Reciprocal insurance exchange raises ethical, access to justice questions

Friday, May 05, 2017

Whether lawyers have class is open to question. But a select group does have CLLAS.

CLLAS is not a typo. It is the acronym used by an elite group of about 15 law firms comprising some 5,000 lawyers who have banded together to incorporate a reciprocal insurance exchange, known as the Canadian Lawyers Liability Assurance Society, that provides them with excess insurance.

But the arrangement raises ethical and access to justice issues in a country where only a handful of national firms exist to serve a tightly integrated economy and where consumer access to the profession is a live issue.

A reciprocal exchange is an old English trading concept under which members self-insure by agreeing to indemnify each other. In this case, what they’re indemnifying each other for is the risk of professional negligence claims. What makes CLLAS unique is that the law firms involved are all competing with each other in the legal marketplace.

CLLAS is licensed under Ontario law and fully compliant with Law Society of Upper Canada rules. Among its members are McCarthy Tétrault LLP, Borden Ladner Gervais LLP, Fasken Martineau LLP, Blake Cassels & Graydon LLP, Torys LLP and McMillan LLP. According to a former chair of the organization, firms must be “fairly large to join” so as not to impair the concept from a premium or coverage point of view.

The original group consisted of eight or nine firms, formed about 20 years ago when errors and omissions (E&O) insurance rates skyrocketed. The idea was that the larger law firms could form a better risk profile, especially since traditional E&O insurers, of which there were and are a limited number, refused to separate the far riskier U.S. market from the Canadian market in establishing their premiums.

It was a brilliant business move: CLLAS has saved some members millions of dollars over the years. Because CLLAS is a non-profit organization, it has been able to return more than $5 million in premiums to members over the years. CLLAS also has a “voluntary excess” program, which offers from $1 million to $9 million in excess insurance to non-member law firms who want coverage beyond the mandatory limits set by the law societies. Interestingly, however, this is not available to firms in Ontario or British Columbia.

Statistics from Ontario’s superintendent of insurance for the latest period available, 2015-16, show that CLLAS wrote $7.3 million in direct premiums and incurred direct claims of some $32 million. It had assets of $125 million and liabilities of $114 million. The group generated a profit of $482,000.

But there’s more. A Barbados company negotiates and provides reinsurance to CLLAS. The Barbados entity 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 international insurers and brokers. How ever this may be, the fact remains that CLLAS is an elitist, somewhat secretive powerhouse union of some of Canada’s largest firms.

To make things worse, there’s a conflicts issue. CLLAS deals with the issue by allowing group members to sue each other in professional negligence matters if they make full disclosure to the client. This happens with some regularity. The difficulty is that disclosure may manage conflicts, but it doesn’t necessarily resolve them. It’s a practical solution, but it doesn’t obviate concerns about how the very plaintiff’s case they’re taking on increases a CLLAS member’s own exposure.

To be sure, the risks are mitigated by the fact that premiums are based on generalized actuarial calculations and not the result of a particular case. Unless the case is big enough, in which case any unpaid portion of the claim could be visited on group members. Aggravating the situation is the fact that CLAAS differs from other insurers because it’s the financial standing of the firm’s members, rather than capital, that backs the organization. Here, the difficulty is that the stability of firms is not what it used to be, something the demise of Heenan Blaikie in Canada and the collapse of King & Wood Mallesons’ European arm demonstrate amply.  

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.

Plaintiffs’ lawyers say they have been involved in cases where the defendant firm has been willing to settle but other CLLAS members are unwilling to do so. They also confirm that having CLLAS in the background raises competitive issues not normally seen when defendants are insured by other companies.

Canada is a market in which freedom of choice has already been hampered by the Supreme Court of Canada’s landmark conflicts decision in R. v. Neil 2002 SCC 70. Not only does CLAAS’s existence create even more strictures on the choice of lawyers available to sue elite firms, plaintiffs’ lawyers say that the extent of CLLAS’ reach across the legal market has in certain cases made it difficult to find expert witnesses. This is not theoretical. A brief analysis and anecdotal evidence show that the majority of post-Neil conflicts judgments involve national firms. CLLAS’ existence can only make that worse.

As for access to justice, CLLAS members argue that they will take on any legitimate claims regardless of whether the defendant is a partner in CLLAS. “I don’t think CLLAS make any particular difference because the administration of justice requires us to be prepared to hold each other to account,” said a lawyer at a member firm well-versed in CLLAS and professional ethics.

It may be true that big firm clients have no problem getting access to counsel when they have complaints against other firms. Certainly that’s true in an environment where the litigation market has segmented to include a very strong group of litigation boutiques. But what about the consumer?

“We don’t act for them,” our source said. “The rates we charge and the expertise we have aren’t really useful to ordinary people.”

Enough said.

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