Along with the name change, law society should also look at title insurance

Thursday, October 19, 2017

The Law Society of Upper Canada (LSUC) will be changing its name. Let’s hope it doesn’t use the occasion to toss its sticky if not seamy underside into the compost bin.

What remains unexplained in the rush to judgment that culminated in LSUC’s new advertising and referral fees — a stampede that besmirched the public image of the entire personal injury bar because of the alleged excesses of one notoriously bad apple — is how LSUC managed to respond so quickly to the situation while allowing the litany of murkiness, two decades old, that has surrounded the workings of title insurance, to continue unabated.

If the new advertising and referral rules are any indication, transparency is the new — renewed, if you will — buzzword of choice circling the Rules of Professional Conduct. But ever since Stewart Title’s Examining Counsel (EC) Program took shape in 1998, the relationship between real estate lawyers and title insurance companies has been anything but transparent to consumers, the people who actually matter.

Stewart calls the EC “a fee for the legal services of ordering the policy through a secure online platform, informing the title insurer of the various title qualifications for the policy and providing a report on title as required by the Insurance Act, Ontario.” Stewart has not only consistently cautioned lawyers about their obligation to disclose the EC fee to clients, its agreement with lawyers requires disclosure of the EC fee. Whether lawyers pass on the savings to clients is entirely up to them.

But meaningful disclosure by lawyers is not always what’s been happening, or at least not consistently. Take, as just one of the many examples I could cite from firms around the province, a recent set of reporting documents sent in 2016 to the purchaser of a home from one of Hamilton’s longest-established law firms.

On Schedule A to the reporting letter, which particularizes the title insurance, the “premium” is stated to be $502.20. But the trust ledger shows $150 less ($352.20) as having been sent to Stewart Title. So what happened to the $150? As it turns out, the odd number of $132.74 turns up as a separate and additional fee item, titled “Stewart Title Administration Fee” on the purchaser’s invoice. Other firms, it should be noted, just bury this amount in a total fee.

The difference between the $132.74 and the $150 is attributable to the fact that law firms have no idea how to tax the $150. HST is payable on fees but only PST is payable on premiums. In this particular case, the additional “fee” of $132.74 number seems to be a product of $150 less 13 per cent. What’s happened is that part of a disbursement (the premium) magically becomes a fee. How long do you think it would take to explain that to a consumer —  if they ever asked?

Stewart is adamant that the EC fee is “is not a referral fee, discount or refund on premium.” The insurer points out that the premium it charges to an insured using a lawyer who is an EC is the same as the premium charged to an insured using a lawyer who is not an EC.

But that misses the point. The proper characterization of the EC fee is a matter between title insurers and the industry’s regulator, the Financial Services Commission of Ontario. It has nothing to do with the issue of transparency between lawyers and their clients. This is not about title insurers. This is about lawyers. And what lawyers who are not passing on the saving should do, according to one practitioner whose firm does do so, is to have clients acknowledge up front that that they’re okay with “the lawyers making $125 to $150 from the insurance company.”

In other words, it’s what the EC and similar arrangements are in practical terms that matters. They are an incentive, no more, no less. An incentive for lawyers to nudge their clients to buy policies from Stewart Title, FCT Insurance or Chicago Title, the three companies that pay them money in one form or another.

Otherwise, why would lawyers not favour the TitlePlus policy offered by LawPRO? The LSUC-owned insurer would have offered title insurance for $285 to the purchaser of the $500,000 home cited in our example. Even if the law firm had not added the “Stewart Title Administration Fee” to its account but passed the saving on to its client, the clients would have saved $65 by going with LawPRO. Because the savings were not passed on, the client effectively paid almost twice as much for title insurance.

And let’s be clear. The EC strategy is working for Stewart, which wrote $92 million in title insurance premiums in 2013. LawPRO, which makes no payments to lawyers, has current premiums of $6.5 million. While Stewart and LawPRO are the two companies who focus primarily on residential purchasers, other insurers targeting different parts of the title insurance market who offer incentives to lawyers are also way ahead of LawPRO. FCT Insurance wrote $106 million in premiums in 2013 and Chicago Title wrote $26 million.

It’s not that LawPRO doesn’t offer incentives or use marketing strategies. First and foremost is the fact that it combines its title insurance product with errors and omissions coverage. Whether that should be disclosed is a subject for another day.

There is, however, a silver lining on the horizon. Since Malcolm Mercer took over LSUC’s working group examining referral fees and the like, considerable progress has been made. He assured me that title insurance fees are still under the microscope. He also says they are a complex issue that require some time to explore and resolve.

Fair enough. Let’s just hope it doesn’t take another 20 years. A renewed sense of urgency could give LSUC’s proposed name change some real substance.

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