Lawyers’ Compulsory Professional Liability Insurance
Benchers clarify Trust Protection Coverage
At their October 2006 meeting, the Benchers approved two changes to Trust Protection Coverage (Part B of the BC Lawyers’ Compulsory Professional Liability Insurance Policy). Effective January 1, 2007, Part B coverage will exclude claims arising from investment schemes where BC lawyers do not misappropriate funds directly and will limit recoveries to $300,000 per claim. The changes are designed to clarify and enhance the Part B trust protection coverage provided to innocent victims of theft of money or property by BC lawyers.
Introduced on May 1, 2004 to complement Part A’s compulsory negligence coverage, Part B’s insurance-based approach to compensating victims of defalcation by BC lawyers was the first of its kind to be offered by any law society or bar association in the world. Part B creates a contractual obligation between the Lawyers Insurance Fund (LIF) and the insured lawyer to honour verified claims, providing an important response to public concerns about the discretionary nature of the Special Compensation Fund regime. At the same time, Part B limits total compensation available annually to $17.5 million, signalling that there is a practical limit to the ability of all BC lawyers to guarantee one lawyer’s conduct.
The Benchers intend these changes to address two emerging threats to the intention and effectiveness of Part B coverage.
First, arguments have been raised suggesting that some claimants will look to Part B to respond to losses arising from a fraudulent investment scheme involving a BC lawyer. Part B’s coverage was conceived to fulfil by non-discretionary means the Special Compensation Fund’s statutory mandate to pay compensation where:
money or other property was entrusted to or was otherwise received by a lawyer in the lawyer’s capacity as a barrister and solicitor;
the lawyer misappropriated or wrongfully converted the money or other property; and
a person sustained a pecuniary loss as a result of that misappropriation or wrongful conversion.
The Special Compensation Fund Committee has stated, “The intention of the Special Compensation Fund is to assist innocent victims of dishonest lawyers, not to act as an insurer respecting highly speculative and questionable investment schemes.”
Second, Part B’s annual aggregate limit may be threatened or even exhausted by a single catastrophic claim. Prompt intervention by LIF recently foiled a US $8.5 million solicitation of a single US investor, who was assured that investment funds placed in a BC lawyer’s trust account would be protected by Part B coverage. The Benchers are concerned that the non-discretionary nature of Part B’s trust protection coverage may attract the attention of some fraudulent rogues, who promote “get rich quick” investment schemes by touting that funds paid to a lawyer’s trust account are “guaranteed” by an insurance policy of $17.5 million.
The Benchers also noted that a $300,000 per claim limit would ensure the continued financial viability of the Part B insurance program without diminishing the protection provided to the public. Historical analysis of Special Compensation Fund claims demonstrates that 98% of all payments made since 1986 have been for amounts less than $300,000 (excluding claims arising from the Martin Wirick case). Even in the Wirick claims, 76% of all claimants were fully compensated by payments under $300,000 (87% of all individuals and 71% of all financial institutions). Under modelling analysis that applies a $300,000 per claim limit to a catastrophic loss scenario with a claims distribution similar to Wirick, in which Part B’s annual aggregate limit of $17.5 million has been exceeded, individual claimants with claimed amounts up to $300,000 would still receive pro rata compensation for 98.2% of the value of their claims.
The Benchers observed that the average per claim limit in the rest of Canada (eight participating provinces) is only $184,000, and that BC is the only jurisdiction not to make payments subject to case-by-case discretion.
Finally, the Benchers considered the American experience, noting that 45 of the 48 American states with lawyer theft compensation funds have individual limits. Seventy-eight per cent of those funds have per claim limits of $75,000 or less, and the average per claim limit is $37,000. Only two states (Idaho and Alabama) follow BC’s approach of creating a right to compensation, as opposed to a discretionary entitlement, and they impose far more stringent limits. Idaho has a per claim limit of $15,000, and Alabama’s limit is even lower — $10,000 per claim (all US dollars).
The Benchers concluded that a per claim limit of $300,000 for Part B coverage, supported by exclusion of claims arising from investment schemes where BC lawyers do not misappropriate funds directly, will provide the greatest benefit to the most vulnerable claimants, and will support the long-term interest of the public and the profession in a stable and sustainable compensation system.