Getting money BACK in the hands of those who need it most1 January 23, 2018 at 10:23 am by Steve Kee
The calendar has flipped to 2018, and in Ontario, we continue to debate fair auto insurance benefits.
In December, Ontario announced its Fair Auto Insurance Plan. This announcement came after the government’s extensive consultations regarding David Marshall’s report entitled Fair Benefits Fairly Delivered: A Review of the Auto Insurance System in Ontario.
The plan outlined several substantive measures to improve the stability and long-term health of the auto insurance system in Ontario. But in the meantime, we continue to live with an auto insurance system that’s broken. One serious factor affecting rates is the high annual cost of settling thousands of disputes over the goods, services and income support paid to people injured in vehicle collisions. In these disputes, most of the cost is for legal services for both insurers and injured claimants.
Marshall found that approximately $469 million in contingency fees is paid annually to lawyers of motor vehicle accident cases – nearly $100 million of which is derived from Ontario’s no-fault auto insurance system.
The high cost of contingency fees has contributed to the sense among many injury claimants that compensation for their losses has been unreasonably reduced by payments for legal services. It has also contributed materially to the cost of auto insurance in Ontario, which has among the highest premiums in Canada.
Insurance Bureau of Canada (IBC) and its members had hoped that following the Marshall report, the Law Society of Ontario (LSO), which regulates the legal profession, would take action and propose measures that would, in all circumstances, result in reasonable limits on how much lawyers could charge their clients. For instance, some jurisdictions have adopted sliding caps, which limit certain payments to lawyers, while others have put limits on fees that vary depending on the stage at which the matter settles.
Instead, LSO has recommended a change to the Solicitors Act that would expand the base amount from which a contingency fee can be calculated. This will enable lawyers to draw from a larger proportion of their clients’ settlements and awards than the current rules allow. A bigger slice of the same pie, in effect.
The current rules can create an incentive for lawyers to violate the Solicitor’s Act by moving money from costs to damages so that they can collect a larger fee (because contingency fees are currently calculated based on damages alone). IBC strongly believes that the solution to widespread non-compliance with the current rules should not be found in a rule that would deliver more to plaintiff lawyers at the expense of injury victims without significant parallel changes to the contingency fee marketplace
Consider the following scenarios:
In the current system, a plaintiff is awarded damages of $100,000 plus legal costs of, say, $15,000. If the lawyer is using a 30% contingency fee, that lawyer receives $30,000. The client receives the damages, MINUS the contingency fee, plus costs ($100,000 – 30% + $15,000), and so nets $85,000.
Under the proposed system, costs would be included with all other losses recovered by the client to establish the amount upon which the contingency fee is calculated. In this scenario, the client is awarded the damages plus costs, minus the contingency fee, which is now taken as a percentage of the damages PLUS the costs ([$100,000 + $15,000] x 30%). Hence, the lawyer collects $34,500, while the client nets $80,500.
So as you can see in this example, which assumes the proposed changes make no corresponding reduction in the contingency percentage, the result of the proposed amendment to the Solicitors Act is a 5.3% decrease in the amount collected by the victim, and a 15% increase in the fee collected by the lawyer.
The LSO’s rationale for the policy change is deeply flawed and relies on an assumption that the new transparency measures it has proposed will fundamentally transform the contingency fee market. We do not believe that the measures LSO has adopted would be sufficient to exert downward pressure on contingency fee rates. There’s simply no evidence for that. The recommended change to the formula will almost certainly worsen the position in which the victims currently find themselves.
The LSO should have recommended a cap on contingency fees, much like the ones in place in British Columbia, New Brunswick, the U.K. and many U.S. states. As it stands, lawyers take, on average, 30% of injury victims’ awards and have expanded their ability to keep claims settlements out of the hands of those who need it most – the injured victims in motor vehicle collisions.
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