Changes to the class-action indemnity market, implications for counsel
In the Summer of 2016, the Financial Services Commission of Ontario (FSCO) and British Columbia’s Financial Institutions Commission (FICOM) issued cease and desist orders against BridgePoint Indemnity Company (Canada) Inc. (BICO.) The orders were the result of a complaint issued by a competitor, DAS, who alleged that BICO was selling “insurance” as an unlicensed insurer in contravention of provincial insurance laws. While BICO’s position at the time was, and remains, that its legal cost protection products are not “insurance," its priority was to protect the interests of its clients, the lawyers and plaintiffs who were relying on BICO to manage the risks of litigation. Accordingly, BICO resolved these issues with the Canadian regulators in a timely way by converting its legal cost protection program into an insurance-backed business. The purpose of this article is not to revisit the merits of the orders, but to explore the game-changing impact of these orders on the Canadian class-action bar and continued access to legal cost protection for and on behalf of its clients.
The orders broadly defined “legal cost protection“ to cover all forms of indemnity protection offered by BICO, including indemnities offered by an affiliated company, BridgePoint Global Litigation Services (BridgePoint GLS), to representative plaintiffs of class actions. Many class-action law firms, principally those in Ontario, Alberta, Quebec and Nova Scotia, have historically provided (and continue to provide) their clients with an indemnity for adverse costs while agreeing to write off their investment in disbursements if the case is unsuccessful. Counsel in Ontario and Quebec also have the opportunity to seek adverse cost protection and (limited) disbursement financing from two government-created non-insurance legal cost financing schemes: the Ontario Class Proceedings Fund (CPF); and, the Quebec Fonds d’aide aux actions collectives (previously known as Fonds d’aide aux recours collectifs – Fonds.)
These funds provide protection and financial assistance to people with meritorious claims. The effect of the current order, as we see it, will be to prevent law firms from offering their clients indemnities, and, arguably, in the absence of a legislative exemption, the CPF will be prohibited from offering a non-compliant insurance product.
Access to adequate sources of funding and legal cost protection is critical for facilitating access to justice. This is particularly true for class-action litigation, where representative plaintiffs are forced to bear significant financial risk for the benefit of a class of people who are unrelated and not personally known to them, while the large organizations that defend these claims often have the money and resources to defend against them.
Most individuals would be reluctant to act as a representative plaintiff in a class proceeding if they lack access to the funding required to properly prosecute the claim. They would be even more reluctant if they were not protected against the risk of an adverse costs award in litigation.
Consequently, they will not bring forward claims that may compensate large populations of people from the harm caused by the unlawful actions of others, and in doing so, modify the behaviour of those who caused the harm.
The orders will significantly affect the availability of legal cost protection for class actions, particularly in those provinces where there is no statutory fund comparable to the CPF and Fonds. Class-action law firms will no longer be able to offer their clients legal cost protection, since they are not licensed insurers offering an insurance policy that complies with provincial insurance laws. Although BridgePoint GLS has historically been the leading provider of financing and legal cost protection to the Canadian class-action market, unregulated foreign litigation funds now are on the scene that offer limited legal cost protection for Canadian actions on a sporadic basis. The orders will prevent those litigation funds from offering legal cost protection as a non-regulated indemnity product going forward.
The issue is further exacerbated because Canadian (and global) insurance companies, which are licensed to offer legal expense insurance products, are not, and will not be, in a position to address this market. Traditional insurers face significant conflicts and hurdles in this area for the following reasons:
- they are usually the primary insurer of the large business organizations that are often defending class-action claims and bear significant financial exposure for class-actions launched against their insurance clients;
- they lack the expertise to develop a claimant side insurance program that efficiently aggregates claims and offers class counsel value-added services to create a seamless integrated financing and insurance solution for law firms and their clients;
- their reputation and tactics in defending past class actions has made many plaintiff’s class counsel wary that these companies will drive the prosecution of class actions in the same manner as defending one;
- they lack the relationships and expertise to share knowledge and syndicate risk globally to co-ordinate the prosecution of claims across different geographic markets; and
- they are not set up actuarially to account for the risk undertaken in legal expense insurance.
BridgePoint GLS is in a unique position to offer a fully compliant class-action insurance product for the Canadian market. It is in the process of creating a class-action/corporate litigation insurance program to convert its existing class-action legal cost protection products to a licensed class-action insurance program and to offer insurance coverage for commercial litigation. It will work with litigation firms specializing in class-action and commercial litigation to ensure they have both sufficient capital to manage their cases and that their clients have adequate insurance coverage to protect them from adverse cost exposure. In addition, BridgePoint GLS plans to offer a regulatory compliant solution for litigation funders who seek access to the Canadian class-action market but do not have a licensed insurance product or partner that they can offer to law firms and their clients.
Management expects to launch this new insurance program by April 30.