An insurance fund for lawyers in Newfoundland and Labrador has ballooned to $10 million, even as clients continue to be charged a premium on top of their legal fees to help cover potential mistakes.
That added fee, called the transaction levy, dates back to 2005. At the time, lawyers in the province faced an unexpected surge in insurance liabilities claims, and the possibility of crippling premium hikes.
Lawyers are responsible for paying the levy, but can — and do — whack their clients with the amount.
Fast forward to today, and the levy remains in effect — even though the coffers of the insurance fund are now bulging with cash.
Meanwhile, the premiums paid by lawyers themselves have dropped by more than 70 per cent, putting them below the national average.
Brenda Grimes, executive director of the Law Society of Newfoundland and Labrador, says there aren’t any plans to further increase the piggybank set aside for potential claims against members.
"We are not budgeting at the moment to increase that capital pool,” Grimes said.
“We are budgeting to balance the budget each year."
But a review of financial documents and other records shows that the insurance fund has grown swiftly over the years, even as some cash was funnelled back to the Law Society to defray expenses.
And a portion of the money in the insurance fund is now in the markets, invested in equities and other securities.
The Law Society says all of this is being done to safeguard the public from lawyers’ mistakes.
"The Law Society's focus, sole focus, is to ensure that the public is protected in whatever manner the law society can ensure that it is,” Grimes said.
“One of those ways is making sure that lawyers have adequate insurance to cover a situation where a mistake might be made so that the client is not the one that is ultimately at a loss."
Levy implemented in 2005
The Law Society began looking at the idea of a transaction levy a decade ago.
Soon after, it became a priority.
In 2004, there was a surge in insurance liabilities — exceeding $11 million.
According to the Law Society publication called Benchers’ Notes, nearly half of those related to the Myles-Leger bankruptcy.
Lawyer Bill Parsons was disbarred for his firm's handling of millions in mortgage payments related to the bankrupt developer.
Criminal cases involving the Myles-Leger bankruptcy remain before the courts today.
The Law Society’s solution? The transaction levy.
Initially, the levy was set at $50 plus HST. It applies to real-estate transactions and some other civil proceedings.
The Law Society has long maintained that it is lawyers who are responsible for paying the fee, and it is up to them whether to charge it to clients.
But initial descriptions of the levy in Law Society documents advise that lawyers must “charge and collect” the cash.
“Under a transaction fee levy system, a member will charge and collect the levy, then submit it two or three times a year on a schedule determined by the Law Society,” the January 2004 edition of Benchers’ Notes advises.
Regardless, the levy is a chargeable expense that lawyers can pass onto their clients.
And over the past eight years, the levy has helped the lawyers’ insurance fund transition from a dire deficit to bulging bank balance.
According to its most-recent financial statements, the insurance program boasted net assets of $9.9 million as of Dec. 31, 2012.
That figure does not include an additional reserve fund of more than $2.3 million set aside for claims and related costs.
And while that bank balance has grown, the premiums paid by lawyers have shrunk.
In 2005, when the levy was brought in, premiums were set at $6,000, with the possibility floated that they could rise to $15,000.
Today, lawyers are paying annual premiums of $1,655 per year — not much more than it costs to insure a new car.
‘Loss prevention’ expenses
Some of the money from the pool has gone back to the Law Society in recent years, for purposes that don't seem to be directly related to insurance.
In 2010 and 2011, in addition to administration and other expenses, the insurance fund transferred a total of $500,000 back to the society for “loss prevention.”
Grimes says that included “public protection programs” like the bar admission course, a trust audit program, and a discipline program for lawyers.
“There was money transferred from the insurance program to offset the costs of some of those programs,” she noted.
But aren’t those things the Law Society would be doing anyway, that have nothing to do with the insurance fund?
“No, they do have something to do with the insurance fund when they are dealing with loss prevention,” Grimes said.
“You're dealing with the issues that assist lawyers, educate them, prevent claims.”
That “loss prevention” transfer stopped in 2012.
The same year, the amount of levy dropped to $40 from $50.
But the fund continues to grow. And now the Law Society is putting some of the cash into the market - in 2012, making $1.5 million worth of investments in stocks and mutual funds.
"It’s invested in only those equities that have very high — blue chip companies — very high ratings, and invested very cautiously,” Grimes said.
“Believe me when I tell you, it's invested extremely cautiously."
The bulk of the money in the insurance fund remains in guaranteed investment certificates, according to financial statements.
Largely under the public radar
While the transaction levy has been largely below the public radar, it has surfaced as an issue over the years.
Realtors questioned the fairness of the levy when it was first charged in 2005.
In late 2011, the Canadian Home Builders' Association of Newfoundland and Labrador (CHBA-NL) balked at the fee, and sent a letter to the Law Society outlining its concerns.
"A lot of our members are really upset about it," CHBA-NL president Craig Williams told the St. John’s Telegram at the time.
"There may have been a point where lawyers, because of their own actions, became uninsurable ... We shouldn't be paying for their professional risk."
Today, the homebuilders group says its concerns were mollified by the levy reduction to $40 nearly two years ago.
“In 2011, the CHBA-NL expressed concern about the levy and its purpose,” the group’s CEO, Victoria Belbin, said in an emailed statement.
“As a result the Law Society reduced the levy by 20 per cent as of January 2012 and committed to regular review. Since this time the CHBA-NL has been in regular communication with the society regarding their annual review. The society is showing good faith as they continue to respect the CHBA-NL concerns raised two years ago.”
The Law Society meets at the end of every year to assess the status — and future — of the transaction levy.
Officials say it’s too early to know whether there will be any changes coming to the status quo.