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Rising litigation trends increase demand for E&O coverage in Canada

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Litigation trends in the United States are starting to have a major impact on Canada's errors and omissions insurance market, increasing demand for the coverage and possibly leading to a firmer pricing environment.

Major lawsuits and settlements related to professional services demonstrate that the U.S. trend of holding professionals responsible for financial losses or alleged misconduct in services they provide to companies has filtered into Canada.

"We're seeing what I'll call a ripple effect from the U.S. in this post-Enron era," said Donald McGarvey, an Edmonton, Alberta-based partner with McLennan Ross L.L.P. Mr. McGarvey specializes in commercial litigation and insurance and works on E&O claims involving several professionals, including lawyers, accountants, financial brokers and agents, and insurance brokers and agents. "People are so much more likely in Canada to point the finger and assume someone else is responsible," he said.

In December 2005, for example, Toronto-based law firm Torys L.L.P. agreed to pay about $30.3 million to media holding company Hollinger International Inc. to settle claims that Torys failed to offer proper legal counsel to Hollinger due to a conflict of interest arising from its simultaneous representation of former Chairman and Chief Executive Officer Conrad Black.

In February, the bankruptcy trustee for former retailer Dylex Ltd. in Toronto reached a $32 million Canadian ($28.4 million) settlement in a lawsuit related to the acquisition of the company by Hardof Wolf Group Inc. The lawsuit, alleging negligence and breach of fiduciary duty, was filed against Dylex's former board of directors, certain senior officers and Toronto-based Goodmans L.L.P., which acted as Dylex's legal counsel in structuring the acquisition agreement.

The litigation exposure for lawyers is one that Mr. McGarvey, chair of his firm's risk management committee, says he ponders constantly. "I have to think about it daily because we're trying to find the line in terms of a professional's conduct," he said.

The rising number of claims has led to an enhanced focus on risk management for Canadian professionals, including careful avoidance of any potential conflicts of interest, Mr. McGarvey said. "The heightened sense of diligence on the part of professionals can't be a bad thing," he said.

U.S. litigation trends have had a major impact on other professions as well. Canadian accountants, for example, are facing more lawsuits than ever before, driven by Enron/ Arthur Andersen-type claims related to professional conduct, he said.

Systemic changes in the Canadian legal environment have had a "tremendous impact" on the rise in E&O claims--namely the passage of legislation in several jurisdictions that has allowed or facilitated the filing of class action lawsuits, Mr. McGarvey said.

Because of the more litigious U.S. environment, a key risk for Canadian professionals relates to cross-border services they render, said Robert Lee, chief underwriting officer for MINT Canadian Specialty Underwriters in Toronto, a division of London-based Markel International Ltd. that writes miscellaneous E&O coverage in Canada. "I think that necessarily creates a heightened exposure for them just given the differences in the litigation climates in the two countries, with the U.S. being a more volatile climate," he said.

This has created a frustrating situation for E&O brokers, because Canadian subsidiaries of U.S. insurers often do not have the authority to write these types of risks, even though their parent companies frequently write the coverage, said Kelly MacDonald, assistant department manager of Aon Corp.'s professional services group in Toronto. "When Canadian risks have U.S. exposures, we have a difficult time getting Canadian insurers to write that," she said.

Generally, if brokers cannot secure coverage in Canada, they go to Lloyd's of London, Ms. MacDonald said. They would call U.S. insurers only on large risks because they tend to run into pricing issues when attempting to secure coverage in the U.S. market, she noted. While U.S. insurers have an appetite to underwrite the risk, they often view it through the prism of a much more litigious U.S. environment and offer price quotes that are unacceptable for Canadian buyers, she said.

While coverage may generally be available for certain risks, the Canadian market needs more capacity because brokers are often forced to go overseas when they cannot secure coverage in the domestic market, Ms. MacDonald said. "I find it very frustrating how conservative Canadian underwriters are," she said. "I'd love to see more capacity in the Canadian marketplace."

Canadian insurers, though, say the market has sufficient capacity due to an influx of new entrants. "I think the Canadian marketplace is reasonably well served by the insurance companies that are currently active here," MINT's Mr. Lee said.

Self-insurance

Certain professional groups have chosen to self-insure their risks. Lawyers, for example, generally secure E&O coverage through provincial legal associations, although some lawyers and firms purchase additional coverage on the commercial insurance market.

The Law Society of British Columbia, which operates a compulsory insurance program for 7,000 of the 10,000 lawyers practicing in the province, created its program in 1971 in response to an insurance crisis in the professional liability market that left lawyers in the province uninsured or underinsured, said Susan Forbes, director of the society's lawyers' insurance fund. The organization eventually established a British Columbia-domiciled captive in 1989 that provides $1 million Canadian ($888,889) in limits per occurrence and $2 million Canadian ($1.8 million) in aggregate for each participating lawyer, she said.

"We decided a captive would most effectively meet our needs of long-term price stability and program stability and allow us to completely control the scope of coverage and claims handling," Ms. Forbes said.

In the commercial market, limits up to $10 million Canadian ($8.9 million) are generally available although the amount of actual limits purchased may vary. For Canadian life insurance agents, the marketplace provides up to $5 million Canadian ($4.4 million) in limits while limits greater than $15 million Canadian ($13.3 million) are not uncommon for large property/ casualty brokers, said Stephen Ritter, Canadian and U.S. life agents' product leader based in Toronto for Swiss Reinsurance Co.'s Commercial Insurance.

Increased demand

Demand for E&O coverage for lawyers and accountants has increased due to the rising prevalence of E&O litigation, but regulatory mandates contribute to the need for coverage for many professionals, including mortgage brokers in Ontario and paralegal professionals in Quebec, said Alison de Broux, vp, product line manager for professional liability for ACE Canada in Toronto. The company writes E&O coverage for a variety of professional segments, including learning institutions, lawyers--excess coverage above what they receive from professional associations--and financial services. "The regulatory environment has had a noticeable effect on the demand for E&O," she said.

Insurance agents and brokers are required in most provinces to carry E&O insurance, usually in the range of $500,000 to $1 million Canadian ($444,000 to $888,889), as part of regulatory licensing requirements, and may be subject to fines and penalties if they do not have E&O coverage, Mr. Ritter said.

In general, pricing for E&O coverage in Canada is stable to slightly softening, insurers and brokers say.

"I believe the Canadian market is a very stable market," said Ms. de Broux. "It's very consistent and it has been for the last five years. And I hope it continues to be consistent."

The increasing risk of litigation, though, may have an impact on future pricing. "I think the Canadian marketplace has been fairly stable from a price perspective in recent years, but I think longer-term some of the developments here will tend to keep rates fairly firm," Mr. Lee said. "I think that's why Canada is seen as an attractive place for insurers to come in and open their doors."

Underwriters view the Canadian E&O market as a very attractive market to deploy their capital because it is still much less litigious than the U.S. market. "Our legal climate is a lot less onerous than it is in certain jurisdictions in the U.S. such as Texas," Mr. Ritter said.

E&O experts, though, say they expect the trend of lawsuits challenging the work of professionals in Canada to continue to increase.

"Certainly, the U.S. lawsuits pose a far greater threat than Canadian ones, but I think it's only a matter of time before we start seeing more large lawsuits in Canada," Ms. MacDonald said.