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Firms' self-insurance raises ethical issues

|Written By By Julius Melnitzer

An exclusive group of Canadian law firms may have CLLAS, but that hasn't prevented their foray into errors and omission (E&O) self-insurance from raising important ethical and accessibility issues in a country where only a handful of national firms exist to serve a tightly integrated economy.

'One of the criteria for membership is that a firm has to be fairly large or the concept doesn't make sense from a premium or coverage point of view,' says Ben Hutzel.
'One of the criteria for membership is that a firm has to be fairly large or the concept doesn't make sense from a premium or coverage point of view,' says Ben Hutzel.

CLLAS is not a typo. It is the acronym used by an elite group of 14 law firms comprising over 5,000 lawyers that have banded together to incorporate a reciprocal insurance exchange, known as the Canadian Lawyers Liability Assurance Society.

"A reciprocal exchange is an old English trading concept under which members self-insure by agreeing to indemnify each other," says Ben Hutzel of Bennett Jones LLP's Toronto office. "The group is very unique because they're all competing with each other in the legal marketplace."

Bennett Jones is not a member of CLLAS, but Hutzel was at Campbell Godfrey (a forerunner of Fasken Martineau DuMoulin LLP) when he was the founding chairman of the organization some 20 years ago.

Although registered and licensed as an insurer under Ontario law and fully compliant with Law Society of Upper Canada Rules, CLLAS is fairly secretive.

"We're a private organization that has no interest in having its affairs made public, and whatever's public you can find out for yourself," said Pat Mahoney, general manager of CLLAS, when first contacted by Law Times.

Indeed, it is difficult to find an independent address or phone number for CLLAS through online sources such as Canada411.com or Google. When the organization's address did appear, it turned out to be the same address as Torys LLP. CLLAS has no web site, and one of its directors told Law Times the board had been instructed "not to talk to the press" well before Law Times' interest in the group. But Michael Thorley of Torys, the current chairman, denied any such edict exists.

In any event, CLLAS did resile somewhat from Mahoney's original position when it allowed Law Times to interview Thorley and Barry Bresner of Borden Ladner Gervais LLP, a member of its board.

Yet Thorley could not provide Law Times with a list of CLLAS members.

"I was unable to obtain unanimous consent for releasing a list of members, although some individual members were prepared to be identified on condition that the whole group be identified," Thorley said.

What Law Times has discovered is that five of Canada's six largest firms — McCarthy Tétrault LLP (1), Borden Ladner (3), Fasken Martineau DuMoulin LLP (4), Fraser Milner Casgrain LLP (5), and Blake Cassels & Graydon LLP (6) are members of the group. So are Torys and McMillan Binch Mendelsohn, both also in the Top 20.

The average number of lawyers in member firms approaches 400. According to Bresner, only one of the 14 members has fewer than 100 lawyers.

"One of the criteria for membership is that a firm has to be fairly large or the concept doesn't make sense from a premium or coverage point of view," Hutzel says.

The original group consisted of eight or nine firms, formed in the mid-80s when E&O rates skyrocketed.

"The feeling when the organization was formed was that the bigger law firms could produce a better risk profile," Thorley says.

The feeling was right. "The formation of CLLAS has saved our members hundreds of thousands, if not millions, of dollars in premiums over the years," notes Hutzel.

The group incorporated and had itself licensed as the first reciprocal exchange in Ontario. Today, there are nine such exchanges.

Like all insurers in Ontario, CLLAS is regulated with reporting requirements that are subject to regular audits by the Financial Services Commission of Ontario (FSCO).

The latest statistics on FSCO's web sites are for 2002. FSCO would provide no other information, citing privacy concerns.

In 2002, CLLAS wrote $17.3 million in direct premiums and incurred direct claims of $8.4 million. Its assets were $86.4 million, its liabilities $71.8 million and its net income $334,000.

In 2001, premiums were $14.7 million compared to $21.1 million in claims, but income was $3.3 million. In 2000, direct claims ($19.1

million) also exceeded direct premiums ($15.5 million) and net income was $556,000.

Direct claims against some of Canada's most prominent law firms between 2000 and 2002, then, were almost $50 million. If, as reported recently in the Globe and Mail, Torys has tentatively negotiated a $30-million settlement in the Hollinger affair (Torys has acknowledged settlement discussions but refused to comment further), claims will almost certainly have reached a new high.

Still, actuarial reporting governs the affairs of CLLAS, which has reserves against future claims and a current surplus.

"We can withstand one or two maximum claims in a year without any need to go back to memberships for reassessments," says Thorley.

According to Hutzel, CLLAS members insure to mandatory limits (which vary from province to province, from $1 million in Ontario to $10 million in Quebec) through the various law societies. Beyond that, CLLAS provides excess coverage for a further $5 million or $10 million.

But that isn't all. A Barbados company negotiates and provides reinsurance up to at least $50 million. The Barbados entity, whose name CLLAS would not provide, is governed by the Barbados Exempt Insurance Act of 1983, overseen by the country's Ministry of Finance and Economic Affairs. Qualifying companies, known as "Exempt Insurance Companies" or EICs, enjoy very favourable tax treatment and are exempt from withholding tax and exchange control restrictions.

There is nothing sinister about the Barbados company: the country is a respected and well-known tax haven for insurers. Some of Canada's largest chartered banks (BMO, Scotiabank, CIBC, RBC) have created EICs for their insurance arms, as have a host of mainstream insurers and brokers.

However this may be, the fact remains that CLLAS is an elitist, secretive, powerhouse union of some of Canada's largest firms. Because the firms are made up of lawyers, each and every one of them has a public interest mandate — an interest that could be jeopardized by CLLAS' very existence and certainly its lack of transparency.

To begin with, there is a conflicts issue, which Bresner acknowledges.

"We dealt with the issue when CLLAS was formed," he told Law Times. "Group members may sue each other in professional negligence matters provided they make full disclosure to the client. There are any number of occasions on which this has happened."

But Rob Staley of Bennett Jones' Toronto office says it's not as simple as making disclosure.

"Disclosure is about managing conflicts, but it doesn't always solve them," he says. "It may provide a practical solution, but there's always a concern how people will act if they're exposed."

Thorley says CLLAS members are not "exposed" by any individual suit because a rise in premiums isn't dependent on the result of a particular case but on more generalized actuarial calculations.

Unless the case is big enough.

"If all hell breaks loose, then technically an unpaid portion of a claim could be visited on group members," he agreed.

And by Thorley's own admission, reciprocal exchanges differ from other insurers in a material way.

"Instead of capital we have the financial standing of our members behind us," he says.

With financial standing at stake, and with CLLAS law firms saving "millions" as a result of their staunch claims histories, "full" disclosure would arguably include an explanation of the precise relationships in CLLAS, the complicated factors that drive premium rates, a discussion of the reinsurance arrangements in Barbados, and CLLAS' relationship to the EIC.

"It's hard to imagine CLLAS members having the type of undivided loyalty that fulfils their fiduciary duties when they might be required to contribute in some way to the pot that pays the claim," Staley says.

Staley says he has been involved in cases where the defendant firm has been willing to settle but other CLLAS members are unwilling to do so.

"You see competitive issues that you normally wouldn't see when you're dealing with insurers," Staley says.

Doubtless this makes clients — presumably suing because they were unhappy with a law firm's services — even more unhappy. So does the fact that in a market where freedom of choice has already been hampered by the Supreme Court of Canada's landmark conflicts decision in R. v. Neil, the existence of CLLAS creates even more strictures.

"There is no question that the CLLAS arrangements limit the business community's ability to get a lawyer of their choice to sue the elite firms," Staley says. "I've also been involved in cases where it's extremely difficult to find expert witnesses in certain areas of law because of this limitation."

The experience of Don Jack, a litigator at Lerners LLP, is similar.

"This situation should not exist because it's not a good thing from an administration of justice perspective," he says.

One would think that the experience of firms in the post-Neil world would have created a higher awareness of the issues. Indeed, a survey of the 10 most prominent post-Neil conflicts judgments shows that national firms account for six of these 10 judgments and an important regional firm is involved in a seventh.

Clearly, the conflicts action has centred on the big players. The existence of CLLAS can only aggravate that situation.

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