A toxic mix of higher claim costs and a struggling economy has forced Ontario’s legal liability insurance provider to boost its base premium by $500 for 2010.
On top of that, a special levy due to the new harmonized sales tax also might be in the works.
The $500 boost works out to a 20-per-cent increase excluding any special harmonized sales tax fee, a concern for people like County & District Law Presidents’ Association chairman Randall Bocock.
“Any time you have an increase off the top to the cost of practice, it causes people who are already on the cusp of determining whether it’s worthwhile to stay in practice or not to leave the practice,” he says.
Bencher James Caskey, a member of the Lawyers’ Professional Indemnity Company’s board of directors who rolled out the company’s annual report at September Convocation, said 2009 “challenged LawPRO like no other year before it, and all signs point to an equally invigorating or challenging year ahead.”
He added, “The impact that the credit crunch has had on our bottom line is one of the many factors which, in concert, create what we call in the report ‘an ugly cacophony of challenges.’”
The base premium will go up $500 to $2,950, versus $2,450 in 2009. LawPRO said it will collect an extra $200 per lawyer for rising claims costs, $150 for the decline in investment income, and $150 for the HST. An additional $450 one-time special levy may also be charged when the new tax is officially rolled out, said the insurer.
Some lawyers, however, could pay as little as $1,595 depending on the type of coverage they opt for and their practice areas.
In terms of the increased cost of claims, LawPRO noted that while it once paid between $55 million and $60 million to resolve claims in a single year, that number is expected to rise to more than $88 million.
Meanwhile, investment income took a dive in late 2008 and early this year, LawPRO reported. Historically low interest rates meant the insurer’s investments brought in only $1.8 million in the first six months of 2009.
Meanwhile, the province’s plans to harmonize the five-per-cent GST with the eight-per-cent PST on July 1, 2010, will drastically bump up the fees connected to the investigation, defence, and indemnity of claims, said LawPRO. It pegs that added expense at $3.2 million for 2010.
The new combined tax will also increase program administration costs by about $250,000 per year, LawPRO reported.
“This is hard to believe, but true - the immediate impact of the HST will be to increase LawPRO’s legal bills, as well as our operating costs, by eight per cent, about $3.5 million in the year 2010,” said Caskey.
The insurer said the special HST levy would help pay for a review of existing claims liabilities and would depend on the province’s provision of transitional relief from the new blended tax. Caskey said the insurer is in talks with the government on that.
LawPRO reported that it held nearly $365 million of unpaid claims liabilities on its books as of June 30, 2009. It said most of those claims will not be resolved before July 1, 2010, when the HST takes hold.
The $450 levy would go toward the estimated $10.2 million in additional costs the HST is expected to add to this unpaid claims liability, said LawPRO.
The levy will be needed when the HST legislation passes second reading, at which point the insurer will have to account for the liability.
But the annual report wasn’t all doom and gloom. The real estate practice coverage option will drop to $400 from $500, but an increase in the real estate transaction levy to $65 from $50 will mildly offset that.
Bencher Bob Aaron, however, questioned the need for any separate transaction levies at all.
“For all small practitioners out there - those who do real estate and civil litigation - we’re now going to have to have two kinds of transaction levies,” he said. “It’s going to be a headache for booking purposes, and I think the optics of having a higher transaction levy for real estate, higher than civil litigation, the optics are bad.
And particularly when, from year to year, there’s always a contest between which area of law - real estate or civil litigation - hits the top of the claims charts,” he said.
Caskey explained that the real estate levy is a “risk-related premium increase” that relates specifically to the claims LawPRO has received.
“The information that our claims experience demonstrates is that real estate is in fact the problem area that has to have this increase reflected, and it’s felt to be actuarily and in insurance terms an appropriate risk-related premium increase, and it would not be appropriate, in the view of the board [of directors], that this be reflected under the other areas where there is a surcharge,” said Caskey.
Still, Caskey said the insurance program is performing well despite the difficulties it faces.
“LawPRO’s position is solid,” he said. “It continues to receive a consistent A rating from [credit rater A.M.
Best Company, Inc.], it continues to meet or exceed important regulatory requirements, its dedicated team is coping well with the influx of more complicated claims, and it continues to innovate for the benefit of the profession.”
Caskey noted that 2008 fraud claims could cost the program about $9 million. But 2009 has brought an 18-per-cent reduction from that level, he said.
“That is an encouraging trend, but we do not take it lightly,” he said.
Caskey said LawPRO caught wind of at least 18 instances this year in which lawyers backed away from probable fraud attempts. He said the thwarted frauds could have cost the program up to $5 million.
LawPRO is owned by the Law Society of Upper Canada and provides malpractice insurance to about 22,000 lawyers in Ontario.