2004: No. 1 January-February 

Table of contents 

New insurance will cover losses arising from lawyer defalcation

In December the Benchers approved a plan for the Lawyers Insurance Fund (through the LSBC Captive Insurance Company Ltd.) to provide insurance coverage to the legal profession to cover claims arising from the misappropriation of money or property by any BC lawyer.

The "innocent insured coverage" (IIC) is expected to come into effect for claims made on or after May 1, 2004. Although the Special Compensation Fund will continue to exist for the resolution of existing claims, all new claims will be covered by the IIC, not by the Special Compensation Fund.

The coverage is intended to maintain public confidence in the profession by ensuring that innocent members of the public do not suffer a pecuniary loss through misappropriation by a BC lawyer.

The Law Society of BC has historically shown leadership in providing financial protections that benefit the public, becoming the first law society in North America (in 1949) to create a Special Compensation Fund. Most Commonwealth jurisdictions have since followed BC's example, although the extent of coverage varies greatly from fund to fund. Some law societies, for example, cap payments from their funds or reimburse some types of claimants and not others.

In 2002 the Special Compensation Fund faced an unprecedented number of claims arising from the practice of former Vancouver lawyer Martin Wirick, and the Law Society appointed a Conveyancing Practices Task Force to consider reforms to the compensation regime. Following its review, the Task Force concluded that claims should be resolved more expeditiously and that the payment of meritorious claims should be mandatory, not discretionary, as is the case under the Special Compensation Fund scheme. After further study and consultation with BC lawyers, the Task Force outlined a form of insurance coverage that could offer these protections more effectively than the Special Compensation Fund.

In June, 2003 the Benchers considered various regulatory, actuarial and insurance issues related to innocent insured coverage and asked Law Society staff to develop a specific proposal. The Benchers approved that proposal in December.

What will the IIC cover?

The innocent insured coverage, as approved by the Benchers, will cover claims arising from the misappropriation of money or property by any BC lawyer related to his or her practice of law. If that lawyer practises in partnership, the coverage will protect any of the lawyer's innocent partners from liability arising from the misappropriation. The Lawyers Insurance Fund will be entitled to seek reimbursement from the responsible lawyer and to subrogate against third parties who also may be liable.

What are some of the benefits and risks of the IIC?

The Conveyancing Practices Task Force recommended insurance coverage as an alternative to the Special Compensation Fund to offer the public greater certainty as to payment and a more expeditious determination of claims.

Under the IIC, claims will be handled by the Lawyers Insurance Fund, rather than the Special Compensation Fund Committee. Although there will be some increased costs within the Lawyers Insurance Fund to administer the new coverage, the program should benefit from the claims handling expertise and efficiencies that exist in the Lawyers Insurance Fund.

Payment of meritorious claims will be a contractual obligation under the IIC, not a discretion exercised by a committee as is now the case. The payment of claims will be based on terms of coverage incorporated into the compulsory professional liability policy. Claimants will ultimately have access to the courts in the event of a dispute over a claim for recovery of a loss.

The new scheme should benefit from greater overall stability since all payments will be subject to a global annual aggregate limit. The Benchers have set that limit at $17.5 million for 2004, inclusive of all defence costs and settlements. This is the same limit that previously applied to what the Special Compensation Fund Committee could award in a calendar year. Although the Benchers decided to exceed that limit in 2002, so as not to restrict compensation on the Wirick claims, the limit will be reinstituted for the IIC program.

The $17.5 million annual aggregate will clarify for the public the extent of the coverage available and will help ensure the stability and longevity of the program by limiting catastrophic losses.

It is important to flag that, while the IIC brings greater certainty respecting the coverage of claims, there are clear limits on this coverage. As a result, when relying on the services of BC lawyers, clients such as financial institutions that are involved in large real estate or commercial transactions will wish to take note of the coverage and consider the degree of financial risk involved in the transaction. While misappropriation is very rare in the profession, such clients should consider whether they wish to seek coverage in addition to the general insurance coverage carried by BC lawyers.

Who will pay for the IIC?

All practising members of the Law Society of BC will pay an annual assessment as the primary funding for the innocent insured coverage, just as they now pay an assessment for the Special Compensation Fund. These assessments may in fact be charged together in future years.

When will coverage take effect?

The innocent insured coverage is expected to take effect on May 1, 2004. Prior to that date, all claims for compensation arising from a lawyer's misappropriation must be made against the Special Compensation Fund.

What is the cost of the coverage?

For 2004 all practising lawyers in BC are required to pay the $600 Special Compensation Fund assessment toward the funding of claims made up to May 1, 2004. (Note: This is not a new fee and has already been billed to all practising lawyers as part of the fee billing for 2004.)

A portion of that assessment may be allocated to the Lawyers Insurance Fund to fund the innocent insured coverage, for claims made on or after May 1, 2004. The exact amount of the allocation will be based on the extent of the claims, and it is possible, given the strength of the Lawyers Insurance Fund reserves, that no allocation may be required in 2004.

In 2005 and 2006 all practising lawyers will be expected to pay an annual assessment of $100-200 as primary funding for the IIC. They will also pay a Special Compensation Fund assessment of sufficient amount to pay those claims made against the Fund prior to May 1, 2004, which include all the claims made in respect of former lawyer Martin Wirick.

The funding model for innocent insured coverage has been mapped out over the next three years (2004-2006). Over this period, the Lawyers Insurance Fund should be able to better evaluate revenues and costs. There should also be a more complete picture of the Special Compensation Fund claims already under consideration.

What will be the future role of the Special Compensation Fund?

The Special Compensation Fund will continue to exist under the Legal Profession Act after introduction of the innocent insured coverage on May 1, 2004. As noted, the Fund will be responsible for the determination and payment of all claims made prior to May 1. Claims made after that date will be resolved through the IIC.

The Special Compensation Fund, however, will continue as a discretionary fund of last resort. In the rare event that losses in a future year should exceed the IIC global limit, or should a particular claim fall outside IIC coverage in some unusual circumstance, it is possible that a claimant might elect to bring a claim against the Special Compensation Fund. In that event, it would be for the Benchers to determine how they would exercise their discretion on such claims.

When can I expect more information?

The Law Society and the Lawyers Insurance Fund will update the profession on the innocent insured coverage in the near future. Terms of the coverage will be set out in a new policy of the LSBC Captive Insurance Company Ltd. and posted in the Practice & Services/Lawyers Insurance Fund section of the Law Society website once available. The coverage is scheduled to take effect on May 1, 2004.

For more information, please contact Margrett George, Program Administrator at mgeorge@lsbc.org (Tel: 604 443-5761) or Susan Forbes, QC, Director of Insurance at sforbes@lsbc.org (Tel. 604 443-5760).

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