From crisis to innovation: 20 years of LAWPRO professional liability insurance
Twenty years ago, an investigative task force appointed by the Law Society of Upper Canada made a sobering discovery: the fund established to pay for professional indemnity claims against Ontario lawyers was underfunded by over $200 million dollars. The resulting crisis presented the bar in Ontario with one of the most serious challenges in its history. It also prompted the delegation of the primary professional liability program to the organization you have come to know as LAWPRO, a highly specialized, innovative, and solvent licensed insurance company owned by the Law Society.
As of the fall of 2014, LAWPRO insured about 25,000 Ontario lawyers, managed over $600 million in cash and investments, and had shareholder’s equity of $200 million. Out of the insurance crisis of the 1990s has arisen a professional liability powerhouse, committed to values of professionalism, innovation, integrity, service and leadership. And its main business (90 per cent of its gross revenue) continues to be providing the Ontario private practice bar with its primary layer of professional liability insurance protection.
Compulsory professional indemnity insurance has a 40 year history in the province. Since 1972, Ontario lawyers have been required, as a condition of licensing, to maintain coverage for malpractice claims.
The Law Society Act empowers the Law Society of Upper Canada to “make arrangements” for professional indemnity coverage for its members and to own shares in a provider company. Early “arrangements” included the negotiation of coverage from Gestas Corporation Limited, then American Home, and then Lloyd’s.3 Adjusting services were provided by Maltman’s International. In 1990, the Law Society first arranged its own E&O policy through Lawyers’ Professional Indemnity Company (then known as LPIC) and began handling the administration and funding of coverage for smaller claims. LPIC was useful to enable the reinsurance of larger claims.
Though separately incorporated, LPIC was not operationally separate from the Law Society. Via a “layering” structure common to many insurance programs, the Law Society (through a group deductible), LPIC, and the chosen reinsurers bore responsibility for respective “layers” of claims losses.
The funding crisis
In the spring of 1994, evidence began to emerge that the value of the insurance fund managed by the Law Society was at least $122 million short of estimated claims liabilities. The Law Society appointed actuary Brian Pelly of Eckler Partners Ltd. and accounting specialist David Ross of Deloitte & Touche to investigate further. They determined that the convergence of multiple factors − including a misunderstanding about capital requirements, inaccurate estimation of deductible receivables, and computer and other errors − had led, by June 30, 1994, to a deficit of $154 million. Because of the time value of money, and because the Law Society was also required by regulators to raise an additional $50 million to capitalize LPIC, the amount required to retire the deficit and place LPIC in a position to continue to offer insurance was estimated, in October 1994, at $240 million over the course of four years (1995-1998).
The Task Force
This discovery sent a shockwave of panic through the bar. To come to terms with the monumental challenge before it, the Insurance Committee of the Law Society acted quickly to appoint members of an Insurance Task Force. Established by Convocation on June 27,
1994, the Task Force, chaired by Harvey Strosberg, was comprised of Thomas Bastedo, Susan Elliott, Abraham Feinstein, Neil Finkelstein, and Ross Murray. With the assistance of a team of experts including Brian Pelly and David Ross, the Task Force members spent the summer and early fall of 1994 grappling with the deficit’s implications for the future of lawyers’ professional indemnity coverage in Ontario.
On October 28, 1994, the Insurance Task Force and the Insurance Committee (hereafter Task Force) released a report recommending that the requirement that Ontario lawyers carry professional indemnity insurance be maintained, but that significant changes be made to the terms and administration of that coverage. In particular, the Task Force recommended that the insurance fund be operated in a commercially reasonable manner, that risk-rating be employed, and that coverage not be extended on a no-fault basis – and some lawyers could be denied coverage in certain circumstances.
The Task Force report made it clear, however, that LPIC as it was being operated in 1994 was poorly positioned to put these recommendations into action. At that time, LPIC did not collect the data necessary for risk rating6, did not keep its own records, did not track its own denial of coverage statistics or reasons, had no guidelines for the expenditure of legal fees, and outsourced key functions (such as the development of coverage opinions) that, if managed internally, would have provided the information needed to risk-rate premiums and accurately set levies. The management structure of the company was also a barrier to success: there were “no identifiable channels for decision-making and no clear lines of authority.”
To overcome these barriers, the Task Force recommended that LPIC immediately put in place a dedicated CEO/President responsible for the company’s operations, including underwriting; that an active and informed board of directors be appointed; and that the company hire a vice-president of claims, a vice-president of finance, and a vice-president of operations. The result: an independent insurance company.
Malcolm Heins was the company’s first CEO and he had a clear vision for what the company could become. He was a lawyer with a background in professional indemnity insurance and 12 years of experience as a senior insurance company executive.
When asked about LPIC’s toughest challenge, he references not just its finances, but communications: “we knew we needed to create a real understanding by Ontario’s lawyers as to what caused their claims. We needed to encourage them to make changes in their law practices.” Educating lawyers about claims prevention remains a key priority for the company today.
Michelle Strom, President and CEO at LAWPRO from 2001 to 2008, joined the company in January 1995 as Chief Financial Officer, and remembers the very practical challenges of the company’s first several months: “Something people tend to forget is that when LPIC separated itself from the Law Society in 1995, the new company had no separate computer systems. We started building them right away, but the company’s operations had to go on while that was happening. Wesent out about 16,000 insurance applications that year – on paper – and each one had to be reviewed and the data manually entered.
Everyone who could review applications did. This allowed us to develop what ultimately became a very robust set of data to better manage the program, but that first year, from a data perspective, we were in the dark, building everything from scratch.” (For some perspective on how times have changed, 98 per cent now e-file.)
Convocation accepted the Task Force’s recommendations, and acted quickly to appoint Malcolm Heins as the CEO of LPIC. “Having those detailed guidelines and a specific mandate from the Task Force was key to moving forward,” said Heins. Under his direction, changes to the company’s management structure were implemented within a few months of his arrival. “In addition,” noted Heins, “we had to persuade the reinsurance market to provide financial support, but before going out to the reinsurers, we needed to redesign and clarify the insurance coverage and be able to demonstrate to reinsurers that we had the ability to make the insurance program financially sustainable.” Heins rewrote the policy and put on a road show in early 1995 for all of the reinsurers who could potentially support LPIC. The result: the reinsurers got on board and LPIC was ready for operation as an independent insurance company, governed by commercial insurance industry principles, within six months of Convocation’s acceptance of the Task Force’s report.
The primary insurance program is planned each year to generate only those profits required for present and future compliance with regulatory requirements and prudent solvency planning. The company’s focus for the program remains consistent with the Task Force’s vision of a commercially responsible insurance initiative: premiums charged in a particular policy year are intended to match, to the closest extent possible, the projected defence, indemnity and administrative costs, plus meeting regulatory capital requirements.
A well-defined scope of coverage
As recommended by the Task Force, LAWPRO takes a principled approach to defining the appropriate scope of coverage for the mandatory professional indemnity policy. For example, the LAWPRO policy covers lawyer errors and omissions, but does NOT generally cover criminal acts or fraud (other than through its specifically defined and priced innocent party coverage) – compensation for losses related to these is more commonly available from the Law Society’s victim compensation fund.
The primary program policy also does not cover losses that are remote from the delivery of professional legal services. Where a lawyer offers non-legal services (for example, by acting as a real estate broker or a financial advisor), there is no coverage for claims that result. Coverage of losses related to trust account overdrafts resulting from counterfeit cheques and instruments is available only in circumstances where the lawyer has taken steps required by LAWPRO to verify the validity of instruments. Finally, in 2014 LAWPRO introduced a sublimit of coverage for losses related to cybercrime, recognizing that prevention of these losses is more closely dependent on the appropriate use of information technology, and not on the application of legal skill.
The evolution of today’s LAWPRO: expertise prompts innovation
The story has a very happy ending: not only did the reorganized LPIC succeed in retiring the 1994 deficit, it did so slightly ahead of schedule. Credit for this achievement must be shared with the bar, who paid levies to the Law Society to permit it to fund the higher LPIC capital requirement, and to insured lawyers who paid higher levies in 1995-1998.
Lawyers’ willingness to accept responsibility for the deficit and for the creation of an independent, solvent insurance program was an important show of faith in what the company could achieve. Says Michelle Strom, “in 2002, we changed the company’s name to LAWPRO to reflect our emergence as a professional and proactive insurance company. Re-launching and rebranding the company was our way of saying that, while the problems of LPIC had shaped the program, LAWPRO represented the future and all that it has become.”
We hope lawyers licensed in 2015 and beyond who aren’t familiar with the insurance crisis will not take for granted the result of these efforts: an innovative, legally compliant, and financially stable primary professional liability insurance program that offers coverage carefully tailored to claims risk. Today’s LAWPRO is celebrating five years of premium stability in the primary program despite annual claims costs of approximately $100 million, once internal claims handling costs are considered.
The chart below illustrates both the growth in the number of lawyers in private practice and the reduction in the proportion of lawyers who chose to go into private practice in the last 20 years. Despite these demographic shifts, LAWPRO has stabilized premiums – the 2015 premium of $3,350 represents a 40 per cent decrease from the premium charged in 1995.
With each passing year, the company develops a deeper understanding of claims trends, and is well positioned to identify and cope with emerging risks including sophisticated mortgage frauds and cybercrime. “Today’s LAWPRO,” notes Heins, “provides one of the best– if not the best – professional indemnity programs for lawyers in the world. Ontario lawyers need only observe what’s happening in other jurisdictions to see that they enjoy a more favourable insurance market than their peers.”
Just how innovative is LAWPRO’s primary professional indemnity program?
The Law Society of Upper Canada’s mandatory professional indemnity program, underwritten by LAWPRO, is the largest of its kind in Canada. While professional indemnity insurance for lawyers is mandatory across the country, the Ontario program is distinctive in being offered by a licensed insurance company with such a long history of operational and governance independence.
Because malpractice insurance for lawyers is not mandatory in the U.S. (except in the state of Oregon), LAWPRO has been at the forefront of research into coverage models, claims trend analysis, premium setting, and many other aspects of insurance administration.
Kathleen Waters is President & CEO at LAWPRO.