Exclusion 6 of the Policy: The business and benefit exclusion

This is a summary of Exclusion 6 of the Policy, the ‘business and benefit’ exclusion.  It's intended to assist lawyers in understanding how the Exclusion operates in relation to negligence claims, and includes an explanation of its application to trusts.  This summary also offers information about a due diligence process to disclose activities that may trigger the Exclusion, as well as a sample questionnaire.

Please note that bolded or italicized words are defined in the Policy, and the following abbreviations are used:

  • “family” or “family member” refers to spouse (including common-law spouse), children, parents or siblings 
  • “colleagues” refers to law firm partners, associates or associate counsel
  • “interest or control” refers to effective management or control or beneficial ownership in an amount greater than 10%

And, of course, coverage for any claim or potential claim is determined by the Policy wording. If you would like our position on the application of the Exclusion to a particular set of circumstances, please contact one of our advance ruling advisors. Depending on the nature of your question, we may ask you to send us a detailed description of the circumstances, in writing.

Exclusion 6, the ‘business and benefit’ exclusion, removes coverage for claims that arise from a lawyer’s business activities or losses rather than professional services. Coverage is also excluded for claims that arise from professional services provided to a lawyer’s family. Both scenarios present an undue risk to the insurance fund for several reasons. The lawyer’s personal interest may well lead to more casual, less thorough, service and clouded judgment, increasing the likelihood of a successful claim. It also increases the risk of paying defence costs because the lawyer is more likely to become the target of a disgruntled party in the matter. Finally, our ability to successfully defend a claim is further compromised by the lawyer’s desire to assure a claimant’s recovery.

Exclusion 6.1 of the Policy states that the Policy does not apply to:

“6.  a claim:  
  6.1

arising out of an error of an Individual Insured, the payment of which would benefit, in whole or in part, directly or indirectly, the Individual Insured or the Individual Insured’s family or law firm, provided that this Exclusion 6.1 does not apply to any benefit derived solely from the ownership of an organization;”

As a result, you will not have coverage for a claim the payment of which would personally benefit you, your family1,or your law firm.

Examples of how the exclusion applies are as follows:

  • You act for your father in a personal injury action leading to a settlement. Your father talks to his neighbours months later and develops “settler’s remorse”. He sues you alleging professional negligence in the handling of his claim resulting in an improvident settlement. This claim would not be covered as payment of it would directly benefit your father; 
  • Your spouse borrows funds from a business associate and you prepare and register a mortgage over the matrimonial home to secure the debt. The mortgage goes into default and there is insufficient equity to repay the debt. The business associate sues your spouse for the shortfall, and you, claiming she relied on you qua lawyer to provide appropriate security for the loan. There would be no coverage for this claim as the payment of it would directly benefit your spouse by discharging your spouse’s obligation to repay the loan. It would also benefit you on the basis that a financial gain to your spouse would be to your indirect advantage.

The exclusion most often arises when you act for yourself or a family member on a personal matter, although it may arise when you act for a client unrelated to you2. Further, although in-law, step and other relationships fall outside the Policy’s definition of ‘family’, the exclusion may still be triggered. For example, if you act for your brother-in-law on a matter, payment of any claim may well directly or indirectly benefit your sister.

 

Exclusion 6.2 of the Policy states that the Policy does not apply to:

"6.

a claim:

 

 

 

6.2

by or in any way connected to any organization in which:

 

 

6.2.1

the Individual Insured;

 

 

6.2.2

the Individual Insured’s family; or

 

 

6.2.3

the partners, associates or associate counsel of the Individual Insured or of the Individual Insured’s law firm;

 

 

individually or collectively, directly or indirectly, had at the time of the error or thereafter, effective management or control of the organization or beneficial ownership of the organization in an amount greater than ten percent (10%), provided that with respect to any payment resulting from a claim that falls within Part B of this policy, this Exclusion 6.2 applies only to exclude the ineligible portion of such payment.”

As a result, you will not have coverage for a claim that is by or in any way connected to3 any organization4 that is partially owned, indirectly or directly, or managed or controlled by you, your family or your colleagues, either alone or together. Whether you have “indirect” or “beneficial” ownership of an organization depends on the actual circumstances of ownership at the time the services were provided and the claim is advanced. Examples of indirect and beneficial ownership that would trigger the exclusion are:

  • You and your spouse own all the shares of Holding Co, which owns 50% of the shares of ABC Co, which in turn owns 25% of the shares of DEF Co. Any claim arising from your provision of legal services to ABC Co or DEF Co would not be covered;
  • You and your sister are the sole contingent beneficiaries of FamTrust Co, a trust set up by your father who has rolled all the shares of ABC Co into it. Any claim arising from your provision of legal services to ABC Co would not be covered.

Whether you, your family or your colleagues exercise “effective management or control” also depends on the particular circumstances present at the time the services were rendered and the claim is advanced. In investigating effective management or control, the Insurer will consider a number of factors, for example:

  • whether you, your family member or your colleague (referred to as “you”) is an officer or director of, or employer in, the organization, and if you are a director, how many other directors the organization has;
  • whether the organization’s other directors look to you for guidance and generally accept the advice given;
  • whether your shareholdings, alone or in conjunction with that of others under your influence, or your financial contributions, are sufficient to elect a majority of the Board of Directors or maintain de facto control of the organization; and
  • whether you have day to day management of the organization’s affairs.

Optional business innocent insured coverage (“BIIC”) may be purchased from the Law Society. BIIC provides coverage to innocent lawyers who may be vicariously liable for another lawyer’s acts, but have no insurance under the negligence provisions of the Policy because of the operation of Exclusion 6.2. BIIC does not provide any insurance coverage for Exclusion 6.1, the benefit exclusion.
 

Although the definition of ‘organization’ is very broad, it does not include trusts. As a result, you are free to provide legal services to your partner’s family trust, for instance, without concern that your partner’s relationship with the trust itself might trigger Exclusion 6.2. However, Exclusion 6.2 may still apply if, for instance, there is another organization related to the trust that is owned, controlled or managed by you, your family or your colleagues. Further, Exclusion 6.1 may apply. For example, 6.1 will be triggered if you provide legal services to or act as trustee in relation to your own family trust. Although neither Exclusion will apply if you provide, either directly or through your firm, legal services in relation to an arms-length trust of which you are also a trustee, providing both types of services does increase the risk of claims. More information on this risk is provided in the second part of Executors, trustees and other fiduciaries.

Firms may wish to implement a due diligence process to try and discover whether or not any of the lawyers at their firm (including partners, associates and associate counsel) are providing legal services in circumstances that would trigger the application of Exclusion 6, if a claim or potential claim arose. To assist, we have developed a questionnaire that firms may wish to incorporate into whatever due diligence process they use. The questionnaire is intended as an aid only, and may not succeed in disclosing all potentially offending activities. If any offending activities are disclosed, your firm will need to decide whether or not to continue providing the services, given that coverage will not be available. Use of the questionnaire by a firm will have no bearing on whether or not any claim or potential claim is covered under the Policy. A copy of the questionnaire can be found here.

On personal matters – matters that do not involve an organization – if your family members require legal advice or services for personal matters, you should not act. Your colleagues, however, may.

On business matters – matters that involve an organization – consider if the legal advice or services required involves an organization in which beneficial ownership in an amount greater than 10% or effective management or control is, or may be, held, directly or indirectly by you, your family or your law firm colleagues, alone or together. If you or any other lawyer or lawyers at your firm have the offending interest or control, then no one at the firm should act. If your family has the offending interest or control5, another lawyer at your firm can act, but you should not.

If you as the lawyer handling the matter have coverage, then your firm will have coverage. If you fall within the Exclusion, you will not have coverage, and neither will your firm6. Neither defence nor indemnity coverage will be available. Protect yourself. Have one of your colleagues provide legal services for you or your family on personal matters, or retain outside counsel. On business matters in which no one at your firm can act, retain outside counsel. And appreciate that even if the Exclusion does not apply, there are still risks in acting for family on personal or business matters. Read ‘About to act for family or friends? (Resist, it’s just too risky)’ before you agree to act.

The material on this page is also provided in ‘A Summary of Exclusion 6 of the B.C. Lawyer’s Compulsory Professional Liability Insurance Policy (the "Policy")

 

Footnotes:

  1. Since the Exclusion relating to common-law spouse, parents and siblings was introduced for the first time in the 1991 Policy, this provision was “grandfathered” so that the Exclusion would not apply to claims brought by a common-law spouse, the parents or the siblings of the lawyer if the services giving rise to the claim occurred before January 1, 1991 (see Exclusion 6.3 of the Policy).

  2. For example, if you are acting for a business that owes you, your family or your law firm a debt (not legal fees), payment of a claim to the business will constitute a “benefit” if the business, otherwise not viable, is now able to repay the debt.

  3. It is not necessary that the organization be the claimant. More often than not, it is a third party, such as an investor, financial institution or joint venture, who is advancing a claim against both the organization in which the lawyer has interest or control and the lawyer.

  4. Broadly defined in the Policy to mean “any business, business venture, joint venture, proprietorship, partnership, limited partnership, cooperative, society, syndicate, corporation, association or any legal or commercial entity”.

  5. Note that if your family, together with you or your law firm colleagues, has an offending interest or control, another lawyer at your firm can still act (but not you) provided that neither you nor your law firm colleagues, either alone or together, have an offending interest or control.

  6. Condition 6.3 of the Policy extends limited coverage for a lawyer’s former partners (although not the lawyer) in circumstances where, for example, the lawyer acts for an organization and later moves in-house, acquiring beneficial ownership in an amount greater than 10% or effective management or control of the organization.

 

Last updated: August 2017