The LSO owns the Lawyers' Professional Indemnity Company so it should benefit from its investment
The Law Society of Ontario’s spring 2023 bencher election is fast approaching. Some benchers are already writing articles and sending out campaign missives. In addition, the LSO just passed an election-year budget. Dues are going up – but not nearly as much as is needed to fund the LSO so it can go back to providing almost all its old programmes and endeavours.
The only reason there needed to be an increase in dues this year is because the LSO is unable or unwilling to utilize its most valuable financial resource. That, of course, is its 100 percent ownership of Lawyers’ Professional Indemnity Company (LAWPRO), which sits on more than $250 million of the LSO’s money.
In 1994, the then Law Society of Upper Canada (LSUC) discovered that its insurance obligations were underfunded by over $200 million. This situation became the “insurance crisis” of the early 1990s when insurance costs skyrocketed. The crisis led to the establishment of an insurance task force, which recommended the creation of LAWPRO. Since 1994, LAWPRO must operate under the mandate given to it by the LSUC (now the LSO): (1) to be independent of the LSO; (2) to operate in a “commercially reasonable manner”; (3) to offer “premiums that generally reflect risk”; and (4) to settle “claims fairly and quickly, though not on a ‘no-fault’ basis.” While items 1, 3 and 4 may be debatable, what is happening today is undoubtedly commercially unreasonable.
The LSO has at least $257 million invested in LAWPRO (around $227 million in retained earnings (y/e 2021) and roughly $30 million in contributed surplus). LAWPRO has made over $60 million in profits in the last five years alone. Incredibly, the LSO gets virtually no financial return on its investment. That is because the LAWPRO board (including several LSO appointees) has rebuffed every LSO effort to have LAWPRO declare a dividend to its sole shareholder. Even a small return on capital or a tiny dividend would have avoided, or at least substantially mitigated, an increase in LSO dues in 2023. The LSO could also be drawing down the surplus at LAWPRO instead of significantly depleting its reserves.
How can benchers justify an increase in dues and fixate on cutting LSO services that are critically important to lawyers while receiving no return on a 1/4 of a billion-dollar investment
The LSO’s efforts to establish LAWPRO have been a resounding financial success. The founding not only solved the “insurance crisis” that led to its creation but has also provided valuable coverage for the profession. More importantly, the LSO has built an extremely valuable financial asset. LAWPRO’s sustained, significant financial profitability has come principally from keeping all its retained earnings. Not distributing these excess funds to the LSO has meant that insurance premiums are not “commercially reasonable.” Instead, they are, in fact, heavily subsidized in an unprecedented manner. It’s not hard to keep premiums down when you are using other people’s money.
In Ontario, LAWPRO offers compulsory professional liability insurance coverage for about 30,000 Ontario lawyers (out of approximately 55,000 lawyers in total). Virtually all Ontario paralegals who need insurance must buy it elsewhere.. The other 25,000, who are not required to purchase insurance, are each paying about $200 in dues yearly to support this subsidy. About 99 percent of paralegals also help to subsidize LAWPRO without being able to buy a subsidized LAWPRO policy.
During this election, Ontario lawyers and paralegals need to ask hard questions about why benchers allow this financial discrimination to continue.
In September, the LSO approved the LAWPRO primary insurance program for 2023. Effective January 1, 2023, the base premium will increase by 8.3 percent and be priced at $3,250, a $250 increase from 2022. That rate remains much lower than the premiums of only a few years ago.
LAWPRO apologists will no doubt say that the company is heavily regulated and we don’t understand the benefits of subsidized insurance. One response is that when you have made $60 million in profit over the last five years with ample excess capital, it’s hard to say that you have fulfilled your fiduciary duty to your stakeholders when you have refused to pay a dividend.
While a continuing obligation to pay a sustainable dividend might eventually require an increase in LAWPRO premiums, that certainly would not have been true for the last five years. And, of course, that would be the fair and reasonable approach to bring this artificial subsidy to an end.
This situation is wholly untenable and inequitable. Approximately 45 percent of lawyers and 99 percent of paralegals who do not benefit from the subsidized LAWPRO primary program are paying higher annual LSO dues.
LAWPRO enjoys robust financial health and the ability to spend money as it likes (for example, paying more to its hand-picked and select group of coverage counsel). At the same time, the LSO struggles financially and is rapidly depleting its reserves. In an alternate universe where LAWPRO, as a taxable entity, had distributed its excess funds to the LSO on a tax-free basis, the LSO would have invested these proceeds tax-free, increased its capital base and used them in the interests of the entire legal profession. One straightforward option would have been keeping annual LSO dues at a much lower level than they are today for the benefit of all lawyers, especially those who don’t need insurance. Unfortunately, we don’t live in that universe.
As benchers of the LSO, we have duties of accountability and transparency to the entire profession. Those duties require us to represent the interests of all lawyers and paralegals. This group includes those who are not a part of the LAWPRO program as much as, if not more than, those who are. This year we need to accept the responsibility for our failure to prudently exploit the LSO’s most important financial asset, instead choosing to increase dues and significantly drawing down the LSO’s reserves to avoid an even higher increase in annual dues.
When you read about the claims of fiscal responsibility and cost-cutting that some incumbent benchers will make in support of their slate or convoy’s efforts to be re-elected, ask them why they have allowed this to happen.
As LAWPRO is failing to act in accordance with its mandate, it’s time to consider alternatives, such as changing the board's composition, re-financing or even a sale.
I can think of many better ways to help the legal professions with $250 million than selling heavily subsidized insurance. It is long past time that LAWPRO shows the LSO the money.
Bianca Costantino and Ryan Greenspoon also contributed to this article.
