers are employed by unions or societies. We also offer optional insurance coverage to public legal service lawyers who are employed by non-profit associations such as Westcoast Environmental Law Group, B.C. Civil Liberties Association and other public interest entities that provide pro bono services to the public. To support interjurisdictional mobility within Canada, we allow B.C. lawyers to practise law in other Canadian jurisdictions without becoming members. Although the policy already provided broad coverage to lawyers practising the law of or in another jurisdiction, the wording was tailored to clearly meet the insurance requirements of the other jurisdictions for mobility. 2. Business Innocent Insured Coverage In 2002, we began offering on an optional basis, a professional liability insurance policy designed to protect innocent partners in firms who may face claims that would otherwise fall within the business exclusion in our primary policy because of the business interests of another lawyer at the firm. The exclusion is triggered when a lawyer is providing services to a company or entity in which she, alone or with family members, holds an interest in the company greater than 10%, or has effective management or control of the company. 3. Defalcation or Misappropriation Insurance The most significant expansion to the policy coverage occurred in May, 2004, when trust protection coverage, or TPC, was added to the policy. In adding TPC, the Law Society changed its process for dealing with defalcation claims from a discretionary fund administered quasi-judicially to a contractually-based insurance fund operated through the claims management process. TPC insures all Law Society members for claims arising from defalcation or the misappropriation of money or property relating to the member s practice of law, and provides a profession-wide annual aggregate of $17.5 million. Whether a member of the public suffers a loss as a result of a lawyer s negligence or theft, the policy responds and the Lawyers Insurance Fund provides the claims handling expertise. The Program Today The policy provides limits of $1 million per error and $2 million in the annual aggregate for a premium of $1,500, unchanged for seven years straight. In 2005, B.C. s premium was the fifth lowest premium out of 14 jurisdictions. The highest premium was $6,000.
6 - 5 - The Lawyers Insurance Fund ( LIF ) manages the program for approximately 7,000 insured lawyers, with a staff of nine claims counsel, a Director of Insurance, Claims Supervisor and Program Administrator. Approximately 1,000 reports of claims and potential claims are received annually. In the past five years, the program has spent annually, on average, $7 million in indemnity payments and $4.5 million in claims expense. The critical components of our program follow. a. Claims Handling Our claims management goal is to: Resolve claims, one file at a time, on a cost-effective basis balancing the interests of the claimant, the insured lawyer and the membership as a whole. LIF is audited regularly by independent third party auditors who report to the Law Society s Board of Directors on LIF s success in meeting that goal. In our most recent external audit, auditors from Crawford Adjusters Canada expressed the opinion that we are highly effective at meeting the claims management goal. Using a three point system where 1 = does not meet expectations, 2 = partially meets expectations and 3 = meets all expectations, the overall audit produced an average of 2.9. The auditors commented that this is an excellent score. In their view, it represents a well-run and efficient claims operation, and staff who are highly qualified and experienced, exhibit judgement indicating a superior knowledge of insurance and the law, and work within a proactive leadership and management structure that supports the skilful and creative and creative resolution of claims. As well, in 2004 an in-depth file audit was performed by an excess insurer. In assessing the effectiveness of LIF s claims management, the auditors concluded that: claims counsel actively manage files and routinely and appropriately check the work of outside defence counsel, ensuring timely reports and appropriate assessments of coverage, liability and quantum issues; policies and procedures put in place are firmly entrenched and uniformly administered; LIF is meeting its objective of reducing the overall cost of claims by the early investigation and assessment of claims to enable damage control and early settlement; and the program is managed and staffed with an enthusiastic and knowledgeable group who work in a co-operative atmosphere, due in part to excellent leadership. Feedback is sought from insured lawyers on the services we provide through a Service Evaluation Form sent out to the insured lawyer on file closing. Lawyers continue to express high satisfaction overall with our services. In 2004, 92% of survey respondents gave a high approval rating (4 or 5 on a scale of 1 to 5) on the outcome of their claims, 95% on the handling of their claims and 96% on the services provided by claims counsel. These high ratings from both external auditors and our insured lawyers are the result of a variety of factors. The most salient are:
7 experienced claims counsel All of our claims counsel are experienced practitioners who work in-house in the dual capacity of legal counsel and claims adjuster. By offering competitive salaries and an excellent working environment, we are able to attract and retain an outstanding team of experienced lawyers who have credibility in the profession. Several of our claims counsel actually worked for us as defence counsel before joining our team, and continue to act as defence counsel on files. We defend approximately 30% of all suits in-house. 2. confidentiality All file information is kept strictly confidential from the regulatory and discipline departments of the Law Society? unless the insured lawyer agrees to the release of information. The confidentiality policy helps ensure that lawye rs report potential claims to us promptly, completely and truthfully, without fear that the information we are collecting to defend them will be used to discipline them. The only exception to this rule is if LIF has evidence of defalcation, fraud or criminal activity. 3. early notice of claims and potential claims Lawyers must give written notice of claims and incidents (or potential claims) as soon as practicable, however unmeritorious they may be. For the past 12 years, the percentage of matters reported as incidents has remained remarkably consistent, within a few percentage points of 65. Early reporting of both claims and incidents allows us to mitigate or avoid a loss, avail ourselves of early, advantageous settlement opportunities, or effectively prepare a defence. We encourage lawyers to contact us first by telephone as soon as they discover a claim or an incident. Early contact allows claims counsel to determine if steps can be taken to repair a problem or affect damage control. 4. proactive resolution The facts and circumstances of active claims are investigated quickly so that realistic reserves can be set and an early determination of strategy made. If a finding of liability is probable and damages can be reasonably assessed, the settlement process begins provided that the claimant s expectations are realistic. 5. preferred defence counsel We retain outside defence counsel from a select group of preferred lawyers, experienced in working with claims counsel in defending lawyers professional liability cases. Our choice of defence counsel for a particular file is based on a number of factors intended to ensure the best match for the file, and we work in close partnership with our counsel in developing and assessing strategy, and discussing and approving steps of any significance in the litigation process. Our philosophy is to encourage counsel to be pro-active and to direct their efforts towards early resolution of claims as soon as enough is known to assess them reasonably. We negotiate our preferred lawyers hourly rates individually, then review and adjust those rates, as appropriate, on an annual basis.
8 quality control The claims management process involves a number of checks and balances, including: b. Coverage All claims counsel perform peer file reviews? written file audits or reviews on files of their colleagues. The review provides claims counsel with feedback on whether they are handling files in accordance with established policies and procedures, and offers an opportunity to learn about effective handling styles or procedures and the other kinds of claims of their colleagues. The process also allows the Director of Insurance to detect systemic problems that may need to be addressed. In order to proceed to trial, claims counsel must obtain approval from the Trial Approval Officer (the Claims Supervisor or a senior claims counsel), at least two months before trial. The purpose of the trial approval process is to ensure that the risk of trial is fully evaluated in every case, and that proceeding to trial is the most appropriate method of resolving the claim. The progress and strategy of claims with large potential losses are monitored regularly and carefully by the Director of Insurance and Claims Supervisor with a view to achieving the most advantageous result for the program. As a self-financing compulsory insurance program for lawyers, we recognize the importance of ensuring impartiality, fairness and consistency in making coverage decisions. Coverage issues are investigated thoroughly at an early stage, with the assistance of outside counsel where necessary. If it appears that coverage should be denied, the claim is referred to the Coverage Committee for decision. The voting members of the Coverage Committee are a representative from Jardines, a practising B.C. lawyer experienced with insurance coverage issues, and the Director of Insurance. In making coverage decisions, the Coverage Committee takes into account the fact that the purpose of the compulsory program is to protect lawyers and the public they serve. The Committee also considers the interests of the Captive, the lawyer involved and any reinsurers and excess insurers who may be affected. Denials have dropped in recent years to less than 2% of all matters reported, as lawyers have become more familiar with the requirements of the policy and organized their activities accordingly. The denials that are made rarely lead to subsequent suits against the insurer for coverage, as the use of the Coverage Committee? rather than the insurer? to deny coverage avoids any perception of bias, a perception cemented by our approach of fairness and consistency. We also provide advance rulings to lawyers on whether the policy will provide coverage for a particular activity or in a particular set of circumstances. In the event of a claim, the advance ruling given is binding on the insurer. Answers to some of the more common coverage inquiries are also available on the Law Society s website ( c. Statistics Accurate statistics are critical to projecting future losses, particularly for a self-insured program. The traditional lag time in developing claims payment statistics has been approximately four to six years. We have tried to reduce this lag time by pressing claims to resolution, and we
9 - 8 - maintain realistic reserves on claims that remain open. Moreover, we keep a current record of payments and reserves in a computerized format so that trends can be identified at an early stage. This is important in setting annual premiums. We also maintain current statistics in a computerized format on the source of claims according to area of practice, type of claim, cause of error, level of experience of the lawyer involved and other criteria, and track specific issues such as immigrant investor schemes, environmental claims, and out-of-province litigation, to name just a few. This information? and our easy access to it? assists in early identification of problem areas that warrant attention for loss prevention. d. Risk Management One of our goals is to reduce the risk of loss. As this goal is based on the theory that risk management ultimately leads to lower claim payments, LIF funds all of the Law Society s risk management activities. There are two separate approaches to our risk management activities: 1. focused risk management Our most effective risk management efforts are those targeted specifically at recent developments in the law or practice traps that could give rise to claims against the unaware or uninformed. We work to manage that risk either by warning the profession, or by attacking the risk directly. An example of the latter is through the orchestration of legislative change. To alert the profession to critical issues that present immediate risks to lawyers, we distribute in paper form or by an ALERT! bulletin or a Notice to the Profession to all lawyers and students in the province. For issues that present a less severe or immediate risk, the regular publication of the Law Society s Practice Advisor s Practice Watch provides an appropriate forum. We are also in a unique position to reduce or eliminate certain risks by creating favourable legal precedents. We regularly identify and discuss cases to take to trial with a view to creating a solid bank of precedents beneficial to the profession in specific situations, or at large. Having direct control over the defence of most of the lawsuits against the members of a professional body, as well as indirect control in litigation involving repairs, affords us the opportunity to create favourable law in appropriate cases (and avoid unfavourable precedents). 2. general risk management We also provide risk management support by gathering information that may be relevant to the cause of the loss or the claim, advising on areas of exposure and practice tips, and offering risk management advice through various publications and presentations. As earlier noted, we maintain statistics in a computerized format on the source of losses and claims according to various criteria. These statistics also allow us to identify the underlying causes of claims using a new coding system introduced in The new coding system allows us to drill down into the root causes of claims and track more meaningful data than is generally kept by insurers for loss prevention purposes. A section
10 - 9 - of the Service Evaluation Form allows us to obtain the insured lawyer s view on what caused the claim or potential claim and how other lawyers might avoid being caught in a similar situation. The statistical reports, in conjunction with the anecdotal information received from the Form, are used in our risk management activities. We offer advice on activities and areas of practice that present potential risks to lawyers through various means. We are consulted regularly on issues affecting the profession that may have risk management components, and given an opportunity for input to help manage those risks. We publish Insurance Issues: Risk Management, a bulletin with risk management tips circulated to all lawyers. Our claims counsel regularly address the profession through continuing legal education forums and presentations to individual firms on risk management issues. Conclusion This paper offers a condensed version of our program s first 34 years. Anyone interested in more information, or copies of our Forms or precedents, is invited to visit the Lawyers Insurance Fund section of the Law Society of British Columbia s website at or contact the author directly at e:\insuranc\sf\misc\malaysian paper.doc