Will Lawyers’ E&O (aka Errors and Omissions or Professional Liability for Lawyers and potentially their firm) insurance and Law Firm Outside Directorship Liability (ODL) insurance (see former post) get more expensive in Canada? I would suggest that the recent certification of a few Ontario based class action claims should not create panic. But, this risk should not be ignored.
Regarding lawyers’ E&O, even despite the increased limits capacity, largely from Lloyds syndicates, premium reductions seem to be flattening. It can be argued that the large real losses experienced in Canada (see here for Torys LLP and Hollinger) were not priced into the market. The early stage cases that are being watched by law firms and their insurers are Allen v. Aspen Group Resources (here), because it names Weirfoulds LLP and one of its lawyers, Robinson v. Rochester et al. (here), because it names Fraser Milner Casgrain LLP, and, most importantly, the claim brought by Trillium Motor World Ltd. (here), because it alleges up to $750 million in damages and names Cassels Brock & Blackwell LLP and two of its partners as defendants. Potential insured losses from these claims are definitely not built into market pricing. Therefore, I suggest that a premium increase of 10-15% should not be a surprise.
Regarding Law Firm ODL premiums, I should first make sure there is no confusion of the term. First, I am not making any reference to ‘Employed Lawyers’ (lawyers on the company side) liability or insurance, as such coverage has very little market acceptance and is a topic for a future post. Second, ‘Outside Director’ usually refers to a member of a board of directors who is not also an executive, officer or employee of that company (but does not mean they are automatically considered ‘independent’, which is a topic for another post.) Third, ‘Outside Director Liability’ may refer to the personal risk exposure of such individual. But, the insurance world seems to (and for this blog I will) use the term Outside Directorship Liability (ODL) describe insurance coverage for any members of a board of directors (or even any officer or employee of that company) who also act in the capacity as a director of an Outside (not a subsidiary or direct affiliate) Entity. As a side comment, this ‘ODL’ cover can be an extension to the company’s D&O policy (thereby, potentially exhausting limits of liability otherwise available to the other members of the board) or purchased on a ‘stand-alone’ basis with limits of liability dedicated to all combined Outside Entity exposures of the board and therefore not share the limit of liability of the company’s D&O policy – again, a topic of a previous post. A common condition of ODL coverage is that the holder and directorship be at the knowledge and/or written request of the company, and specifically endorsed onto the policy. So get your position, public, private or non-profit, in writing with your entity and in its D&O program, preferable on a standalone ODL basis. ODL insurance is most commonly provided by extension to a company’s D&O policy. Law firms usually have a standalone ODL policy, partly because law firms are less likely (than public companies of similar size) to even buy a D&O policy, partly because lawyers are better aware of the risk of holding board positions and the pitfalls of indemnity (for another post), and partly because they know their E&O policy won’t cover them for this exposure. Other concerns and warnings about ODL and Lawyers E&O insurance will have to be left for another blog.
Now back to law firm ODL premiums. This is a much smaller market, which seems to be dominated by a few ‘programs’ rather then negotiated and priced on a client-by-client, risk-by-risk basis. This arguably should mean greater volatility in pricing. However, product acceptance not readily available, and loss experience is not public and very determine, so there is either a lack of significant market upheaval, or it is just very quiet. Therefore, the volatility could be coming, and I would budget for increased premium (I cannot offer a range), reduced coverage, and more strict underwriting criteria. To reduce uncertainty, my best suggestion is to seek alternatives. This will not be easy or cheap. There is a lack of underwriting and loss experience in the domestic, competitive marketplace, based on a long period of ‘program underwriting’. Therefore, underwriters entering, or reentering the lawyers ODL market may only be motivated by opportunistic pricing. To the buyer this may seem like ‘pound of flesh’ mentality from underwriters who have not profited from this class of business for an extended period. However, underwriters add premium for risk and the lack of data will mean more risk premium. They will be willing to listen to individual prospective clients who have made the effort to manage their ODL risk. This means identifying the exposure and making every attempt to mitigate it. Documentation and classification of risk, for each individual, each Outside Directorship position and each Outside Entity, will payoff in overall risk management value. Criteria for classification will require a significant amount of information on each Outside Entity, as well as its unique relationship with each lawyer/director (I call it the risk matrix criteria.) The exercise might already be happening, and, if its not, it should. Risk information, along with any related loss experience or potential claims, will become the insurance submission. Based on the possible ‘double-down’ nature of D&O insurance in Canada (because the potential ODL Insurer might already have a significant exposure to the underlying Outside Entity), this submission may need to be marketed to a number of different insurance carriers, but based on the sensitive nature of the information it should not be a shotgun submission.
There is a great article by Luis Millan in Lawyers Weekly, that includes quotations from very experienced Canadian lawyers and goes further than the financial exposure by appropriately discussing “the distraction, effort and impact” a lawsuit or class action can have on a lawyer and his or her law firm. It also discusses the reputational damage to the lawyer and the plaintiff lawyer’s attempt to increase the number of deep pockets in their suit.
I am not attempting to ‘fear-monger’. In fact, despite the cases Cloud v. Canada (here), Cassano v. The Toronto-Dominion Bank (here), and Markson v. MBNA Canada Bank (here), which may suggest increased certification of class actions based on the Ontario Class Proceedings Act, there are still very few successful cases creating personal liability for individual outside directors in Canada. But, there are a number of current situations where directors are funding their own legal fees because of a failure of their indemnification from their Outside Entity and failure of their D&O or ODL insurance policy. The number of cases testing the law is increasing, and the costs to defend are significant. Therefore, loss costs will continue to rise, and risk management efforts need to be increased.
Please note, there are many more issues, concerns and nuances that I have not covered. But I would be happy to discuss them in person.
Greg Shields, Partner, Mitchell Sandham Insurance Brokers, 416 862-5626, firstname.lastname@example.org
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