A winning slice of Canadian PII
15 November 2010
Last month we heard the sad news that Chris Haney, one of the two Canadians who invented Trivial Pursuit, passed away. I was fortunate enough to meet Chris once or twice. A super bloke who brought fun to hundreds of millions of people with the most simple of ideas.
In July another Canadian, Gordon Nixon, CEO of Royal Bank of Canada, addressed the British Bankers Association annual conference and talked through the reasons why Canadian banks have weathered the worldwide financial crisis relatively unscathed.
He summarised why Canada had got it right during the boom years.
Simple concepts are the key. Sound macro economic policy, well capitalised, well-managed banks, geographic and portfolio risk spreading, strong but common sense regulation and most importantly the structure of the Canadian housing and mortgage markets, which feature strong risk management strategies.
Canadian practices and the regulation of solicitors mirror the English system in most respects. Solicitors have always controlled conveyancing, complying with a set of professional conduct rules that would be instantly recognisable in this country.
In 1995, the profession in Ontario, governed by the Law Society of Upper Canada (LSUC), faced similar problems with its Professional Indemnity Insurance (PII) market to those we're currently facing in England. Canadian PII suffered disproportionate losses from civil litigation and residential conveyancing work.
LSUC, took the lead and drove reform in the way PII was structured in Ontario. LSUC recognised that the tens of millions of pounds of conveyancing related PII losses were first and foremost a problem for the client, not the profession.
Their reforms quickly produced a better system of client risk management and, as a by-product, a sustainable, stable PII market.
- Solicitors who practised in these higher risk areas paid more, through a system of levies;
- Clients had the option to supplement the protection they received from PII by the purchase of insurance for their property ownership rights or their mortgages.
Solicitors who did not want to practice in these areas reduced their subsidy, which they were giving to firms that did as a result.
It insured risks on a no-fault basis, removing the need to prove negligence. It provided unlimited legal expenses insurance and covered seller misrepresentation, fraud and other matters which affected property ownership, many of which the best conveyancer cannot avoid.
LSUC then amended Professional Conduct Rules and compelled solicitors to explain this option to their clients in each transaction. Clients quickly understood the benefits of this additional level of security. Today, Canadian property buyers take out the insurance in 90% of transactions.
Common sense logic says that if the client suffers a loss which is not the result of solicitor negligence, but which would have been covered by the client's own insurance if they had purchased it, then the solicitor had not done their best if they were aware of it but failed to give the client the opportunity to buy it.
Latest available statistics for the performance of this part of the client insurance provision, in the last four reported years (2005-2008), indicate that the average payout was equal to 52.25% of total PII pay outs, payments to clients under this insurance exceeded CAN$153m or an average annual claims payment of more than CAN$38m.
Clients had these claims processed without the need to prove loss, and the policy covered all legal expenses incurred as part of the claim.
The Ontario scheme was introduced in 1995 and had a rapid and dramatic impact on PII. By 2001 the base premium for a sole practitioner with a CAN$10,000 excess, early lump sum premium payment and early filing of PII application had halved. Premiums have stayed at that level ever since.
This is a helpful lesson for the English system. It would certainly be good to imagine that we too could have access to more easily available and better-priced PII premiums.
The profession would have to take care to ensure that conveyancing standards improved and that insurance was not used as a facilitator of sloppy work. Quite the opposite should be true if professional insurance services are employed, as conveyancers who wanted to use this insurance should have to prove they were competent and regular errors would prompt a review of eligibility into such a scheme.
For many reasons, some complicated, some simple, a collegiate co-operation between governing bodies and regulators is extremely unlikely. We can either press on doing what we have always done and hope for a different result (the definition of insanity) or we can apply some good old fashioned common sense, apply some simple ideas that put clients first, be innovative and modernise the way we look after clients and ourselves.
It is the whole system of client risk management that needs review, not just ARP and the minimum terms.
Phillip Oldcorn is a Director of the First Title Group.