Why professional liability claims are rising…but payouts aren’t

‘I’ll sue!’ And they do. But are they winning?

When it comes to private sector coverages for professional liability, the answer is generally ‘no,’ says Oren Schemool, who heads professional lines at HDI Global SE – Canada.

While a tilt toward U.S.-style litigiousness means total numbers of claims are increasing in Canada, that’s not translating to rising claims severity.

“We have not experienced increased payouts on claims, but we have seen a greater frequency of claims,” he tells Canadian Underwriter.

Schemool adds his firm’s lawyers are diligent on informing his team about incoming legal actions.

“It’s not unheard of [in one year] to have…30, 40, 50 notices on a [single] law firm but…what we’re seeing so far is [that] most of those go away, or they’re settled within the LawPro layer [Lawyers Professional Indemnity Company], and it doesn’t bleed into the excess layers,” he says. (LawPro provides primary errors and omissions coverage for Ontario lawyers.)

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Hints of change

While that’s good news for now, Schemool says change could be coming.

Canadian insurance and legal professionals have long warned the U.S. brand of litigious behaviour is slowly making its way North. And, he says, mechanisms like litigation funding firms – which provide plaintiffs with financing to bring lawsuits in exchange for a share of the proceeds – are becoming more common in Canada.

“I do think that we are going to see an increase in severity down the line,” he adds. “But I couldn’t tell you if that’s going to be in the next six months, 12 months or 36 months.”

He adds U.S. private equity firms are getting involved in litigation funding programs.

“It is starting to happen in Europe,” he says. “It’s happened in Australia in years past, and that really did cause a rapid deterioration in insurance company earnings, and Australia has become far more litigious.”

Another factor is inflation rates, which can increase hourly fees charged by lawyers and other participants and service providers within the legal system.

“In such a scenario, your lawyers costs go up and that causes higher limits erosion. Experts’ fees go up. Our outside counsel fees would be going up. All that tends to ride along the same wave,” says Schemool.

“And then, in such a scenario, we’re telling our insureds, ‘Inflation is going up 3% or 4% and we anticipate that lawyers’ fees and our costs are going to go up 3% to 4%, so therefore we need to increase your rates accordingly.’”

“That’s a losing argument sometimes…so that could lead to you eating costs.”

Phil Porado

Phil, an award-winning journalist with over 30 years of experience in financial topics, has been managing editor of Canadian Underwriter for more than three years.