Proceedings of the Standing Senate Committee on Banking, Trade and
Issue 24 - Appendix B - Transcript of Meeting in London, England
Fact-Finding Meeting on Joint and Several Liability
LONDON, ENGLAND, Friday, November 22, 1996
The Standing Senate Committee on Banking, Trade and Commerce met this day at
9:00 a.m. to examine the state of the financial system in Canada (professional
Senator Michael Kirby (Chairman) in the Chair.
The Chairman: Thank you all for coming.
Let me begin by introducing my colleagues. There are six members of our
committee here, Senator Don Oliver, Senator Michael Meighen, Senator Celine
Hervieux-Payette, and Senator Colin Kenny. The committee vice-chairman, Senator
David Angus, is probably known to many of you since he often visits this
country wearing his business hat as opposed to his political hat.
As you may know, the big six accounting firms conducted a very intensive and,
frankly, successful campaign of lobbying ministers and officials of the
Department of Industry in Canada, arguing, in effect, that joint and several
liability should be changed, at the very least with respect to the accounting
profession, to proportionate liability.
The government decided that they needed to understand the problem somewhat more
thoroughly before making a policy decision on it. As a result, this committee
was asked to hold hearings and, within the next six or eight months, to give
them advice on whether the existing policy ought to stay the same or whether
the law ought to be changed.
We held some preliminary hearings in Canada, and the advice we received was,
frankly, fairly conflicting.
The Canadian Bar Society, for example, and the Canadian Institute of Chartered
Accountants were not entirely in agreement. As well, the Canadian Association
of Consulting Engineers had a somewhat different view.
We thought it would be useful would be to try to understand the issue on a more
broad, international basis. Yesterday we met with Professor Burrows as well as
with officials from the DTI in an attempt to better understand both the
background to Professor Burrows' report and to probe more deeply into some of
the issues arising out of it. We also wanted to understand where your government
stood in terms of considering changes to the law.
The main issue we would like to discuss with you this morning is the issue of
the availability of insurance. This issue has arisen because it has been put to
the committee, largely by the big six accounting firms, and to a much lesser
extent by some other witnesses, that there is difficulty in getting insurance.
It is somewhat unclear whether the difficulty relates to the availability of
insurance, or whether the it is that it is simply too expensive and, therefore,
is having a significant impact on fees.
First, we would like you to discuss whether capacity exists at all and, second,
the cost of insurance is and whether it is prohibitively expensive. We would
like to do that not merely with respect to the big six accounting firms --
although if you have a view on the big six that would be useful -- but we would
like to get a feeling for professional liability insurance in general as it
applies to not only accounting but accounting law, the various construction
organisations, architects, consulting engineers and the like. We want to hear
your views as underwriters of that market.
Senator Angus: I would like to add a word of welcome to all of you and thank you
for coming. I know how valuable your time is. That comment applies to not only
the underwriters, but to our friends from Minet Inc., and Alexander &
Howden. We have a very impressive array of representatives of the market here
and my colleagues and I feel privileged to have this opportunity to exchange
views with you.
A couple of points are becoming clear to us, and hopefully you will disabuse us
if we are getting the wrong drift. It seems quite clear that a problem exists
with the big six as a result of some of the litigation in the U.S. and in other
jurisdictions around the world as it relates to joint and several. They have
been caught up in that. Although they were not found to have been the principal
guilty party, they have had to pick up the whole caboodle, rightly or wrongly.
The numbers are astronomical.
Indeed, yesterday, friends from Minet indicated that one of the problems for the
big six results from the fact that it is difficult for you, as underwriters, to
even assess the risks because of the magnitude of the potential quantum. There
is also the predictability and all of the other criteria that we understand you
apply when you are assessing a risk for underwriting purposes. Those factors
make it almost impossible.
However, on a general basis, we understand that the insurance issue may well be
a red herring. In the sense that the case has been made to us by the
accountants, that there is an insurance crisis and they will not be able to
carry on doing business and so on if this joint and several issue is not changed
to proportionate liability.
We understand there may be other solutions.
We also understand that insurance is available to most of the professions, that
there is a market, that there is capacity, and that, indeed, the cost is not so
prohibitive as to make it impossible for lawyers, engineers, architects and,
indeed, most accountants, other than the big six.
However, as you will appreciate, we are completely naive when it comes to these
matters and so we would very much like to have your views on it. Hopefully our
friends Peter Christie and Nick Rudnai will act as interlocutors as the
discussion on the issue generally of availiability of insurance for
professionals and PI cover.
Mr. Peter S. Christie, Chairman and Chief Executive Officer, Minet Inc.: Those
who would underwrite the big six today, please raise your hands. Let the record
show that no hand was raised in response to my question.
Mr. Richard Hardingham, Agnew Syndicate: I think the big six have their own
particular risk characteristics. They are large, worldwide which probably audit
and provide services to approximately 95 per cent of the world corporations,
the big businesses.
Unfortunately, it is a feature of human nature that, if there is a business
failure and shareholders and banks lose money, they tend to scout around for
somebody to blame. If a major corporation goes out of business and there is
very little left for the creditors, then, as I say, it has been a feature, an
increasing feature over the last 10 years, that people who have lost money will
find someone to blame and, nine times out of 10, the auditors become the
principal target. That is happening now with the Orange County affair in
California. KPMG are certainly in the firing line there, even though there may
be no professional liability.
That brings me on to another point, in that the question of professional
liability is often just a matter of being in the wrong place at the wrong time
and being dragged into a situation by association. Obviously, people try to
To come back to the big six and the role that they play in auditing, as I said,
for 95 per cent of worldwide corporations, they immediately become a target if
there is a business failure. They are perceived as a source of paying for the
loss; because they are known to have significant resources, and to have some
professional liability cover. It makes it very difficult to insure that type of
organisation if every time, as I say, there is a business failure they are, if
you like, stood up in the dock and made to pay, made to take the blame.
I cannot criticize them for moving to the LLP status. They have to do that to
protect their own business. they have largely done that in the U.S.A and I do
not think any states are objecting to the LLP status.
Senator Kenny: What does "LLP" mean?
Mr. Hardingham: Limited liability partnership. I don't blame them for trying to
protect themselves by forming limited liability organisations and I don't blame
them for trying to change the legislation from joint and several liability
because, otherwise, they will find it very difficult to stay in business.
They will also find it very difficult to recruit people because young
accountants today are asking why they should join a big six firm, and strive to
be a partner if they face the danger of their worldly assets being at risk
because of a major business failure.
The Chairman: To what extent is this an American problem because of the size of
jury settlements in the United States versus a worldwide problem? To what
extent, in a sense, are we all being dragged into a situation because of what
we regard, and I suspect you also regard, as some of the more bizarre aspects
of the American legal system? That is one question.
Second, to what extent, in a sense, have the big six created their own problem
by becoming the big six? If you go back 15 or 20 years, the big six did not
exist in the same conglomerate fashion as they do now, before mergers reduced
the number of sizable accounting firms to just a handful. To what extenthave
they created their own problem? For instance, if, instead of the big six there
was the big 20, would the problem be simpler for you from an underwriting
My questions are two totally separate questions. One touches on the American
issue and the other is to what extent have they created their own problem.
Would someone also comment on underwriting for professionals in general, not
exclusively the big six?
Mr. Hardingham: Perhaps I can address your question, "Are the big six to
blame". I think that to assume so would be an unfair conclusion. Their
businesses have grown as they wanted. It is the type of business that they
handle that make them the target that they are. If it were the big 20, the same
risk would still be there but it would be more broadly spread. It would still
be a difficult issue to underwrite.
Mr. Julian Spence, B.H. Bannister Syndicate: Perhaps I can address the question
of whether it is a particularly American problem or an international one. While
we concentrate on America because there are significant problems there, the big
six have encountered major problems in Australia, the U.K. and, indeed, in
Canada. would characterise it as international.
The Chairman: What about other professions and, indeed, what about other parts
of the accounting profession?
Mr. Hardingham: If you move down to the middle tier, which we, as a syndicate,
have some involvement with, the next level down below the big six, you will see
that their businesses are different because they do not audit, they do not have
the same connection with what I call the large corporations, the publicly
quoted companies. Their businesses derive more and more from private companies
where the risk is different. If there is a business failure, less people are
involved. It tends to be the family who have lost money and they are not
generally going to have a go at the accountants, the auditors, in that
You may have other creditors, such as the bank involved or suppliers, but, as I
say, the risk is subtly different in the case of somebody who audits major,
publicly quoted corporations and somebody who audits private family businesses.
The insurability of what I call the "second tier" becomes
increasingly more viable as you move away from auditing the public sector to
auditing the private sector. I am just talking about accountants.
Senator Oliver: Could I revert to the first question again about availability
and just flush that out a little more? Surely premiums can be higher. Even with
higher premiums and other conditions are you saying you would still not look at
any of the big six today?
Mr. Hardingham: I personally would not, because of the way that they are
continually made a target, rightly or wrongly, as a result of major business
failures or investors losing money.
Senator Oliver: What recommendations would you make to us then?
Mr. Hardingham: Obviously, if you can reduce their exposure from that type of
claim, then their insurability is enhanced. It is difficult to see how to do
that. They can protect themselves by becoming, as I say, limited liability
partnerships or have limited liability in some sense or other. That does not
affect the professional liability exposure, from our point of view. It does not
matter whether they are in partnerships or whether there is limited liability,
we still have the same risk to insure from the professional standpoint.
If you change the joint and several liability aspect, I must admit I would have
to wait some period of time to see the effect of that to be convinced about the
greater insurability of a big six firm.
Senator Oliver: How about putting more of an onus on the plaintiff and saying
the plaintiff should have done more searching, himself or herself; that they
should have used more due diligence; and, perhaps, they can be held to be
contributorily negligent? If that were the case, would that not tend to reduce
the exposure of the defendants?
Mr. Hardingham: Yes, I lean towards moving to the Canadian legal system as
opposed to the U.S.A legal system where a case is heard before a judge rather
than a judge with a jury straight out of hicksville in Texas or something like
that, where you can get a very arbitrary result. You are then dealing with the
knowledge, capability and understanding of the judge.
If an environment is created where the judges have an understanding of the
issues, as well as an understanding of how to apportion liability, then you
will achieve a better result, a more even result, if you like, for claims
against the big six firms.
Senator Kenny: And a more insurable company?
Mr. Hardingham: Yes. Again I would have to be convinced over a period of time,
as a result of decisions in various cases that might be heard, that what was
being done was having the right effect.
Senator Meighen: Even if you had proportionate liability and you are found to be
40 per cent liable on $500 million, it is still a lot of money.
Mr. Hardingham: Yes. You still have the potential for a $100 million-plus claim.
Senator Meighen: Would it be fair to say that, if we move tomorrow to
proportionate liability it is not ipso facto going to result in --
Mr. Hardingham: I do not think you will necessarily have insurers jumping out of
the trenches and rushing forward and offering to insure them.
Senator Hervieux-Payette: Do we have a precedent of that nature in other
sectors, in other places? I know that my colleague is in the marine business
where claims can be substantially larger than is usual in other professional
liability situations. What would be your suggestion if we are faced with the
unique situation in that the means that now being recommended will not reduce
the risk? What kind of formula or approach would you recommend?
Mr. Hardingham: Many claims result from the reliance of others upon the audit.
You could limit the accountants' liability arising from what they have done in
the audit process, in other words, offer them some sort of immunity. However,
that will be very difficult to handle because you will still want to protect
people against genuine professional negligence.
As I said, the type of claims we are faced with do not relate to professional
negligence, they relate to being in the wrong place at the wrong time when
people have lost a lot of money.
If you can create an environment where the big six doing the audit are immune
from claims from third parties and that needs a lot of thought -- then you will
certainly improve the insurability environment for them.
Senator Oliver: When the Canadian Bar Association appeared before our committee,
they made that recommendation. They made two of recommendations. They said that
we could consider limiting those to whom a duty of care is owed, and consider
limiting services to which professional liability attaches. In relation to the
former, they said that we could try to define some of these categories. Is that
what you are saying?
Mr. Hardingham: Yes, that is absolutely right. The audit is a legal requirement,
an annual legal requirement. It is a very special thing. It is an annual
snapshot. I question its value, quite honestly, but it is a legal requirement
set down by the government. It is relied upon by other parties and, if you can
limit the big six or any accountants' exposure to whom they owe their duty of
responsibility, then you will improve their legal liability situation.
Mr. Christie: On the point you are making, sir, why is it the insurance market
can provide, say, half a billion for a rig, on the London slip or on the
national slip? What are the characteristics of the marketplace that drive you
out of this sort of business and yet, in other areas, we can put together
terrific amounts of coverage? Is it the claims; is it the concentration; or what
is the issue?
Mr. Mike Quigley, Q.B.E. Insurance Company: That is a very good question. It is
a long time since I have actually thought about it. It may well be purely
historical but, in more recent times, professional liability has undergone a
change in exposure which has had a negative impact on potential underwriters
who may wish to write professional indemnity.
It is, I think, a very ambivalent attitude and I am slightly confused myself in
all of this. In one respect, insurers are dying to write professional indemnity
business, they are piling in at a rate of knots when the market is soft, but,
on the other hand, there is a reluctance to create great amounts of available
coverage. This is somewhat exacerbated by the fact that the client can only pay
for what is available and what is affordable in his own terms.
For example, in the U.K., the larger law firms will, in theory, buy as much as
is available. At the moment that is hitting about o200 million.
Senator Angus: Could you give us just a sense of what that costs? As many of you
know, to have that kind of a cover in Canada, where the risks, I submit, are
much less than they are certainly in the U.S., the cost is prohibitive, you
could never come up with the premium to get that kind of coverage.
Mr. Quigley: I terms of the size of law firms in this country, without giving
names, the top four or five earn very useful fees.
Senator Angus: Nicely put.
Mr. Quigley: I know that one particular firm will probably pay approximately o6
million for o200 million coverage.
Senator Angus: Are you speaking of the big firms like Linklaters, Freshfields,
Slaughter & May, Clifford Chance, that dimension of company?
Mr. Quigley:Yes, but I will mention no names.
Senator Angus: They were sued in Canada for $1 billion on Canary Wharf. That is
probably one of your slips.
Mr. Quigley: Obviously that is why they are buying those sort of limits. I am
not too familiar with the claim as such. Lawyers, if they are working for a
plaintiff, tend to pile on the agony, as it were, and it doesn't help matters
Those sorts of figures are astronomical. They are beyond comprehension.
There is one law firm in this country which is just about to settle for a fairly
large amount which is a real quantum leap in terms of the profession.
You have to differentiate between what I would call the "construction"
and the "non-construction" areas.
Senator Oliver: Is the case that is about to seetle to with a negligent
Mr. Quigley: It is virtually a negotiated settlement. It is, is a very basic
cock-up by the solicitors. In this instance I would think a junior clerk would
have made the same error. I also believe that the partner who made this mistake
is no longer there. These things happen.
Senator Angus: That is why we have insurance.
Mr. Quigley: That is why you have insurance, but, as I say, you must
differentiate. The construction area is containable.
The Chairman: What is the difference?
Mr. Quigley: You have open-ended situations. With an accountant who purportedly
or allegedly has made an error, it could run into hundred of millions of
pounds, but the construction area does not have that problem.
The Chairman: Is that because in construction or, to use Peter's example of
drilling rigs, the limit is based on the fact that you simply have to replace
the rig or the building, whatever it may be, so there is clearly a fixed limit
that you know in advance? Is that the difference?
Mr. Quigley: It seems to me that the courts are deliberately dragging back the
exposure of economic loss and going back to the third party. It is another
area. hey are dragging back the exposures in terms of economic loss and
Whereas the size of construction related claims has increased, we are not
talking in the same sort of numbers. You can actually take a viewpoint on a
construction risk. If, for example, a design-and-build contract is worth o50
million or o100 hundred million pounds, they are not going to get it totally
wrong. Problems may be pointed out and an underwriter would make a judgment.
That is where the underwriting experience would come in. He would make a
judgment related to their level of exposure based on the type of construction
I do not think you can apply that sort of thinking to a big six or even a large
law company. It is more open ended. I think you will find that there is a
different attitude applied to the various areas of professional liability.
Senator Angus: Do directors and officers, particularly corporate directors, run
a risk analogous to that faced by the big six? It used to be an achievement to
get on a board of a bank or a big public financial organisation, but today, in
the States and Canada, it is very difficult to get corporate directors for
Mr. Quigley: I am not a specialist in that area, but I do not think liability is
a major consideration in this country. It is not the first thought in a
director's mind, when he is considering whether he should accept a board
position, whereas I believe it probably is in the states.
The Chairman: It also is In Canada.
Senator Angus: From an insurability point of view, are the risks not monumental?
Mr. Quigley: No. I think Canada, has more history than the U.K. in the question
of directors' and officers' liability.
More analogous to the U.S.A. and Canada, is Australia. My experience of one
particular state in Australia, is equal to what is happening in California, for
example, not in terms of size but in terms of approach to the claims. One would
be very careful in some respects about D&O in Australia because the lawyers
have the same gene. I think they are genetically linked.
Senator Meighen: I think D&O coverage is more available now in Canada than
it was a few years ago.
Mr. Christie: Does anybody here write on a Canadian deal?
Mr. James Blake, Cottrell Maguine Syndicate: I write some.
To address the general availability of insurance, if you take a generalized view
of the whole of the insurance market, currently, there is a lot of capacity.
Senator Angus: At reasonable rates?
Mr. Blake: Not necessarily from our point of view but from the buyer's point of
Senator Angus: You are saying in effect it is quite a soft market?
Mr. Blake: Correct. From a capacity point of view on this side of the Atlantic
we would say that you are probably being tainted by what has happened in the
U.S. When lot of people club together, they immediately exclude the U.S. and
Canada on certain jurisdictional requirements. There are certain people in this
market, who do not write U.S. or Canadian business. I am afraid you are lumped
in, tainted, with a North American problem.
The other problem we sometimes run into relates to the limits people choose to
buy. The client takes the view that if he buys more he will be sued to that
limit. It may be available but they choose not to buy it.
Obviously, the more regional or smaller entities, do not see that they have
exposure, whether they be an architect, an insurance broker or whatever.
We all know that mistakes can be made and that can create problems, but it seems
that the problem has to be pointed out before you recoginize: "My
goodness, perhaps my half million of cover is not nearly enough, I need five
million or 10 million".
Senator Kenny: From an insurance perspective, are there ways the accounting
firms can, one, structure themselves differently, or, two, provide a different
sort of audit? There is a great deal of pressure on them to give a clean audit.
The argument we hear is: "If we don't give a clean audit, we won't be the
auditors next year". Essentially it seems that the audit is being misused,
and that is why it has become such a target.
My question is in two parts: One, if they structured themselves differently,
and, two, if they provided a different form of audit, a more qualified audit,
would that make any difference to you?
Mr. Spence: It may, but it would not be, as Richard said, immediate, because we
have suffered a frequency of loss from the accounting profession and a severity
We would need to see any changes that you make tested in court before we would
feel comfortable that whatever you put in place holds up.
Senator Kenny: Are you talking about a decade or five years?
Mr. Hardingham: It would probably take five years to get a sense of how any
decisions are changing the claims history against the big six firms.
Senator Hervieux-Payette: What about capping the exposure? Is there a formula
you could envisage?
Mr. Hardingham: I am sure the accountants would love a capped liability of $20
million or $30 million or less, but where do you set the cap?
Senator Hervieux-Payette: What about five times the fee they charge on an annual
basis, or ten times? The penalty would be that, if you do not do a good job you
will be penalized. You will lose the job for a number of years.
Mr. Spence: If you have a cap, does that not then become the immediate target?
Senator Oliver: Yes.
Senator Kenny: You folks are in the insurance business and your concern is that
these accounting firms are now in the insurance business too. They are
obviously taking this business and they are handling it one way or another.
They don't quite like the way they are handling it, but they are basically
self-insured and dealing with it. Do you see this as competition or something
you can deal with?
Mr. Hardingham: We don't see that as competition, no.
The Chairman: You are happy to let them have it?
Mr. Hardingham: That is out of necessity, if they have to fund their own
retentions, whatever that may be, and I am sure they are significant. That is a
result of the insurance market not wanting to be dragged into these type of
situations because it is not profitable for them to be in that environment.
Senator Kenny: At some point they will structure themselves in such a way that
they will be self-insured.
Mr. Hardingham: They do that.
Senator Kenny: They may even do it in a more formalized way and then that is
business you will not have.
Mr. Hardingham: Yes, it is business we don't have. I understand what you are
saying, but the vast majority of commercial organisations do not want to assume
risk. They want to get on with the business that they are running. They do not
want the hassle, the worry.
The Chairman: They want to lay the risk off on somebody else and they are
prepared to pay for it.
Mr. Hardingham: Yes, and that, again, is human nature. If, all of a sudden, the
conventional insurance market embraced the big six and said, "We will
insure you in excess of two million, five million", or whatever it is, all
of the self-funded mechanisms they have in place would immediately collapse.
They would dispose of them if they knew a long-term conventional market was
available to them.
Mr. Quigley: You can move away from accountants and the big six, because most
law and bar associations in this country and abroad now operate on a mutual
basis and are self-insured. Some are probably handled quite well, but the
conventional market, I feel, could still play a part in these areas which they
have now lost. There are, in any scheme, good risks. In any legal bar
association facility or solicitors' facility, there are individual risks which
are good and are conventionally insurable.
The members who got together to form their mutuals were promised, at the outset,
premiums which would be probably lower than what they were paying at the time.
Invariably, they complain when the bar association mutual increases those
There is a conventional market who will, if they can, uncharter some of these
schemes, and who would be quite happy to underwrite the medium to small sized
firms who have complained that they are paying for the losses of the bigger
businesses in these mutual schemes.
Accountants, being canny and like banks, don't want to retain any sort of
exposure at all. They continue to come to the conventional market for
reinsurances and that is where brokers like Peter would make certain deals. We
in the conventional market still retain, in an indirect way, some of the
I think, to a degree, the conventional market would only be too happy to get the
business from some of these bar mutual schemes if they can be perceived as
being a better party.
Mr. Steve Gilbert, Minet Inc.: You refer to reinsurance. One might consider the
limits in some of the construction and energy fields. Regardless of the
willingness to write a risk, to what extent are you going to be influenced in
the ability to write it? There must be a commitment to capacity. Is it a simple
issue of wanting to write the big six and then being able to do it?
Mr. Hardingham: If you compare, say, the rig market, with multibillion dollar
values at risk on a physical exposure, then the market is much broader. There
is a considerable amount of reinsurance available to enable Lloyds Syndicates
insurance companies to write substantial lines on rigs.
Senator Angus: Are you restricting your comments to the property aspect, or are
you including liability for pollution or whatever?
Mr. Hardingham: I am talking about the whole rig market.
The professional liability market is younger. It is less broad in terms of the
availability of reinsurance, and people are less encouraged to come into
professional liability reinsurance because of the vagaries of the claims that
A physical exposure like a rig is far more simple to analyse, to manage, than
what I would call the "nebulous" exposure of a professional firm
which could be exposed to a $5 million or a $100 million loss, or even a $500
Our ability to write large lines on professional liability exposures is limited
by what is available in the reinsurance market.
Senator Angus: Is there a domestic market? We understand the London market it is
the most developed and the most sophisticated PI market there is.
Is there a domestic market, say, in other jurisdictions, such as Canada, the
U.S., the continent, Australia?
Mr. Hardingham: There are certainly domestic companies. GIO and FAI in Australia
write large amounts of domestic professional liability, indeed, international
professional liability. In Canada you have companies such as Boreal which write
professional liability risks. The professional liability insurance is most well
developed in the sophisticated countries of the world. Usually domestic markets
are set up to write the risk alongside the international insurers, such as
Lloyds and the large insurance groups like IMG.
Senator Angus: Do you find that most of those domestic markets tend to reinsure
here in London?
Mr. Hardingham: We all insure all over the place, reinsure all over the place.
They will buy reinsurance from where it is available.
Mr. Spence: The reinsurance marketplace is probably more concentrated than the
Senator Angus: Do you mean in London?
Mr. Spence: Yes, and internationally.
Mr. Nick Rudnai, Alexander & Howden: Is it also true to say that, if you
look at those international markets, they tend to be structured in a different
way? Here in London we have subscription markets where people have relatively
small lines. $1,000 would be a relatively big line in a PI field. In Australia,
companies are putting down $20 million as a single line, largely reinsured. In
Canada companies are putting down $10 million, again largely reinsured.
The London market has reacted to professional liability in a very different way
from the way most other countries have reacted. They have fewer markets with
Mr. Hardingham: You are saying that companies such as FAI, for example, in
Australia, are able to put down more money. I don't know if they can put down
as much as $20 million, but it is certainly a large amount. However, that is
heavily reinsured whereas the London market, as you know, is a subscription
Mr. Rudnai: The only difference there is that they are fronting up a lot of
reinsurance whereas you are writing up your own net lines.
Senator Angus: Are you in agreement with that?
Mr. Hardingham: Our gearing is not as high as theirs.
Mr. Blake: It would give a false impression to say that London syndicates and
companies do not buy reinsurance. They do. Most, if not all, probably buy some
reinsurance of some kind.
When the London market was trying to implement their electronic placing system,
the survey revealed that on each risk they had written, there were an average
-- and this is Lloyds syndicates -- an average of 17 syndicates on any one
Senator Angus: On all classes of business?
Mr. Blake: Across all classes of business. Having said that, that was a few
years ago and I would not be surprised to find that, if you did the same survey
today, you would find that they have probably reduced slightly. We are talking
about 17 different companies writing a particular risk.
Mr. Christie: That might be one line.
Mr. Blake: Indeed.
Senator Angus: Do you mean companies or syndicates?
Mr. Blake: Both. No, I am mistaken. That was done purely for Lloyds syndicates.
Senator Angus: Would these same principles you were describing apply to the
company market as well as to the Lloyds market? I am referring to companies
such as Q.B.E.
Mr. Quigley: We have bigger lines, but we do have a large amount of reinsurance
within those lines.
Ms Mel Goddard, Q.B.E. Insurance Company: There is a fundamental difference,
which is that a syndicate at Lloyds is an annual venture which requires it to
return to its capacity provided that year in the result. Companies in the world
can sometimes stand back and take larger retentions and take a slightly
longer-term view of results.
Senator Angus: Correct me if I am wrong, but I think my colleagues and I are
hearing that whether or not joint and several liability is taken off the books
and replaced with proportionate liability, it will not make a difference as to
the insurability, either as to capacity or cost, of accountants generally,
lawyers, engineers and professionals who are covered by PI insurance. Is that a
Mr. Hardingham: It would take time, for the capacity to have confidence in any
change in the legal environment.
Senator Angus: As things stand today, even with joint and several liability is
there adequate insurance at a reasonable price available to all professionals,
other than the big six.
Mr. Spence: Yes.
Mr. Rudnai: May I add one rider to that? In the construction industry very small
consultants find themselves fighting for contracts with the big boys and being
unable to exclude under the contract things like consequential financial loss.
Their ability to buy adequate levels of professional liability coverage to
protect themselves for those exposures is far out of proportion to the fee they
are earning on that particular project. We see that as a problem.
Senator Oliver: What can be recommended which would ensure a long-term supply of
insurance for auditors?
Mr. Hardingham: Is your concern the big six?
Senator Angus: No, but the big six triggered this investigation. It was quite
interesting yesterday talking with Professor Andrew Burrows, the author of the
Burrows Report which was prepared for the Law Reform Commission in the U.K.
That report concluded that joint and several liability was founded on the
fundamental principle of fairness and the ability of a plaintiff to be
indemnified in whole, restitutio in integrum, and that, based on his legal
analysis, the balance of fairness was to stay with the status quo.
However, from a commercial point of view it is acknowledged there is a problem,
which problem can be better addressed in other ways. This, I believe, is why we
are considering the matter. We were asked by our government to assess whether
we amend the law to fix that problem. I guess we are not hearing that this is
the best way to fix the problem.
Senator Oliver: I would ask each of you to answer the specific question: How
might the long-term supply of insurance to auditors at lower prices be
encouraged? What would each of the four of you say to that?
Senator Angus: There are others here we want to hear from such as these wily
underwriters with unlimited liability.
Mr. Blake: I have actually just changed syndicates, so I am not totally clear as
to exactly what has been written by the syndicate I currently work for.
However, I do know that we do not write accountants.
Senator Oliver: What can be done to encourage you to write for accountants?
Mr. Blake: An awful lot. We need a lot of time to have the proof, if legislation
is passed, that the case law suggests there is a great degree of comfort for us
to enter that field.
Mr. Quigley: Taking up David's earlier point about auditors signing their annual
audit, I have some sympathy with the tenor of your viewpoint that auditors are
sometimes a bit quick to sign things which they really and honestly should not
sign, for the reasons you mentioned. For example, if I were an auditor to one
of the Maxwell companies, and being paid a substantial fee, Maxwell, apart from
being quite an intimidating chap, would probably frighten me as his auditor into
doing something I know I should not do. I think it happens quite regularly that
auditors are fazed and under great pressure from more intimidating people.
Mr. Christie: The reference to Maxwell is clearly a hypothetical one.
Mr. Quigley: That probably happens more times than is known about. My comment is
not related to my experience, but it is based on a general feeling for how
things can be done.
Senator Kenny: The reason I put the point is that companies provide thorough and
complete disclosure to regulatory authorities that reveals all sorts of things
that do not show up in an audit. There is so much candour in some disclosures
that you wonder how anyone would ever invest in the firm. I sympathize with
your earlier statement that you do not attach much weight to an audit.
I do not understand why this pressure is placed on auditors. The same company,
the same officers file a statement that lays it all out clearly for the
regulator. It would seem to me that the candour of a 10K filing, for example,
would mitigate a lot of the liability. If you have laid it all out on the line,
there are no grounds to sue, barring errors or fraud.
Mr. Quigley: Exactly.
Senator Hervieux-Payette: Is your conclusion that they are doing the damage to
themselves by the way they practise?
Mr. Quigley: It is a question of competency. The actual audit, by its very
nature, is not comprehensive. I am sure some of the more reckless firms, not
auditing firms but some of the corporations, have techniques which they can use
to massage the way their auditor is actually handled during an audit. There are
so many instances of audits being undertaken and, when the real result comes
out two or three years later, it is completely the opposite from what it should
Mr. Spence: Even if we could see signs of massive improvement in the risk
management of auditors and their standards --
Senator Angus: Through the best efforts of their brokers and their advisors?
Mr. Spence: Exactly, the confidence we need to write those types of risk can
only be accomplished if there are seen to be changes in the legal framework. As
I said earlier, it will take time for that confidence to come. In the absence
of any such changes, there are few incentives for us to go back into the
Senator Oliver: Do you want to be specific about some of the changes in the
legal framework that you might be interested in and which might give you the
comfort you are seeking?
Mr. Spence: It would be a form of restriction in the sheer scope of actions that
we are seeing and have seen against auditors. We highlighted the audit process
in particular, but the reliance of third parties -- in some cases quite distant
third parties -- on the audit, is one of the aspects that could be addressed.
Mr. Quigley: In the U.K. the law is coming down on that situation at the moment.
We have had decisions in Caparo and Dickman, as well as other cases. The
general drift is towards restricting exposures to tortious situations.
Senator Angus: Based on the evidence of expert witnesses who testified, I
understand that any prudent third party would not rely on a simple audit
certificate but would require fairly substantial due diligence procedures which
would then lead to prospectuses and the kinds of blue-skying activity that
would be more in depth. Would you agree with that?
Mr. Quigley: That is absolutely right.
Ms Goddard: If court cases could be heard more quickly, there would be fewer
outstanding issues to deal with. For example, with an oil rig physical damage
loss, you have some idea, within a reasonable time frame, of the quantum you
are dealing with. As an insurer you can then take a view on premiums that you
require in that market for the exposures you are running. Ultimately, you rate
on the exposures you are running. The length of time it takes some of these
long cases to be resolved causes major problems. People know these issues are
outstanding. The one that Mike mentioned in the U.K. has been outstanding for a
number of years.
Senator Angus: He mentioned Caparo.
Mr. Quigley: That issue was settled some time ago.
Ms Goddard: I don't think we are talking about the same case.
Ms Goddard: The bottom line is that insurers will come to the table if they are
provided with a risk to take; and they will be happy to try to price a risk, if
it is an unforeseen possibility.
The problem with the size of the big six is that there is a considerable
predictability. Their very size naturally means there will be a certain
frequency of claims. The other problem the big six have relates to this issue
However, certain subsidiaries of the big six do get cover in certain territories
of the world.
Mr. Quigley: It is a territorial matter rather than a matter of insolvency or
whatever. The culture of, say, Continental Europe, is not the same as it is
here or in the United States. They do not immediately try to sue somebody or
look towards redress in that sense. They try to sort things out without legal
involvement. There is often the loss of face that has to be considered. In the
Middle East and the Far East, loss of face is very important. Situations do not
evolve into the same litigious situations they do in the more exposed western
Senator Angus: It may be changing on the continent. Just this morning on TV this
morning we saw a lawyer in France who is ready to start issuing writs this
afternoon regarding the Chunnel fire. It reminded me of "hicksville",
Texas or California.
Mr. Quigley: They are catching up.
Senator Hervieux-Payette: Let us assume, that there were separate entities in,
say, KPMG. There would be KPMG, Toronto, KPMG, Montreal, and so on. They could
be divided by state or by different profit centre. You could end up having 500
corporations, each with its own limited partnership.
Would you then be in a better position? One unit could not endanger all the
other units, the 499 other offices around the world. The predators, those who
think they can satisfy their appetites from all the offices around the world,
would have to deal with one single office with limited liabilities, They, in
turn, would file for bankruptcy, and found another corporation the following
Senator Kenny: Are you saying that the solution is to have no insurance and take
all the assets out of the company?
Senator Hervieux-Payette: If they already operate with a different corporation
for other services, because they are involved in consulting activities, there
could be a wall between the rest of the corporation so it would not go down the
drain because of one mistake.
Mr. Quigley: You are going back to the original question put to us, which was:
Does the size of the auditors militate against their coverability?
Senator Angus: Is the answer, yes?
Mr. Quigley: The answer is: I think, yes.
Senator Hervieux-Payette: In the case of a multinational corporation, such as
the Bata Corporation in Canada which makes shoes, each division does not cover
the others with their insurance and so on.
Mr. Christie: I think in the vast majority of cases international corporations
would cover international corporations. I have to disagree with that.
Senator Angus: A plaintiff can break the corporate veil. Even in accounting, and
correct me if I am wrong, I understand that, in the U.S., a plaintiff can sue,
let's say KPMG Minneapolis, and allege that he got the tax opinion from the
London office and that the environmental audit was done in their Budapest
office, the result being that they are all swept into the net.
Mr. Christie: 3M will protect their global enterprise balance sheet. They won't
try to protect each subsidiary's balance sheet. They will look at it as an
enterprise. In extreme cases, they will use that corporate veil to limit
liability, but I don't think many people would buy their insurance that way.
Mr. Blake: You are always fearful you will not cover some area and you will fall
through, and that it will be rather embarrassing.
The Chairman: You said you would not insure any accountants?
Mr. Blake: Currently we do not.
Senator Angus: It is not that they will not.
The Chairman: I thought I heard you say you would not insure any accountants.
Mr. Blake: No, we do not insure them. Perhaps I will speak for where I used to
work. The answer is that they did not insure accountants.
Senator Angus: Was it to do with joint and several liability?
Mr. Blake: No.
Senator Angus: Were there other reasons?
Mr. Blake: Yes. I suppose we are here to pay claims but, equally, if it is not a
level playing field, one may choose not to offer coverage to one particular
sector. You do not have to write every single class.
The Chairman: Forgetting the big six, do you or would you insure other
Mr. Spence: We do not, for two reasons. One is, perhaps an emotional one. It has
to do with our scars.
The Chairman: Have you been burned?
Mr. Spence: The difficulty in explaining the difference between the big firms
and the smaller firms involves the difficulty in trying to persuade them. It is
easier for us to say we do not do it.
That said, if we can see that we would make profit, a significant profit,
hopefully, then we would make that effort.
The Chairman: Do you insure other professionals?
Mr. Spence: Yes, we do.
The Chairman: Richard, forgetting the big six, do you insure other accountants?
Mr. Hardingham: We do, yes. In Canada we do have a book, albeit not a big one,
of accounting firms.
Senator Angus: Are they medium to large firms?
Mr. Hardingham: Yes, firms like BDO, Doane Raymond, and Raymond Chabot of
Quebec. It is not a big number of firms but we are involved in the accountants'
market in Canada.
Senator Angus: Raymond Chabot is a pretty sizable firm by any standards?
Mr. Hardingham: Yes. We are distinguish the risks between those firms that audit
large public entities and those firms that audit middle America, private
companies. As I said earlier, there is a distinction.
I think you are focusing on the wrong area if you believe insurance will fix the
problem. You still have to deal with the big six.
Senator Oliver: They told us they could not get insurance.
Senator Hervieux-Payette: That is why we talked to you.
Mr. Hardingham: You are only at the the periphery of this problem when you talk
about insurance, whether it is available and why it is not available. The
fundamental problem you must address is how your legal system operates in
placing big six firms in the spotlight when there is a major business failure.
That could apply to any auditor, but it principally applies to the big six
because of their client base.
At the moment your legal approach to the issues is, if I may say, is the high
moral plain, because you have joint and several liability. You are concerned
with protecting investors, both big and small people, and ensuring that they
are compensated when they lose money. As I say, I think that is the high moral
ground because, when you come down to the realities of life and consider how
people operate, the way they take risks, and the way people run their
businesses you will see that it is very different from the high moral ground.
They will take business risks, they will conceal things, they will manipulate
situations to their advantage to recover loss if they have lost money. We see
this time and time again with individual investors, with corporate investors or
with people running businesses.
I think this is going right to the other end of the spectrum and it is removing
the audit responsibility from the accountant. What is the audit really worth,
because it is only a snapshot, and, as I say, I think it has very limited
value. I take your point entirely that the 10K equivalent has far more relevance
and value to anybody out there wanting to consider a company. There should be
far more responsibility placed upon people running companies to respond and
operate those companies in a reasonable way. Time and time again, if a major
corporation goes out of business, the people who were running that business
disappear. The value of their D&O insurance is doing to be relatively
limited. It will disappear in the first stages of a litigation. They might have
$5 million or $10 million, but the limits are relatively small in relation to
the amount of money lost.
You must go back to the fundamental principle: Who is to blame? I do not think
the big six are to blame in the majority of business failures. It is not them;
it is those who run the companies. It is those people who have put themselves
at risk in the way that they have done it, in the markets that they have
operated, in the things that they have done, and in the way that they have
concealed the asset values of those companies.
One firm in Canada is presently faced with a very difficult situation where they
have audited a business over six years and the directors of that company have
consistently concealed the asset values within that company to the extent it
has now failed. Who is in the spotlight? The audit company. Why? It is simply
because they are the people still around with some money. I think that is
Senator Angus: Are you referring to the Castor Holdings case?
Mr. Hardingham: No, I am not.
Senator Angus: Confederation?
Mr. Hardingham: We are involved in the claim, so I am not prepared to mention
who it is and what it is, but you have to go back to the fundamental principle
of who is responsible if you are going to solve this problem. At the moment the
people who are not responsible are being made to pay for it. In other words,
the audit firm.
I think there must be a shift away from the audit as being the, if you like,
principal thing on which people rely. Presently, there is much debate about
this in the accounting community, particularly in the U.S.A.
Senator Oliver: That has been very useful.
Mr. Hardingham: If a government requires an audit, why does it not do that audit
Senator Oliver: It may be called a moral ground but it is, in fact, a legal
ground, the legal ground being to keep the plaintiff whole.
The other legal principle or consideration, is found in Hedley Byrne. Before
1964 that was not applicable, but the decision in Hedley means that
consideration will be given to what may be negligent statements by auditors, so
beware. Hedley is a U.K. case, not Canadian, but we have adopted it in our
common law system. It not really a moral ground.
Mr. Hardingham: Well, I think the moral ground is driving the legal
considerations because, when you form a government, you want to do the right
thing for everybody and so you approach it from the moral point of view.
However, as I say, the reality of big business is not quite like that.
Senator Kenny: It would be interesting, if we had an auditor sitting here, to
see what his or her reaction would be to our comments to the effect that the
audit is of little value. It would be good sport to ask the auditor to defend
the value of the audit, because much of this turns on the value of the audit.
Mr. Quigley: It is a matter of what onus or responsibility the auditor has to
question what information he is given. For example, if he is told that certain
asset values are hidden, he should ask questions about that and not just
accept, willy-nilly, statements to that effect. I think that, sometimes,
auditors do not know what their roles are in an audit.
Senator Oliver: Do you think officers and directors should have more of a
responsibility, that there should be more reliance on officers and directors
Mr. Hardingham: They are the people running the company and they have intimate
knowledge of what is going on. An accountant is a third party. He can only go
so far in assessing what has gone on.
In the Miniscribe case, for example, should the auditors have opened every
packing case to ensure it wasn't filled with bricks but with computer
equipment? I would think not. He accepts what he is told.
Senator Angus: Should corporate directors micro manage a company? They are there
in a supervisory role. You are referring more to the management, are you not?
This committee has just written a report that suggests the integrity of the
system would require that directors have a cap, some limitation, on their
exposure as an inducement to stay around, when a company gets in financial
difficulty, to advise and supervise.
Mr. Hardingham: In endorsing that you are suggesting a limitation of liability
for the people who are responsible for the problem, but you are not accepting a
limitation of liability for the auditors who are not responsible for the
Senator Kenny: No. We are saying that, perhaps, the managers have more
Senator Angus: They are the "concealers", as you say.
Senator Kenny: The board in fact may be there to provide some assistance,
direction and guidance to the managers at some point. From time to time, we see
that they don't want to be around at the end of the day, simply because, in
Canada at least, they will have to assume all sorts of unreasonable
Mr. Hardingham: Are you talking about non-executive directors?
Senator Angus: Absolutely. Outside people.
Mr. Hardingham: They are generally brought in for what they have to offer in
terms of general business advice.
Senator Angus: Strategic judgment and so forth.
Mr. Hardingham: They are not running the business day to day. I am talking about
the responsibility of what I would call executive directors who are managing
the business. That is where I feel the responsibility lies.
Mr. Christie: I believe in the U.K. there is no such thing as a non-executive
Senator Oliver: In U.K. court cases are these officers being joined in the
lawsuits with the auditors?
Mr. Hardingham: I am speaking from limited experience, but generally directors
will all be brought in and claims will be made against them, but then they have
Senator Oliver: But no insurance?
Senator Angus: D&O ?
Mr. Hardingham: Individually they may have limited assets or none. They may have
some directors' and officers' insurance which is, generally, of limited value
because the limits of purchase are not necessarily that high. Let us say it is
a single limit covering all of the directors within that company. It tends to
get washed away.
Senator Oliver: In terms of spreading the risk and giving more comfort, is that
not one of things we should be looking at?
Mr. Hardingham: Yes. I am suggesting that you put the responsibility where the
Senator Hervieux-Payette: The onus should be switched inside?
Mr. Hardingham: Yes.
Senator Hervieux-Payette: We know that when we an inspection of books is made
for tax purposes a thorough auditing exercise is undertaken. Are you suggesting
that governments would be doing the auditing process, sending an army of
bureaucrats into a corporation?
Mr. Hardingham: Why not? You are going to have a problem with the big six
because you are going to remove a large swage of their fee income, but you are
the ones who require it to be done.
Senator Hervieux-Payette: I agree with you. Of course, we have government
employees and businesses. There would be a riot.
Senator Kenny: Let us come back to the 10K. You have the same cast of characters
who are quite prepared to give you full disclosure when they are filling out
their 10K, but you do not get the same sort of disclosure in an audit. It is
not necessary to send in an army of people from the Securities Commission to
encourage them to fill out the 10K. The information is provided voluntarily. You
have the same players, but the information is provided in one instance but not
in the other.
Mr. Hardingham: Yes, and the 10K information is provided by the people who
should be providing it.
Mr. Christie: Is the proposition that auditors have frequently been sued because
they failed to reveal in the audit report what had been revealed in the 10K? I
find that very questionable.
Senator Kenny: No.
Mr. Christie: In 99 cases out of a hundred when an accounting firm has been
sued, it has been alleged that something was being disclosed that was not
disclosed in the 10K. Surely you cannot be sued if it is not disclosed in the
Senator Kenny: The suggestion is that, if it is a clean audit, and there is huge
pressure on an auditing firm to give a clean audit, then, that should be all
right. Nobody gives a clean 10K.
Mr. Christie: I think we need some auditors here. I think you could give a clean
audit if it has been disclosed in the 10K. It doesn't make it right.
Senator Angus: That is right.
Mr. Christie: A clean audit means that it contains the correct information. I am
out of my area of expertise.
Mr. Hardingham: Perhaps I am not making my point clear. The trouble is the audit
is signed off by the auditing company and that gives it responsibility.
Senator Hervieux-Payette: The 10K is signed by the company.
Mr. Hardingham: Yes, the 10K is signed off by the directors. I am saying that
there is more information in the 10K, and the information in the 10K is
provided by those responsible for running the company.
Senator Kenny: Who else cannot get insurance? Will you folks insure cigarette
companies, for example?
Mr. Blake: For liability.
Mr. Quigley: You are getting into third party exposures, public liability and
products liability area, not professional indemnity.
Senator Kenny: Right.
Mr. Quigley: I think up to about five or six years ago cigarette companies may
have gotten coverage but now, with what is happening, especially in the States
-- and it is starting to happen here with the equivalent class actions --
obviously, they cannot get it.
Senator Kenny: Who else is excluded?
Senator Angus: What about environmental issues?
Mr. Hardingham: That is murky water.
Senator Angus: To coin a phrase.
The Chairman: No pun intended.
Mr. Hardingham: When talking about environmental issues, there are two
considerations. One is the entity which has caused the problem, and that is
generally a manufacturing organisation. Clearly they should have responsibility
because they have handled their waste in an incompetent or not responsible
You then have the people who are responsible for cleaning that up, the
environmental consultants, who should be regarded, if you like, as the white
knights in the situation. They are coming in to solve a problem, not to create
When talking about environmental issues, you have to separate the two: the
people responsible for causing the problem and the people responsible for
cleaning it up. It should be perfectly possible to insure environmental firms
that do the actual clean-up, depending on their track record, their experience
and everything else.
Mr. Quigley: And those trying to establish the amount of pollution?
Mr. Hardingham: Yes. The reason it becomes murky is because there is a tendency
by governments -- the U.S.A. are particular in this -- to try to recover the
cost of the clean-up, and they go to anybody who has the money to pay for it.
Therefore, environmental consultants are at risk, even though, as I say, they
should be regarded as the white knights of this situation.
I have some reticence insuring environmental consultants because, if they get it
wrong in that they don't clean up the mess to the extent it is capable of being
cleaned up or, if they pierce a water table and pollute the general ground
water to a housing estate or something else, they will tend to pick up the
whole bill for the whole problem, rather than just what they are responsible
for. That is my reticence about insuring environmental engineers, consultants
and so on. Suddenly, like the big six, the spotlight has turned on to them.
They are being held 100 per cent responsible, not 10 per cent responsible.
Senator Oliver: It is a novus actus situation.
Senator Angus: Information regarding the Nagasaki Spirit case has been in Lloyds
list a lot lately. That was being heard by the House of Lords, I gather, this
fall. It will decide some issue on pollution. I am not certain but I think it
comes under the Salvage Convention of 1991 where the salvor has a right to an
award, an additional award, for avoiding or preventing further environmental
damage. The thrust of the articles I have seen in Lloyds list indicate that the
insurance market is waiting for this decision so they can have greater
certainty about the risks.
Is that in line with what you are saying: that you require more certainty in the
law before you will underwrite certain kinds of risks?
Mr. Hardingham: I have not followed that case and I do not know whether anybody
Mr. Blake: No.
Mr. Hardingham: We are looking for the right emphasis from the people who write
or administer the legislation, so that it will move away, if you like, from
taking money from those people who are around rather than holding responsible
those people who should be held as such.
Mr. Christie: Could we have further answers to Senator Kenny's question as to
what are other obvious uninsurable classes? For instance, the drug companies
cannot get enough. There is an issue between the availability of insurance and
enough insurance. Certainly, the drug companies would say that they cannot get
Senator Angus: What about hospitals and doctors? We often hear of, for example,
a specialists in ear, nose and throat who has some other speciality or
specialities, but he cannot afford the insurance to enable him to do one of
those other specialties. He has to stop, or go out of business. This definitely
happens is in the U.S.
Senator Oliver: It also happens to plastic surgeons.
Senator Angus: Some doctors won't stop by the roadside if there is an accident.
Mr. Christie: I think, outside of the U.S., most people can get coverage. I have
no doubt, however, that the guy who does part-time brain surgery might have a
Mr. Quigley: Obstetrics and gynecology is a speciality which is very vulnerable.
Ms Goddard: The advantage of medical malpractice is that it is, to some extent,
generally tied to the value of the plaintiff's remaining life. Someone may be a
quadriplegic as a result of malpractice. In real terms you do not see o100
million medical-malpractice awards. They do not exist, so there is a market for
malpractice insurance. It may be expensive because the frequency of claims of a
certain severity is greater -- maybe o2 million or thereabouts, but the claims
are not for o100 million or o200 million. The premium reflects the frequency
but these claims are not of the same severity.
Mr. Christie: We would agree that, generally, the insurance market reacts to
even very high levels of frequency. What causes the difficulty are the
unpredictable blockbusters, such as actions against the drug companies or the
Mr. Hardingham: You have the possibility of enormous accumulation with drug
companies because they are international. Literally millions of people could
have the same problem, so the amount of the claim could be astronomical.
Mr. Spence: The problem occurs whenever you have frequency and severity.
Senator Oliver: Which you have with the auditors?
Mr. Rudnai: Is that situation aggravated in the case of the auditors because
there is not a large accumulation of premiums? There is not enough of a market
for insurers to decide to take the risk of getting into that market.
Mr. Quigley: Are you saying that most things are insurable, as long as the money
Ms Goddard: Like satellites.
Mr. Rudnai: If you have frequency and severity but also a very big insurance
premium market, you can take a longer view on that and perhaps hang in there
for the good days or try to lobby for changes. However, if you have frequency
and severity, as perhaps you do on the big six and some of the larger
accountants, you do not have the large numbers there and, you do not have the
big premium to make it worthwhile going into that market.
Mr. Christie: That is a well made point. I don't think you could actually get at
the data, but if you expressed the actual and future potential exposure of the
accounting profession, the big six, as a percentage of the revenues generated
by the big six; and did a similar calculation for the drug companies or the oil
companies, you would find a big imbalance with the big six. The amount of
liabilities they incur relevant to the size of the profession is very high.
Senator Kenny: Would the issue be mitigated at all with a large deductibility?
If they took the first $50 million of risk, would that make a difference?
Mr. Christie: They do already.
Senator Kenny: I am talking about the big six. They do not because you do not
insure them. Why are you saying they do?
Mr. Hardingham: They do assume large deductibles.
Senator Kenny: I thought you were not giving them coverage at all?
Senator Angus: Perhaps, gentlemen, I might suggest that we have a short break
and then continue.
I notice that a number of people have not had an opportunity to address the
committee and I suspect, as Senator Oliver has suggested to me, that we have
done more talking than we should have, and that you may have something to say
to us to help us with our job.
Upon resuming after a brief adjournment:
Senator Angus: Ladies and gentlemen, perhaps in the next 20 minutes or so we
could cover the remaining points. A couple of issues were raised during the
break which I think are worth pursuing.
Mr. Christie, you expressed a touch of irony in that accountants are not only
defendants these days. Perhaps you could elaborate on that.
Mr. Christie: I was merely making the comment -- and I am not sure how relevant
it is to our discussion -- that, outside the United States, the most frequent
plaintiffs against accounting firms are accounting firms or auditing firms in
their capacity as liquidators for companies. I am unclear what one should
conclude from that fact.
Senator Angus: I think your point was an excellent one.
In this market, when one of the members of the ILU had a problem, the Orion
liquidators were appointed here in the city, a member of the big six -- and
there is a subsidiary of the Orion in Canada -- and they in turn appointed PW
or whoever over there, and litigation started big time. Perhaps they are the
authors of their own misfortune.
Another point was raised. Richard, you indicated that most of the discussion so
far this morning has been focused on the big six and asked if that is the limit
of our interest.
The answer is definitely no. Our interest is to, first of all, demystify the
fact that there is no quick fix by professional indemnity insurance.
Professional indemnity insurance does exist. You have stated that there is an
ample market, even a soft market in terms of rates at the present time, for most
professionals other than the big six.
Mr. Hardingham: Yes.
Senator Angus: That has come out very clearly.
Mr. Hardingham: I am not aware of a shortfall of professional liability cover
available for practising lawyers or estate agents or anyone else. You probably
have a market that copes with that very well.
Mr. Christie: May I interject on one point which I think has been raised a
couple of times in the last two days. It is perhaps a very obvious point. I
agree there is no shortage of insurance. You may find a single practitioner
from Saskatchewan wanting to buy $100 million of coverage but he finds it costs
too much money. The insurance market cannot be responsive to people who want to
pay $5,000 for $1000 million coverage. Therefore, smaller firms will have an
economic problem in buying enough coverage. That is a sort of structural
The Chairman: That is a price problem, not an availability problem.
Mr. Christie: Yes, the pricing is so high.
The Chairman: There is a difference. You said that you would not insure the big
six . That is an availability problem. You would not buy that action at any
Mr. Christie: That is quite a different problem.
The Chairman: The other is a price issue, which is quite different.
Mr. Christie: Therefore, the committee may hear on occasion that I have an
The Chairman: Public policy can't fix the price problem, in the sense that that
is a market driven issue.
Senator Angus: What would interest us substantially, in the time that is
remaining, is to have your collective wisdom as to what solution there may be
to a severe economic problem that interferes with the smooth running of our
financial systems in Canada, here in the U.K., as well as Australia and the
U.S. Are there other solutions apart from changing the law of joint and several
Mr. Rudnai: There are two comments I could add to that.
The first is that we have seen with certain professions, and I can think of
surveyors as one in particular, where an effort was made to try to specifically
identify what a surveyor was supposed to do in his professional role and then
judge him in terms of negligence based on his capacity to do that particular
job. I wonder if there is scope to move that into the accountancy profession as
The Chairman: That is the point Richard was making earlier.
Senator Oliver: Limiting the scope?
Mr. Rudnai: Yes. Whether you limit the scope or widen the scope, you should try
to clearly identify the job. Then they can say that they are responsible for
working on a particular part of the auditing process, but not responsible for
the supply of information that comes to them. That is the job of the company
directors. You would then be able to judge them on their ability or inability to
do that particular task. I have the impression that those are blurred issues at
Senator Oliver: What was your claims experience after you did that for
Mr. Rudnai: It definitely helped. There was a crisis in the capacity in the
market generally for surveyors in the early 1990s, possibly late 1980s. There
were severe shortages of capacity; severe increases in prices.
Senator Kenny: You are suggesting legislation that would define what an audit
is, what the purpose of an audit is, and what an audit may be used for; is that
Mr. Rudnai: As I said earlier, we are not heavily involved in the role of
insuring auditors, so I should preface my remarks with that. However, it seems
to me that an auditor has a fairly limited role. As I said earlier, he takes a
snapshot of the company, but he then has to make a general statement regarding
the accuracy of the figures that are produced at the end, rather than saying, "This
is what we have done and we stand by the information we processed and the
results we have reached as a result of that information, but we go no further
than that". That has been done in other professions.
The other point you alluded to earlier was the prospect of a number of
professionals with an unlimited personal liability, where there is a real risk
of a claim going through. You wanted to know if it would be possible to protect
at least their own personal asset base and perhaps even the asset base of the
partnership in general so that it can continue trading.
I would suggest that it is not against the public interest to do that, as long
as it does not take away their incentive to insure to the maximum possible. To
say to one particular group, "We can give you a cash policy which means
that you will not lose your house. Someone else will provide that fund to the
creditors rather than you actually having to liquidate your personal assets".
I think there are issues there that can be discussed.
However, with the big six that may not be a solution, although it may be for the
With very big firms, with large numbers of partners, you run into fairly major
aggravation problems, because of course you have a situation where if a claim
does go through the PI limit and it attacks one partner, it will attack all
partners and all people who have an interest in that firm. Therefore, if a
partner is worth $1 million, and if you have a very large number of partners, I
suspect you would still struggle to get capacity in the market to insure all of
those. Certainly there have been efforts in the past to provide insurance to
partners to protect their personal assets, in the event that everything does go
wrong and they are attacked by the creditors.
Senator Angus: Are you underwriters conversant with that solution?
Mr. Hardingham: Yes.
Senator Angus: Is it a useful approach?
Mr. Hardingham: To create an aggregation.
Mr. Christie: To the extent they have LLPs now, I think that issue has been
dealt with because they no longer have their personal assets at risk. You can
fix that one.
Senator Angus: That will go a long way.
The Chairman: Doesn't an LLP effectively solve the problem? I cannot believe the
auditors are fundamentally saying that they should not be liable for anything.
An LLP at least leaves them in the same position as any other company which is
that the assets of the company and, yes, the company, can go bankrupt, I do not
have a problem with that, but the auditors have the notion that their company
should not be allowed to go bankrupt, that everybody else in business should be
but they should be protected.
Mr. Christie: I agree with their view.
The Chairman: I can understand why you would. The limited liability leaves the
joint and several legal principle in place while, at the same time, dealing
with the auditors' real problem which seems to be protection for their personal
Mr. Christie: The LLP has substantially solved that problem.
The Chairman: The LLP does not exist in Canada.
Senator Angus: No, but we are close.
Mr. Christie: For example, in the U.S., I think they would consider that it has
substantially solved their one problem, which is that the perpetrating partners
can still be personally liable. That is a bit more of a problem than it sounds,
because they are worried about the possibility of a claim against the
management. It may be alleged that the managing partner should have hired better
partners. How many people actually participate in the area is the one concern
they have but, obviously, the LLP is a major step forward in solving the
problem you are talking about.
Senator Angus: Would it help lawyers with insurance if law firms could
Mr. Blake: They are starting to restrict in the States.
Mr. Christie: It helps them after they have run out of insurance.
Senator Angus: My concern was related to the cost of insurance, which is, in
many cases, prohibitive. We find that to be the case in any event.
Mr. Hardingham: Whether they are an LLP or a general partnership, it does not
change the risk we are insuring.
Mr. Blake: You do not rate them separately depending on how they are formed.
Mr. Hardingham: What they are doing is still the same.
Senator Angus: I would have thought it limited the amount of money they could be
Mr. Quigley: Ultimately, justice is not served whether you have an LLP or not
because, if it is a genuine mistake that someone has suffered, what happens to
that excess of limited liability? How can you legislate for what happens in
Mr. Christie: Do you think the shareholders of Q.B.E. should be personally
Mr. Quigley: That is the ultimate solution, is it not?
Mr. Christie: You would have warning of that.
Mr. Quigley: Thank you very much.
Mr. Hardingham: It is interesting to note that in New York State the LLP status
was allowed July 1, 1995, if I remember correctly.
The Chairman: For auditors?
Mr. Hardingham: Generally. However, I am talking specifically about law firms. I
expected the majority of the major New York law firms to move to limited
liability. They have not. Some have, but it is a relatively small number.
Senator Angus: Why have they not? Is it for tax reasons, just like the
Senator Oliver: Because of personal liability.
Mr. Hardingham: You still have the individual responsibility. You then have the
unknown of the management responsibility, because, of course, if a person is
individually responsible, then is his boss responsible because of the way that
he supervised him and does that spread into the management's organisation? It
is not a straightforward, simple issue. It is interesting that not many of the
major New York firms have moved in that direction.
The Chairman: Surely one of the major reasons for that would be the tax laws,
the personal income tax laws, which give an enormous advantage to partnerships
over other firms. As David said, greed may underlie part of the decision to not
Mr. Christie: I think that is the issue. It is a balance of fear with greed. If
there were a couple of $200 million settlements, you might see that change.
Senator Kenny: Once things get in balance, the public policy issue disappears.
Mr. Hardingham: I don't think you would have quite the same issue in Canada
because of the difference in your legal system.
Senator Angus: There is a move towards punitive damages now. We are seeing
decisions, just as you are here in the U.K., although it is nowhere near the
degree of the States. That may be because we do not have jury trials in such
civil matters. That may be the key.
Mr. Hardingham: I think that is the fundamental issue.
If you move from having a judge opine on a civil case to a jury applying the
law, that will be a serious threat. We will have to move in exactly the same
The Chairman: I do not believe that will happen.
Mr. Hardingham: It is a fundamental issue for us.
Senator Hervieux-Payette: Let us assume there is a legal requirement to change
the auditing firm every three years, for instance.
Senator Angus: As with the banks.
Senator Hervieux-Payette: That would stop the friendship with the management. Of
course, I know they provide other services and that might create some problems,
but at the end of the day you would have, at least achieved the spirit of the
reality, which is to be at arm's length from the corporation. As it is now they
become too friendly.
If you add to that more reporting requirements and make it a legal obligation to
report all the little sins the company is committing, they would have to tell
their client that they are obligated to report or they will be in breach of the
Ms Goddard: Is it not unrealistic to assume that an auditor can get so close to
a company to be able to guarantee that the company will not pull the wool over
Senator Kenny: So what is the purpose of an audit?
Ms Goddard: Indeed. That comes to the point: Where does the blame lie?
Senator Kenny: Perhaps we should get the auditors in here to tell us how
important it is.
Mr. Hardingham: You have made a very relevant point. Auditors can get close to
their client and be manipulated by their client. There have also been instances
where a auditors have been sacked because they would not sign off. A new
auditor will come in at the same standing and will sign off, taking a liberal
view of stock value or asset value or tax law or whatever. The idea of not being
the auditor forever has appeal, because you will not have the same level of
However, changing auditors does raise new problems.
Senator Oliver: There is the learning curve.
Mr. Hardingham: In that change you can have manipulation as well by the people
who run the company.
Mr. Christie: I have a vague recollection of a U.S. study suggesting that the
first year of audit is the highest risk year.
Senator Hervieux-Payette: That is why I mentioned three years. The first year
requires more work. In order to sign the audit that first year you had better
have done your homework.
The Chairman: It is interesting that, under the Bank Act in Canada, all the
major chartered banks have to rotate auditors every fifth year. It is
interesting that this principle has been applied to banks for at least 20
Mr. Christie: The largest claims against auditors have been by other banks, of
Senator Kenny: They also have two auditors. What difference would that make?
Mr. Hardingham: To be honest, I think without the fundamental change of
responsibility in the legal approach, the result is two companies being sued
instead of one. It doubles our exposure.
Senator Angus: I was going to say there was some interesting precedent set in
Canada before all the privatisations done by that "terrific" Brian
Mulroney government, where there would be a member of the big six or some other
auditing firm like KPMG or Doane Raymond, as well as the Auditor General. This
was applied to a certain type of Crown corporation. Different standards would
apply. They would watch each other. I do not know whether it maximized the
risks or minimised the risks.
My sense is that, because of the rotation factor, the banks have two sets of
auditors and their terms would be staggered so that their expiry dates would
Mr. Christie: I believe you are right. They also tend to separate the actual
audit function. Much of the work is done by one firm all the time.
Senator Angus: The comprehensive auditor.
Mr. Christie: I don't know whether that works better or not, frankly.
Senator Kenny: The question really was: Does it make it more insurable, and your
answer was no because there are two; not yes because we would have better
Mr. Hardingham: Yes.
Mr. Christie: Sorry to amend your answer, but if it created better audits, I
suppose you would like it. However, there is no real evidence that that is the
Senator Kenny: What is the track record of auditors with banks?
Mr. Christie: Appalling.
Senator Angus: We were asked to hold hearings about two years ago, into what
lessons could be learned from the collapse of Confederation Life, which was a
big life company that went into liquidation in Canada. A number of questions
were raised such as: What did they know and when did they know it; when should
the regulator move; and there were the subtle questions about what would start
a run. It is a very tricky area. The issue of insurability is relevant to that.
When should the accountants blow the whistle?
Ms Goddard: It is a question of integrity.
Mr. Hardingham: They are afraid of losing the audit so they do not.
Ms Goddard: All the way down the line everybody is not operating with adequate
levels of integrity and the insurers end up with the bill.
Mr. Christie: That may be a shade harsh.
The quickest way to collapse an insurance company is to announce that it is in
Senator Angus: In my experience of public companies, an auditor may insist that
you write down, say, goodwill because it has insufficient assets underlying it,
and the third quarter results are about to be announced. You want to maintain
confidence. I am on a number of audit committees where discussion with the
auditors has been along that line. The poor underwriter has no say.
Mr. Christie: One of the major oil companies in the U.K. discovered a fault in
many of its North Sea leases. That raised an important disclosure question
because the fault would be eliminated in six weeks. If they said nothing, the
fault would go away.
Senator Oliver: How did they handle it?
Mr. Christie: They adopted their lawyer's opinion, and took out lots of
Senator Angus: It interesting to note the areas of high risk for auditors and
solicitors. It seems to me that the first question you gentlemen should ask a
solicitor or an auditor is: "How much securities work do you do?" You
would want to know how much involvement they have with prospectuses and, say,
how much tax work they do. Of course, auditors and certain law firms are highly
into those things. Would that raise your danger flags?
Mr. Hardingham: Yes, it would.
Senator Angus: Given that the joint and several issue seems to be a red herring,
are there other things that could help resolve the problem?
Mr. Hardingham: We can address tax and SEC work because they both have their own
Senator Angus: Could watertight walls be put around the remainder of the
business, for example, and make it insurable?
Mr. Hardingham: Yes.
Senator Angus: And protect it?
Mr. Hardingham: If you say the audit function is mandatory, it is a government
requirement, and therefore they are immune from claim in performing that
function, that would certainly change our view of accounting terms.
Senator Angus: That would be in the statute?
Mr. Hardingham: Yes.
Mr. Christie: If the audit firm split off from the rest of the big six, you
would just have the audit PLC. The answer has to be that the rest of it would
be easier to insure. You would have a real problem insuring audit PLCs.
Mr. Hardingham: Yes, unless they were immune from claim. I am not sure whether
you are suggesting that or not.
Mr. Blake: Then you have the problem of the consumer not tolerating that move.
We are being selfish and looking at it from the insurance point of view.
Mr. Christie: From a public policy standpoint that option is not on.
Mr. Hardingham: That is why I suggested the government should take on that
Senator Angus: We were surprised. We thought we were in London not Moscow!
Senator Hervieux-Payette: The underwriters told us that if they cannot make
money, they are not interested in that business. Nobody will disagree with
Senator Kenny: If the government were to do it, I would recommend that the post
office department be the supervisory group.
Senator Angus: It has been privatized.
The Chairman: It certainly gives new meaning to the adage: "I am from the
government, I am here to help".
Mr. Hardingham: What problems did the Law Society of Upper Canada outline?
Senator Angus: The problem with the Law Society of Upper Canada, if I get your
drift, is that it was badly managed.
As you know, all of the jurisdictions have a certain level of mandatory or
compulsory insurance which is provided by a mutual or some scheme that the bar
either writes in the market or through a company, but it is managed generally
by the particular law society or bar association in that jurisdiction.
In Ontario, through mismanagement, bad rating or whatever, the cost per lawyer
of that particular first layer, say a $1million, has gone from about $500 per
lawyer to about $1,900 per lawyer; whereas in Quebec the cost of that similar
first layer has gone from $1,100 to $400. It is just the reverse. That is just
My firm, for example, has offices in that particular Ontario jurisdiction.
Terrible problems are caused because of the difference between the two
Is that what you were referring to?
Mr. Hardingham: I did not know whether it was a political issue or not.
Senator Kenny: Only in the legal community, and only for those who have had to
Senator Angus: It stopped the egress of good citizens from Quebec to Ontario.
I think we have covered the waterfront.
The Chairman: Our discussion has been very helpful.
Senator Angus: We are most grateful to all of you for participating in these
discussions with us.
Senator Oliver: What about the people at the back who we have not heard from?
Senator Angus: Perhaps we could have a comment from each of you.
Mr. Richard Peters, S.J. Burnhope Syndicate: To wrap up, I have very little
sympathy for the big six accounting firms. Poor firms cannot get insurance. To
some degree it has to do with the spread of risk. They know from the history of
their auditing practice, that they will have one problem a year, so they can,
in effect, spread their risk by having 100 hundred auditing clients, or charge a
bit more for their auditing work knowing one in a hundred will cause a problem.
As underwriters, we cannot get that spread of risk because we know we will have
one problem a year. I agree that they have caused this problem themselves, to
I think the Canadian government can do little to help the big six firms, because
of the nature of the big six accounting firms' practices and international
practice. However, something must be done on a worldwide basis to protect the
big six accounting firms, because the claim would not just be brought in the
Canadian jurisdiction. Firms hire a big six firm because they have the expertise
in 10, 20 countries and they can perform that auditing function at the
different branch offices of a big corporation.
Picking up on the point of apportioning the blame, I do not think that it is as
simple as dividing up the pot. There is a fashionable mentality today that a
company has to fail, not necessarily because of a failing of somebody. It is
fashionable to think that, because of bad publicity or, whatever, a company may
Everyone wants to point the finger at someone, and accountants are the prime
target at the moment.
Senator Angus: The flavour of the month.
Mr. Peters: If there was professional negligence, then they should be
accountable for that, but not if it was just a bad investment.
Senator Angus: In other words, you are on the high moral standard which
unfortunately is not the real world, as Mike and Richard pointed out earlier.
Mr. Peters: It is not the real world. They cannot buy insurance, because of the
nature of the society we live in today. Someone is always to blame, and because
of the jury system or whatever, it works. That is why they do it. As soon as it
no longer works, then there will be a change. It may change when major
international corporations companies cannot get the audit function done because
the accounting firms they cannot pass that risk on to the rest of their
clients. That may force a change but, until that time, I don't know what the
Senator Angus: That is an interesting point. In other words, they should protect
themselves in that regard by not doing certain types of work and then the
Moscow syndrome could kick in and the government would do that.
Does anyone else have anything to contribute?
Mr. Matthew Irvine, S.J. Burnhope Syndicate:I concur completely with my
colleague, Richard, on everything he has said.
Mr. Neil Beaton, Agnew Syndicate: I think the major problem Richard Hardingham
said, is that you cannot mix morals with the business world. Somebody has to
take a moral position, and somebody has to take a financial position.
Unfortunately, these days, the two do not necessarily meet in the middle.
I am not certain whether it should be is a role of government to fulfil an
I do not think the insurers of the big six accountants can be held responsible.
The problem is they cannot find the insurance. Underwriters are not prepared to
take the risk. It is difficult to find a solution, but I think it is not
something underwriters can fulfil at the moment.
Mr. Spence: Ultimately, the problem is that the big six are too big
Ms Goddard: They are no longer six.
Senator Angus: Has the number increased or decreased?
Senator Kenny: They are now down to four.
Ms Goddard: I was under the impression that they had merged to a lesser figure
than six by this stage.
Senator Angus: There is Coopers & Lybrand, Ernst & Young, Arthur
Andersen, Price Waterhouse, KPMG, and Deloitte and Touche.
Mr. Spence: As Richard said, there is a market for the smaller firms. I think
you have to focus on what is the difference between the auditors or the
accountants in the big firms and the medium-sized firms. It is not only that
they have bigger clients; it is the international scope of operations. They are
then nebulous or more nebulous for us to underwrite.
Senator Kenny: Some of you have said that we are here to try to solve a problem
the auditors have. We are not. The auditors have put there position to us, and
they have suggested a solution, one solution. We are here testing that
solution. Thus far, we have found that solution does not test well.
Mr. Hardingham: Could you say what the solution is?
The Chairman: Their preferred solution is proportionate liability.
Senator Kenny: You are telling us that it doesn't matter a damn if they have
proportionate liability, it won't affect how you deal with them at all.
Mr. Hardingham: Not immediately.
The Chairman: Their logic is: We are happy to pay for what we are responsible
for. If we are only responsible for "X" per cent of the problem, then
we ought to only pay "X" per cent. The unspoken part that you hear
from them in private is their view that "X" is probably under 1 per
The first drive is on proportionate liability.
The second is on lowering the maximum their proportion can be, which is a
logical strategy from their point of view. The LLP would clearly help, but we
get back to the personal tax implications.
What has been intriguing to me about this discussion is that it is not a general
professional problem. There are other areas of the economy, we talked about the
environment and so on, in which people have difficulty getting insurance but,
yet, governments are not being asked to step in and change the rules so that
those firms can get insurance.
The answer could well be to take a position, like the one that Professor Burrows
argued in his paper, which is essentially, vis-à-vis joint and several,
to keep it, but do some other things, like the limited liability partnership
and so on.
What began as a perceived crisis by a group of people who wanted government
action to solve their problem, you have made it very clear this morning, is a
problem unique to six firms. You then have to ask yourself, as policy-makers:
Do you in fact change, as they would like us to do, something as
long-established and fundamental as the principle of joint and several liability
for the interests of six players?.
Senator Kenny: The footnote you would add to that though would be that these six
also audit 95 per cent of the big companies. The question that has to be at the
forefront of all our minds is: What is the value of an audit?
Senator Oliver: We have been told that unless we do something, the six may go
out of business or into bankruptcy because of pending claims.
Mr. Quigley: They may do something else. They are astute people.
The Chairman: You have clarified the size of the problem and the nature of the
problem, and pointed out that, indeed, the solution that was proposed, and some
others that people have suggested in other meetings, is not as neat, clean and
simple as some would have us believe.
There is no quick, easy fix to this problem and you have to be very careful that
whatever solution you come up with has to be thought through as to its
implications in a variety of other areas. This problem cannot be isolated.
Mr. Hardingham: We did not touch on a specific risk for the big six firms, and
that is cross-border work with cross-border line limits. They do have an
exposure to that.
The Chairman: Do the smaller accounting firms share that exposure?
Mr. Hardingham: Whether you like it or not, a number of major businesses are
Mr. Quigley: Underlying all of this must be them asking themselves: Are we
competent enough in what we are doing? Even a perfect firm will still have
problems. However, reducing their liability, I am sure, would help them
The Chairman: On behalf of my colleagues, I would thank all of you for taking
the time to come. I know you are busy people and this was a business day. I
would also thank David for using his network to effectively arrange the
meeting. We really appreciated your input.
The committee adjourned.
Upon resuming at 2:30 p.m.
The Chairman: Essentially, we are trying to understand the issue of professional
liability; should we stay with joint and several liability or should we switch
to something else. What we would like to understand from you is how, in your
case, solicitors' liability works; do you think there is a problem of insurance
related to solicitors specifically? If you have views on other professions, that
is fine, but obviously your expertise is in the area of solicitors.
Mr. Wodehouse: Well, not really. It is the ones below the line on that,
barristers and surveyors. The problem is a greater one at the moment for
surveyors than it is for solicitors.
The Chairman: Oh, really? I note that you have the housing association as well.
I knew from the name SIMIA that you were solicitors in England, so I assumed
you just had solicitors. Why don't you begin by telling us what you do and then
give us an overview of the professional liability insurance issue as you see
it. Then, if we have specific questions, we will interrupt you as you go along,
bearing in mind that this is a discussion.
Mr. Wodehouse: I should make it clear that I was not prepared to give a set
The Chairman: No, I understand. It is a discussion.
Mr. Wodehouse: You will see from our information sheet that for quite a long
time we have been involved in the marine business -- in fact, since 1869. Just
over 10 years ago, for reasons which I will explain later because I think they
are relevant to your discussion, we went into the non-marine business. I became
an insurance salesman; I went round and saw solicitors and found that the
members of SIMIA were nearly all marine solicitors who knew who we were; and
indeed we were fairly major clients.
The Chairman: What does SIMIA stand for, by the way?
Mr. Wodehouse: Solicitors' Indemnity Mutual Insurance Association. When we went
to see the non-marine solicitors, they asked, "Who the hell is SIMIA?",
and we said, "We are part of the Thomas Miller group." They then
said, "Who the hell are the Thomas Miller group?" So that seemed an
appropriate time to produce this particular sheet, and, as you can see, our
maritime business is our main business. We started SIMIA in 1986.
I would just like to mention the background for the starting of SIMIA, because I
think it is material to what I understand your considerations to be. As I am
sure you will have heard in the course of your discussions, in late 1984 and
1985 there was a complete collapse of the capacity in the insurance market.
Munich Reed, for instance, got out of the market, and what appeared to be a nice
cosy market was suddenly short of capacity worldwide. For the purposes of
SIMIA, actually probably worldwide it was relevant. We were first approached --
Senator Angus: Sorry, but just to make sure I understand and my colleagues do,
when you say there was a collapse of market in the mid-80s, or whenever it was,
do you mean a collapse of the availability of professional indemnity insurance
Mr. Wodehouse: For professionals.
Senator Angus: For all professionals?
Mr. Wodehouse: That is one of the key points: the professionals. The
professional indemnity underwriters, as a generalisation, are making no
distinction between solicitors, barristers and accountants, and so on. More
specifically, the top seven or eight law firms could not get coverage in excess
of o50 million, which they thought they needed. They came to us to see if they
could form a mutual group among themselves in order to provide capacity above o
50 million per claim, which the market was no longer offering.
We looked at a number of different schemes, and I won't bore you with the full
details, but no scheme really got off the ground. In the first place, if you
are talking about a mega-trend of that size, there was a very good chance that
two or three of those firms would have to be involved; so all sorts of conflicts
could have arisen. More specifically, however, the capacity came back so that
they could get theircover. But the raison d'être for SIMIA was the
feeling among the solicitors, particularly among those who knew mutuals, which
of course were the maritime solicitors, that never again would they want to be
entirely at the mercy of the insurance market. That is why SIMIA was formed. It
was not formed to provide cut-price insurance. It was formed to provide
guaranteed capacity -- and that is the point that needs to be made --
guaranteed capacity for, in this case, the solicitors' profession.
On the question of the problem of guaranteed insurance, I don't think the
existence or non-existence of insurance should ever be considered a long-time
solution. Certainly, it exacerbated a short-term problem, but the main purpose
of SIMIA was to establish guaranteed long-term insurance, because the only
raison d'être of SIMIA is to insure solicitors. There is no other aim.
Therefore, there is no way it could do what the Royal Sun could do, for
instance. The Royal Sun could be insuring solicitors today and the board of
directors could simply say, "We don't like professional indemnity for
solicitors," and they would stop doing it tomorrow, and the capacity would
disappear just like that.
I have to say, to declare an interest, that I am not here totally on a selling
exercise; I am here to answer whatever questions you want to ask. However, by
an extraordinary coincidence, when I learned that I had been invited to come
and address you, I had linked it to an initiative we had undertaken through our
New York office to go to Canada with the idea of persuading Canadian law firms
that they needed a similar set-up to SIMIA. That is something which I intend to
do, but you can understand that there is some coincidence in my coming to talk
to you about professional indemnitycover. So that is the background for
Another thing the mutual did was to identify the different risks. There is
another problem with joint and several liability which does not seem to me to
be fully covered in the discussions I have seen, but I suspect that ninety per
cent of your problems concern the accountants, particularly the big six and
particularly in their auditing capacity, and, of course, they have not been
identified. Unlike most of the mega-claims, which are more imagined than real,
in the case of the accountants they are actually real, and so they have serious
problems both in limitation of liability and in joint and several liability.
It is interesting to note that before SIMIA and other schemes like the bar and
the surveyors were set up, and you might be able to support this, as a
generalisation, professional indemnity underwriters lumped every profession
under the same head.
Ms Neilson: Prior to 1983 there was not much distinction.
Senator Oliver: With the same premiums?
Ms Neilson: The same premiums and same limits, but that is because there were
not any claims by which they could differentiate between professions.
Mr. Wodehouse: I hasten to say this is not a sort of one-way sales thing. It is
quite interesting though. I actually have a list of the members who founded
SIMIA, and at least it will make my briefcase lighter when I go and make yours
heavier, but it is quite interesting. SIMIA, just to make it clear, is above the
compulsory scheme, which is a totally different scheme; the same is equally
true in Canada, incidentally, as it is the top-up. This is in excess of o1
million. We had as founding members, to name a few, Clifford Chance,
Freshfields, Lovel White, Clydes, you name it, and we now have 80 per cent of
the top 100 and I think 9 of the top 10. So it is as good a sample of the
English solicitors as you will see.
Senator Angus: Would theircover only be with SIMIA or would this be one layer of
Senator Oliver: The layer begins at over o1 million.
Ms Neilson: Are you all familiar with the solicitors' indemnity fund?
Senator Angus: No.
Ms Neilson: Every solicitor in England and Wales, and Mr. Wodehouse will correct
me if I am wrong, has to purchasecover from the solicitors' indemnity fund.
Senator Angus: Like us in Canada.
Ms Neilson: It provides o 1 million of cover for each and every claim; there is
no aggregate, so it is each and every claim into infinity.
Senator Oliver: In a year? What happens if there are 10 claims in a year?
Ms Neilson: Yes, o 10 million, plus costs. So the defendant's costs are paid, in
addition to the sum insured, for every solicitor -- from Clifford Chance and
Freshfields right to the smallest two-man firm.
Senator Angus: Every lawyer pays the same; right?
Ms Neilson: No, it is based on their fees, essentially.
Mr. Wodehouse: It has become more and more complicated.
Ms Neilson: Yes, and there is no claims bonus. It is a very complicated rating
Senator Oliver: So the size of the firm makes a difference?
Mr. Wodehouse: The big guys pay a fortune and they don't like it.
Ms Neilson: The big guys pay more for theircover than they actually get out of
it, but the deductibles are very low. In fact, thecover from the solicitors'
indemnity fund is something that a big firm should actually be taking as a
The Chairman: But they are not allowed to?
Ms Neilson: No, they are not allowed to.
Mr. Wodehouse: That would mess up the scheme.
The Chairman: The universality is critical for the scheme?
Ms Neilson: It supports the people who cannot buy insurance.
The Chairman: It kicks in over the main?
Ms Neilson: Yes, as a supplemental commercial market.
Mr. Wodehouse: That is right, but there is a general point I should like to make
by way of one specific example. I had heard on the very best advice from two or
three impeccable sources that Allen & Overy had a claim against them which
had gone through their reinsurance so that they had had to sell their building
and lease it back. I heard that from at least two sources. There was not a
single word of truth in it. It was absolutely false.
Senator Angus: It was spread around by Freshfields and Linklaters.
Mr. Wodehouse: This may be changing as we speak, because a very large settlement
is going through, but the fact is that no claim against a solicitor in England
and Wales has ever cost more than o 10 million. Those are the statistics we
have had, which just goes to show you how completely wild the rates were when
SIMIA first started.
I will leave it there; those are the members. The example I have given you does
illustrate in fact that there is more hot air around the London market than any
other place one knows.
Ms Neilson: Just to play devil's advocate, and I think you and I may have had
this conversation before, I suppose I am of the belief that, particularly with
the globalization of the legal profession, this is not necessarily a scenario
that can last. It is the past and it is the present, but it is still a very
dangerous business to be in.
Mr. Wodehouse: And the surveyors, of course, have been a very different story.
The Chairman: Tell us about that. Have surveyors been different in the sense
that they are more akin to accountants, because there have been big claims and
big settlements? You are involved with surveyors as well, are you not?
Mr. Wodehouse: Heavily, unfortunately. One of the problems about mutuals, which
it is certainly my job to sell, is that there is a downside, and that is that,
if there are very big claims before the money is built up, the mutual members
of course have to put their hands in their pockets. Incidentally, we started
this at a time when we sort of won the reverse jackpot. It was two years before
the collapse of the property market worldwide and, as a result, there had been
millions of claims. But, if I can come on to my reaction to the paper which you
had, which I think goes to joint and several liability, I think there is a
I would like to illustrate my concern about this as far as the U.K. is concerned
with one specific example, which in all material form could actually be
duplicated. We had a long conference with counsel this week on this case, in
which a bank was lending money during the days when banks were lending money
like there was no tomorrow. They got a surveyor to value the collateral and the
surveyor produced a valuation. They then got a second firm of surveyors to vet
the valuation, for which they paid 5 thousand or o6 thousand. The property
market collapsed. The people to whom they had lent the money went bust -- a
scenario that has been repeated many times -- and the banks then turned to the
surveyor for a negligent valuation.
The first surveyor had also gone bust and his underwriters had cancelledcover.
So they turned to the second surveyor, who had been paid a few thousand pounds
to vet the initial valuation. We resisted this case in court and we lost. It
was held that the vetting of the first valuation was in effect a second
valuation. Because the first surveyor went bust, the second surveyor, who
covered, it matters not, 10 per cent, 20 per cent, or 30 per cent, bore the
full brunt of the claim, and effectively ended up being sued for, and having to
pay, the majority of the bank's business loss through lending the money.
In my opinion, of course, that is just absurd.
One of the concerns which I would like to raise with you is the limitation of
the duty of care. I must say I am delighted this subject seems to be more
actively pursued in Canada, because, as you will have learned no doubt this
week, in England everyone is dragging his feet and doing nothing. In any event,
we are about to come to a six-month, complete stalemate, with elections cropping
up. As you know the limitation of duty of care has always been approached in a
geographical sense: are you within the duty of care or are you outside the duty
of care? It has never been approached in what I would call a quantifiable way.
If you take the example I have just given, which has been repeated twice, there
is absolutely no doubt that the second surveyor was within the duty of care, as
defined under English law. I do not know whether Canadian law has the same
concept. In any event, there is no doubt that we are within that area; but you
then must look at the fees as against the liability. Liabilities, incidentally,
are claims up to o10 million.
One thing you might like to consider is that in certain circumstances it may not
be reasonable to actually limit the duty of care quantifiably as well as
geographically. I have to say that that thought just went through my mind when
I was reading your discussions, so please don't think I have drafted it further
than that. That is, of course, immediately called capping, but the thought I had
was that, if you look at the scenario I have just outlined, it really is a bit
ridiculous that someone who is paid o5,000 for a valuation, even if he did it
negligently, should be on the hook for o10 million. It is less ridiculous that
the person who did the initial valuation, who, after all, had been paid a
sensible fee, and that is why you to go a first-class firm of surveyors, should
be on the hook for, say, o10 million.
One thought I would leave with you is that you might care to limit the liability
to a multiple of the fee. If, for instance, your limit of liability was a
hundred times your fee, then the second surveyor, however negligent he was,
would be on the hook for o500,000. The first surveyor, let's say was paid
o20,000 for the work and would then be on the hook for o2 million. It certainly
would make more sense to me on the question of limitation, if it were not that
the standard figure was necessarily bound to run into public interest.
Senator Kenny: Who keeps the plaintiff whole?
Mr. Wodehouse: I am not necessarily sure that the wholeness of the plaintiff,
and this is another point I wanted to make too, should be so sacrosanct,
because I think in this document also there is a lot of reference to public
interest, and public interest can mean a multitude of different things. If you
are looking at three commercial entities, like a developer, a bank and a firm
of surveyors, to my mind there is no public interest involved that the bank
should get back all the money it lent because it happened to employ two
negligent advisors. You are in the are of assumption of risk, and it is not a
question of moral blame. I think you are between professions here, and it is a
question of assumption of risk.
If you stopped a man in the street on the prospect of this particular bank --
which incidentally bent over backwards to lend the money, but that is another
story -- and asked him whether this plaintiff should be made whole, he would
obviously say, "Why?" On the other hand, and I think the distinction
is drawn in these papers at some point, it is a very different story if you are
talking about the innocent individual or the naive individual, which goes back
to the rather interesting question of the origins of joint and several
liability. In that case, if you stopped a man in the street -- after all, the
man in the street is ultimately making the election -- and said that you had
walked down the street, had gone into a firm of solicitors, and they had made a
complete mess of it and, you know, should you be made whole, I think 99 out of
a hundred would say yes.
A distinction could perhaps be drawn, when you are talking about public
interest, between companies that are at quasi-arm's length. Well, admittedly,
ICL and two-man companies are not exactly at arm's length, but they are both
commercial organisations and individuals; but again it is different philosophy.
The Chairman: This is a variation on a theme, as it were, that someone had
proposed earlier. I like your word "naïve." What you are really
suggesting is that we should be able to distinguish between protecting 100 per
cent someone who is naïve -- the classic image is of a little old lady in
running shoes who cannot afford to pay it -- and someone who should bear part
of the risk, because, clearly, he entered into a business agreement and it
ought to be treated as a business agreement, and he ought to be treated
essentially as someone who certainly had the ability and the intelligence to
make a decision; therefore, he ought to bear a part of the risk.
Mr. Wodehouse: Yes. I mean, there are some areas where you go to a financial
advisor as a form of insurance for yourself. Theoretically, we could all convey
our own houses, if we read a book on conveyancing, but one goes to a firm of
solicitors and pays a few thousand quid because you know damned well it will be
put right if it goes wrong. So, in effect, you are buying insurance.
When you are in the business of a company dealing with a company, on the whole
in principle that is fair enough; but I don't see any objection to there being
a limit to it, because, if you look at the "joint and several"
school, the "plaintiff must be made whole" school, and you take the
example I have given of the surveyor vetting, you may have your own view of
this, but that simply looks to me to be a commercial nonsense.
The Chairman: I am curious. Your proposal related to the level of the fee. I
thought the level of the fee was really related to the amount of the work
involved as opposed to the seriousness of the potential loss.
Senator Angus: It is just a measuring stick.
Mr. Wodehouse: Let me put it in context. It was simply a possible way of
The Chairman: You would have a rule that would put --
Mr. Wodehouse: I had not sort of done a draft of the law.
The Chairman: That is fine.
Mr. Wodehouse: I think the measure of the fee, what it would cover, would be the
pro bono advice, because a hundred times nil is still nil.
The Chairman: On the other hand, in a system in which proportionate liability
applied to businesses, you would not need to put the cap on; right? They would
only get a proportionate amount, in any event, so putting a cap on would not
really be required.
Mr. Wodehouse: Well, it is the same argument; it is the other side, the "plaintiff
made whole" argument. Where you have a plaintiff whom you want to make
whole, then you have to get rid of proportionality; otherwise he won't be made
The Chairman: Say that again.
Mr. Wodehouse: Well, I mean, if the man in the street was protected by --
The Chairman: You need a "joint and several" for my little old lady in
Mr. Wodehouse: You need a "joint and several" to make sure the man in
the street is protected, yes.
Ms Neilson: But not for your sophisticated investors.
The Chairman: It is really "naïve" versus "sophisticated".
Mr. Wodehouse: It is hard to define, but I think we probably know what you mean.
Ms Neilson: Is there not an argument that sophisticated investors are somewhat
guilty of contributory negligence, if they pick advisors who are not up to the
job, because, for example, through their own negligence, they do not have the
wherewithal to meet the losses? Surely, if you are a sophisticated buyer of
services, then you should buy services from people who know what they are
doing, and have insurance, et cetera.
Senator Kenny: Help me with some of the tests for the two classes.
Ms Neilson: "Sophisticated" versus "non-sophisticated"?
Mr. Wodehouse: I think you would have to start off by looking at the two
extremes and then go together where you draw the grey line. There is going to
be a grey line.
Senator Kenny: The extremes are not hard.
Ms Neilson: It is the grey area that is the hard part.
Mr. Wodehouse: I would have thought that, as a very crude observation, it would
be a commercial venture as against an individual. I would not want to push that
too far. I am sure you could break it down and say there are problems with grey
areas, but generally one is talking about a commercial venture as against an
The Chairman: A business deal versus an individual.
Mr. Wodehouse: If you are in a commercial venture and you are going into a deal
and you know perfectly well that there is a danger of your not being made
whole, that is a commercial decision you make.
Senator Hervieux-Payette: Or it could be a private corporation versus a public
corporation, because a private corporation normally is not a huge company; it
is medium sized. Of course, even though they may be private, legally speaking,
companies of a certain size are treated as public corporations. When we are
dealing with big corporations, they are the ones that have a lot of qualified
staff, people who are knowledgeable about their business, people who are
supposed to exercise for themselves some diligence in assessing the risks they
are taking when they are lending money. So the onus on them would be greater
than on the smaller corporations.
Normally, for example, a business with, say, 100 employees would not lend
hundreds of millions of dollars all over the place. They would make small
placements compared to the big companies, and the risk would be smaller. Then
there would also be a more or less balanced relationship between individual
professionals, because even if they are an aggregate, or a group of partners,
they are still individuals compared to a mega-corporation.
In other words, in the balance, you are really not comparing the same size, the
same assets and the same type of protection, and I think that is what we are
looking at. I think that is the role of governments: to have a more balanced
Mr. Wodehouse: If you are making a distinction between different classes,
however well you draft it, you are going to get anomalies.
The Chairman: You always have the problem that, when you draw a line, someone is
just over the line.
Mr. Wodehouse: That is fine; you can live with that, but you still get anomalies
when you make such distinctions.
Senator Angus: Then you make an exception.
Ms Neilson: But should there not also be a distinction between gross negligence
and ordinary negligence, the "standard of care" principle, because
everyone is innocent where gross negligence is involved? Even if I am a
mega-corporation and a sophisticated buyer of services, if someone has been
grossly negligent, I should be entitled to recover my loss.
Ms Trish Harrison, Canadian Department of Industry: Why? Why in gross negligence
but not in ordinary negligence?
Ms Neilson: Because in gross negligence, if I am a sophisticated investor and I
hire Price Waterhouse and they are grossly negligent, I have hired them and
paid them a lot of money to do a job and, if they have been incompetent in
doing that job, I should be able to recover my loss.
Ms Harrison: But that argument applies equally to ordinary negligence.
Senator Angus: In our system of law, our civil law, there is a difference
between gross negligence and ordinary negligence, for example, in that you
cannot limit or contract out of your responsibility if you are grossly
negligent. You cannot depend on exculpatory clauses, and so on, if you are
grossly negligent. Is it the same in the U.K. because it is the common law? You
are trained in the common law; right?
Mr. Wodehouse: Yes.
Senator Hervieux-Payette: For me, gross negligence is the same as fraud.
Senator Angus: You cannot contract out of it.
Senator Hervieux-Payette: It is the same as a fraud or a crime.
Senator Angus: It is something that is so bad that even the most elementary fool
would know the difference.
Ms Neilson: I think common law is different. I think you are right.
Ms Harrison: That is not the law there.
Senator Hervieux-Payette: We have that notion and we will educate you others.
Ms Neilson: Perhaps one of the answers is to have a sliding scale between the
sophisticated investor and the degree of negligence for this limitation of
Mr. Wodehouse: If you were going on the basis of assumption of risk and you then
distinguished between negligence and gross negligence, I think you would get a
lot of problems. Obviously you can have fraud, which can break any limit point.
I think we are a million miles away from drafting anything like that, but I
take the distinction.
Just going back to the surveyor-bank example, which is such a classically good
one, what you have there, far from the naive man in the street being wronged by
a surveyor, is a highly sophisticated bank, probably with a lender who did not
even read the survey report anyway, getting the full business loss back from a
surveyor who is in desperate financial trouble, as they all are. So we have a
really absurd situation.
Senator Kenny: But to expect a bank to know anything about surveying is asking a
Mr. Wodehouse: The banks do not know anything about surveying. In the late 1980s
I don't think the banks even looked at the survey report. They commissioned the
Senator Kenny: But there is no point in their looking at it if they would not
understand it in the first place.
Mr. Wodehouse: They can see the value of half a million pounds. They can
Senator Kenny: I am sorry, I don't follow your point.
Mr. Wodehouse: They have to have the survey report under the bank's lending
criteria in order to be able to lend the money. The reality, in the late 1980s,
before the property crash, was that the lender was getting a commission on the
loan. He went along to his surveying chum and said, "Look, I am lending
money to Joe Blogs to build this particular scheme; he wants to borrow o16
million. Under the bank's lending policy we have to have o20 million; that is
worth o20 million, isn't it?" And he produces a survey record. Well, that
is a slight exaggeration, but that was the sort of atmosphere, and he would
produce a survey report for his chum that showed about o20 million.
Ms Neilson: But such a surveyor should go bankrupt.
Senator Angus: The savings and loan business in the States was faced with that
very kind of thing.
Senator Kenny: But my point remains, that there is absolutely no reason in the
world why you should expect a banker to know anything about surveying.
Senator Angus: He is just saying these are basically corrupt bankers who are
greedy to get the order.
Mr. Wodehouse: Well, it was a slight exaggeration.
The Chairman: The point you are making, and I find myself quite sympathetic to
the notion, is that you want to protect genuinely naïve, innocent people,
but a business deal is a business deal and you have to make the assumption that
it is done with full knowledge. It is the "consenting adult"
Senator Kenny: I like that idea; that concept makes sense.
The Chairman: How you do it, however, is not clear.
Senator Kenny: You know that going into any deal you will be relying on a whole
lot of people who have a variety of expertise that you have absolutely no
knowledge of at all. You are counting on them to bring that expertise to the
table, to make the thing work, and in the final analysis, you are relying on
their integrity and on their signature. You recognise that you cannot make it
work yourself; you have to have them there or the deal does not fly. Sure, you
are a big guy and you are in business and you are a sophisticated person, but
having said that you still cannot be expected to know everything.
The Chairman: You still have proportionate liability.
Ms Neilson: That is the difference. The providers of the service cannot abdicate
their liability. If they have been negligent, then they have to pay. However,
they cannot be held wholly responsible, because you went in there with your
eyes open. It comes back to contributory negligence again, which is the
question at hand.
Mr. Wodehouse: To go back to the example, when you have only one surveyor, then
the surveyor would be liable. Then we get into a different question, the
question of limitation of liability. I was looking at proportionate liability
as against joint and several liability, but it may be that we are merging two
different concepts and that limitation of liability is one.
Ms Harrison: I follow the argument that, intuitively, it is logical to protect
the innocent or the naïve, but the idea of then saying that the lender is
contributorily negligent because of his choice of advisor is a bit much. I
think the logic falls down there, because first, as an exercise of due
diligence, you go to the big accounting firms because you suspect that they are
better; then you find that they are not, because they are making mistakes, or
perhaps in this particular instance they were not because they made a mistake.
Then what have you got? You have contributory negligence because you went to the
big firm. Where else would you have gone?
Mr. Wodehouse: I think the confusion is my fault, because I have been merging
two different issues. Let's just go back to my original example, where the
second surveyor, who is 30 per cent responsible, has 100 per cent of the blame.
That is really the point we are making at this stage, not the limitation of
liability, which is a separate point.
Senator Hervieux-Payette: If the professionals, by giving advice, are providing
more or less a blanket insurance to the lender that, once they write a report,
they are totally liable if things are going wrong, I have a problem with that,
because they would be insuring all banks against all losses whenever they wrote
a report. I tend to agree with you that the banks are more knowledgeable than
that. I guess we really ought to get the auditors to have a little discussion
with the bankers.
Senator Angus referred to the savings and loan business in the States. Let's say
the surveyors were responsible for a wrong assessment there, well they would be
bailing out a savings and loan company, because they would have to pay all the
damages. To me, that does not sound right.
Senator Kenny: Let's test the question of why you would go to a second surveyor.
In other words, why wasn't one surveyor enough?
Mr. Wodehouse: I meant that it was used as a safety valve.
The Chairman: It would be done according to bank rules, I suspect.
Mr. Wodehouse: It is a safety valve.
Senator Kenny: So you went to the second surveyor because you wanted to make
sure that you had confidence in the work of the first surveyor. So the second
surveyor was very important in terms of due diligence, if you will, or in terms
of how you were getting where you were going.
Mr. Wodehouse: As the court found it, whether they were right or not, the bank
relied on the second surveyor.
Senator Kenny: But, if you have gone to the second surveyor, then you, the
plaintiff, have demonstrated that you are a very careful person and you deserve
to be taken care of because you have taken the trouble of going to the second
Ms Neilson: But do you deserve to compensated for 100 per cent of your loss from
the second surveyor?
Mr. Wodehouse: Who runs the risk of the first surveyor's going bust?
Senator Kenny: Well, let's put it differently. If you get 100 per cent of your
loss when there is a first surveyor, and that is all, then, if you are even
more careful by going to a second surveyor, why should you not get 100 per
Mr. Wodehouse: But who bears the risk of the first surveyor's going bust?
Senator Kenny: I don't know the answer to that, but I know that the reason I
went to the second guy was that I wanted to get a good check on the first.
Senator Hervieux-Payette: Was it a really bad assessment or was there a change
in the market situation? If you had taken a third surveyor, would the third one
just exactly give you the same answer as the first and the second?
Ms Neilson: It would have been good for the second one to have obtained the
Senator Hervieux-Payette: But after the fact, after the incident has occurred
and so on, let us say you go to a third surveyor and, without telling him what
happened, find that he comes up with the same answer, then where is the fault?
Ms Neilson: Wasn't there just some law about that?
Mr. Wodehouse: Yes. The court found the second surveyor to be negligent, but, to
take your point, what it comes down to then is who bears the risk of the party
who is, say, 60 per cent negligent? The greater negligence was with the first
surveyors. They produced the calculation; they produced the workings. The
second surveyor, within two or three days, was vetting the methodology. So the
question arises: Who actually bears the risk of the first surveyor's going bust?
I have to say that I think the man in the street, when asked that question,
would say it is the bank that should bear it rather than the second surveyor.
Senator Angus: Right.
Senator Kenny: Simon says why.
Senator Angus: It is a matter of fairness.
Senator Kenny: Why are you so firm about it, David?
Senator Angus: Because I am the man on the street. It seems disproportionate.
That is why.
Ms Neilson: If am the man on the street, which is your point, and if I go to
hire my second surveyor, because I am a careful person --
Senator Kenny: You are the type of man who wears both belt and suspenders.
Ms Neilson: Yes, belt and braces. I want the second surveyor to test the theory
of my first surveyor; I do not want him to just check in the boxes and that is
the end of that; I want him to actually check. So now, if my first surveyor is
bust, I say to my second surveyor, "I am sorry, but I hired you to check
this person. Why I should have to do that is another question, but, now that I
have, I expect to get my loss back."
Senator Kenny: But you are wrong against the plaintiff in this case.
The Chairman: You are disagreeing with the 30 per cent, but the issue is not
whether it should be 30 per cent or 50 per cent. The issue is should it be
something less than a hundred.
Ms Neilson: A more vital question concerns insurance. Let's say I have two
surveyors, one who has insurance and one does not, and I choose to sue my
second surveyor only because he has insurance. That is the real issue for the
big six, you see. There may be culpable parties, but they are too much trouble
to go after.
Mr. Wodehouse: That is one issue. Another issue is whether he should be 100 per
The Chairman: Liability is the issue. After that we can argue numbers.
Senator Kenny: How much liability should the first surveyor have paid if he was
whole? Should it have been 100 per cent?
Ms Neilson: I would say 50 per cent.
Senator Hervieux-Payette: At least 50 per cent, yes.
Senator Kenny: No, assuming there was only one.
Senator Angus: It would be 100 per cent.
Ms Neilson: Yes, 100 per cent, if there was only one.
Senator Kenny: If there is one surveyor, it is 100 per cent, and so the
plaintiff at that point is kept whole. Now, this plaintiff has put on both belt
and braces -- have I got that right? In other words, he is a very careful
person and has gone to a second surveyor to check the first one. However, by
taking this extra step he in fact ends up worse off.
Mr. Wodehouse: No, he does not.
Senator Angus: Of course not. He gets exactly the same. He gets 100 per cent.
Mr. Wodehouse: He gets the same 100 per cent. He is actually better off, because
in the scenario which we are looking at, which is a true scenario, the first
guy went bust; therefore, in going to the second person, even under the
proportionality business, he is better off.
Ms Neilson: At least he gets 50 per cent.
Mr. Wodehouse: At least he gets 50 per cent, whereas he would have got nothing.
Senator Angus: I would like to revert to the question of insurance for lawyers.
You mentioned that sometime in the mid-1980s the market dried up and it was
just impossible to get insurance. It was a real problem for professionals
generally, you said. For lawyers today, as far as I can tell, there is plenty
of insurance around. There is compulsory insurance in most, if not all, of the
law societies in the western world, and then there is excesscover. In the U.K.,
did you say that it is done largely through a mutual?
Mr. Wodehouse: No, not largely.
Senator Angus: For those 371 firms, how far up does it go?
Mr. Wodehouse: The big boys are buying cover up to o200 million.
Senator Angus: We were told that this morning. How high do you go?
Mr. Wodehouse: We go for a maximum of o4.5 million. Well, it is mainly within
the "nine over one". Our maximum is 50 per cent, nine over one.
The Chairman: What is "nine over one"?
Mr. Wodehouse: It is o9 million over o1 million.
The Chairman: And you only go half of that?
Mr. Wodehouse: Yes. By the way, this is not just propaganda, because after 10
years the chairman's statement of SIMIA sets out the rationale of SIMIA and
what it has done, and it is pure coincidence that we are trying to sell SIMIA
to Canada. But you might like to add to that, Senator Angus.
Senator Angus: No, be my guest. Here are the details of my firm right here.
Mr. Wodehouse: We know them already; you are making a presentation to us. In any
case, this explains why SIMIA started and where it has got to.
Senator Angus: Michael Payton? It is scary enough to have to deal with him.
Ms Neilson: Do you know Michael?
Senator Angus: Do I know him? Am I suing him?
Ms Neilson: I just have to jump in here to say, because this <#00A3>200
million figure keeps getting put about, that you can actually buy more than <#00A3>200
million of cover, if you try hard enough.
Mr. Wodehouse: Yes, I am sure.
Ms Neilson: Very well. I just throw that in.
Mr. Wodehouse: I was using that as the equivalent of the stratosphere rather
than being literal.
Ms Neilson: But it does say to you that there is a lot of insurance around for
U.K. solicitors. There used to be a lot of exclusions work done in the U.S., or
claims brought in the U.S.
Senator Angus: There still are.
Ms Neilson: There still are, but they start at a much higher attacking point
now. It is about o90 million worldwide.
Mr. Wodehouse: We had to take out extra insurance for SIMIA this year because
the lead underwriter was giving straight American cover and we had to follow
it. It is a hard market.
Ms Neilson: Because you just follow everything.
Mr. Wodehouse: It has nothing to do with the risk.
Senator Angus: When you say "the lead underwriter", you are talking
about the other o4.5 million and upwards?
Mr. Wodehouse: Yes.
Senator Angus: So is there a drop-down provision? I mean, for example, from
SIMIA. If the lawyers' indemnity fund does not cover or there is some problem,
do you all drop down like a normal excess carrier?
Mr. Wodehouse: No.
Senator Angus: But the big boys above you do?
Ms Neilson: No. There is a drop-down provision in terms of exhaustion of the
limits, but it is difficult to exhaust the limits since they are on an
each-and-every-claim basis; but there is no difference-in-condition cover, so
if the solicitors' indemnity fund does not cover it, then the top-up, as they
call it, the excess cover does.
Senator Angus: So, in other words, you do not have a tailor-made wording?
Everyone has to go with the standard wording?
Mr. Wodehouse: Well, in theory that is the case.
Ms Neilson: It depends on the firm.
Senator Angus: That is why we are not interested. I knew there was a reason.
Mr. Wodehouse: It is meant to be one, single, insurance vehicle. In fact, as the
major companies get more and more complicated, all sorts of things emerge from
the woodwork, but in principle it is just one big insurance cover.
Senator Angus: Do SIMIA reinsure?
Mr. Wodehouse: Yes.
Senator Angus: Back into the London market?
Mr. Wodehouse: Mainly, yes.
Ms Neilson: But I should point out, as I would do, that there are one or two
firms that can buy difference-in-condition cover. It depends on the talent of
your broker, of course.
Senator Angus: That is right. Well, it is a pretty interesting area. Getting
away from the solicitors, one of the reasons, Hugh, we asked you to come today
was to try to put some balance into the thing. We have had a heavy sell from
the accountants generally. It got narrowed down to where clearly it was a big
six issue. This morning it emerged as an unsolvable issue. These are people who
are fundamentally uninsurable. Why should the legislators try to deal with it.
We are recommending public policy to the legislators in Canada. We will say, "Look,
there is a commercial problem of some kind; we do not think joint and several
liability or proportionate liability is the answer, but there may be an answer.
Based on your experience, is there something that we should be focusing on?
Mr. Wodehouse: I think there are two things. If you just take the accountants,
for instance --
Senator Angus: We asked the Bar Association to come to us and they said, "We
don't have a problem."
Mr. Wodehouse: They have no problem; they are covered from the ground up. The
problem I have is telling Q.C.s what is a reasonable insurance to take out.
Senator Angus: "Don't show your pockets to be too deep," is what you
are telling them, I think?
Mr. Wodehouse: No, not at all. Quite the reverse.
Ms Neilson: You are talking about barristers now?
Mr. Wodehouse: I am talking about barristers here, not solicitors. They are very
different. I mean, we are talking here to, say, the top commercial silks, who
theoretically could make mistakes of o100 million or o200 hundred million. My
advice to them is that their cover must not be provocatively low.
Senator Angus: Is it your proposition that they are more susceptible than
Mr. Wodehouse: No.
Senator Angus: I would have thought the reverse.
Senator Kenny: Help me to understand what "provocatively low" means?
Mr. Wodehouse: What I mean is this. Let us take a top commercial Q.C. He could
incur a loss of any number of telephone numbers you like. I am saying in
today's market he should not take out less cover than o10 million. What I am
saying to him is this: "If you incur a loss of o50 million and you have
o10 million worth of cover," which is reasonable in that particular
profession, and that is about right for the individual, "the chances are
that the person who is third-partying you, or the joint second defendant, will
settle for o10 million. However, if you take out an absurd amount, such as o2
million or o2.5 million, and don't take any top-up above the basic o2.5
million, he will say, "Bloody hell! Why should he get away with no
insurance?" and he'll go for an extra million or two and bankrupt you."
That is the only advice I can give, because you cannot take out adequate cover
as a commercial silk, because who knows what that might be?
Ms Neilson: They cannot get sued for much.
Mr. Wodehouse: The solicitors are in the front line. Well, barristers can get
Senator Angus: For what? I don't see what.
Mr. Wodehouse: Well, first of the all, the grounds of immunity are being
narrowed, and, secondly, if you take, for instance, the revenue barristers,
they operate very little in court.
Senator Angus: That is tax law?
Mr. Wodehouse: Yes. They operate very little in court. They are the guys who
dream up these tax schemes. If they get it wrong, they are really exposed --
and the gap, incidentally, between getting it wrong and negligence, when it
comes to revenue, is almost invisible.
Senator Angus: I thought it was solicitors who did that work. Sorry, it is the
litigators who do it.
Mr. Wodehouse: Well, they are barristers, but in fact a lot of revenue lawyers
hardly ever appear in court. So they are extremely exposed, but the fact of the
matter is they are extraordinarily good.
The Chairman: Just to come back to David's question, if one eliminates, for the
sake of argument, the two extremes of joint and several liability and
proportionate liability, do you have any thoughts on the area in between as to
what might work or what would make sense?
Mr. Wodehouse: I think we come back to where we started. If you are going to
have some half-way house between proportionate liability and joint and several
liability, what you are saying is that, even if you are only 25 per cent liable
for the losses, under English law you can be 100 per cent liable as it stands
at the moment. However, a compromise would be to use a multiple of the fee paid.
You could do it in a monetary way or in a percentage way, of course, but I
would prefer to do it in a monetary way, in which case it might, for instance,
be a multiple of the fee paid. It is just an idea.
The Chairman: The point is that you would have some rule of thumb, which,
although it would not become a rule of law but would be arbitrary in a sense,
would nevertheless seek to find some form of middle ground.
Mr. Wodehouse: One possible arbitrary case would be that, if you are less than
50 per cent responsible, you cannot be made more than 50 per cent responsible.
That would be one possibility. In other words, if there were four parties
negligent and two were bankrupt, then the other two would share the 50 per
The Chairman: Right.
Mr. Wodehouse: But the corollary of that is that there may not be enough parties
to make up for it in a sense, in which case the plaintiff would not be made
The Chairman: Really, the issue comes down to this: Should we deal with the
question of whether or not the plaintiff must be made whole, or should we
abandon the principle that the plaintiff must be made whole.
Mr. Wodehouse: All plaintiffs must be made whole, yes.
The Chairman: Right, and your opening comment would suggest that you could
divide plaintiffs into two categories, those who, as you suggest, must be made
whole because they are naïve.
Senator Angus: The widows and orphans.
The Chairman: The widows and orphans, yes, and those who, in my terms, are
consenting adults, in which case they do not have to be made whole.
Ms Neilson: But we don't even know if "public" and "private"
does it, because if you take --
The Chairman: "Public" and "private" does not do it.
Ms Neilson: If you take Donald Trump as an example, is he an innocent party?
The Chairman: "Public" and "private" does not do it.
Mr. Wodehouse: No. We cannot draft him, but we know who we mean.
The Chairman: So the answer is that we would have to find a way to sort of make
a distinction --
Mr. Wodehouse: You need a distinction between the two, which will always look
odd at the margin.
The Chairman: In politics you make those judgments and you just have to come up
with something that is reasonably defensible in the broader context; and what
we are really saying is that maybe the public interest is exactly an element of
compromise between the two.
Mr. Wodehouse: Yes, that is right. Well, I mean, you know better than I do.
The Chairman: It is public interest in the broad sense of the term.
Mr. Wodehouse: If you are drafting legislation, it is the two per cent grey area
that causes 95 per cent of the problem. In most cases we know perfectly well
which side any 95 plaintiffs would come onto; it is the other five cases that
would cause the problem.
Senator Kenny: What would be interesting would be to try to test this against a
range of potential cases.
The Chairman: Potential definitions.
Senator Kenny: Not only potential definitions, but potential cases, where some
of the accountants have come a cropper.
The Chairman: In other words --
Senator Kenny: Price and sensitivity.
Ms Neilson: How would you define that particular plaintiff or that particular
group of plaintiffs?
The Chairman: That is interesting. What you are saying, in effect, is that we
should go back to past history and look at decisions.
Senator Kenny: Yes, and run some sensitivities.
The Chairman: We could look at a number of decisions and the rules involved in
them, and determine what would have happened, if this had been our rule. That
we could do.
Senator Kenny: Also, is there some element of justice there? If you buy this,
you are buying rough justice anyway, but that may be better than no justice.
Mr. Wodehouse: It is pretty rough at the moment.
The Chairman: Apropos of where you draw the line, in 1975, when we were in
cabinet debating capital punishment, which we finally abolished, the debate had
gone on a long time and the ministers were absolutely agonizing over it; the
deputy prime minister of the day summarised the debate and turned to the Prime
Minister and said, "Prime Minister, as a liberal cabinet, the reason we are
having such difficulty with this issue is that none of us can figure out how to
half hang a guy." In a sense, you have to either do it or not do it.
Senator Kenny: So we brought in the cane.
The Chairman: But the concept of half hanging has always stuck in my mind as a
very interesting dilemma for those of us who are here compromising.
Mr. Wodehouse: You cannot half hang here.
The Chairman: That is exactly right.
Senator Hervieux-Payette: It is also very difficult when they are found not
guilty 20 years later.
Ms Neilson: Particularly for them it is very difficult.
Senator Kenny: They get the right settlement. It is just a matter of how many
The Chairman: I think it is time to wrap up the discussion. We have another
presentation to hear.
Mr. Wodehouse, Ms Neilson, we are very grateful to you for coming this
afternoon. You can see the magnitude of the problem we are wrestling with. It
seemed like such a little tiny acorn, but it has developed into a rather large
oak; it has new dimensions to it, but I think you have enlightened us greatly.
Mr. Wodehouse: It certainly needs to be changed. I hope you will succeed.
Senator Angus: And don't forget to take the maroon folder, Hugh. You never know
what you might learn.
Senator Kenny: We enjoyed the commercial too.
Mr. Wodehouse: You will be getting it again, I hope.
The Chairman: Thank you for all your help.
We will hear now from Mr. Nick Rudnai and Mr. Alastair Speare-Cole from
Alexander Howden, Mr. Richard Painter from Reed Stenhouse and Mr. Peter
Christie from Minet Limited.
Mr. Nick Rudnai, Alexander Howden: Alastair will deal with the reinsurance
market, treaty reinsurance and reinsurance schemes, how the market operates and
any peculiarities of that for professional indemnity in particular, if you have
an interest in that area. The second thing we will deal with, as briefly as it
needs to be done, is CAP.
The Chairman: What does CAP stand for?
Mr. Rudnai: Catastrophe asset protection.
The Chairman: Fortunately, it is not what I thought it was.
Mr. Rudnai: On a catastrophe PI claim which exceeds the PI limit, how do we
protect the personal assets of the individual partner at risk, whose house and
car are at stake?
The Chairman: Perhaps you could begin with that.
Senator Kenny: In other words, do you make them whole?
Mr. Rudnai: Yes.
The Chairman: Just as a limited liability partnership would solve the problem.
Mr. Rudnai: Exactly.
I have got various written material with me which I will hand out if you wish.
The Chairman: We will certainly take it with us.
Mr. Rudnai: The CAP is a scheme that we put together about four or five years
ago to meet the needs of some of our clients and other brokers' clients who
were really concerned about the possibility of claims going through their PI
limit and about what would happen to them personally if those claims did go
through. I think one of the dilemmas was how much limit a prudent partnership
should buy. You may think you can afford 20 million, but should you really be
buying 40 million or 60 million or 80 million? You can never really buy enough
limit. It is also fair to say that it is not really something that is
particularly appropriate to the big accountancy firms, et cetera, because it has
a limited use there.
Mr. Peter Christie, Minet Limited: They put similar things in place through
Mr Rudnai: Yes. We looked at providing a scheme which would be a low-cost cover,
the intention being to give partners the kind of premium that they might be
paying, for example, to cover their motor car or their household effects It was
triggered only on claims that were validly indemnifiable under a PI policy, and
it provided them with coverage limits from, say, o250,000 up to o1 million.
Those limits were intended to reflect the value of their personal assets such as
their house and their car.
Senator Kenny: How does it escape the net then, since it only appears after a
settlement has been made?
Mr. Rudnai: That's right. The trigger would be a valid claim under a PI policy.
Senator Kenny: After all their assets have been determined?
Mr Rudnai: That is correct.
Senator Kenny: How does it avoid being included as part of their assets?
Mr. Rudnai: That is specifically the problem. The first problem we hit was when
we asked the barristers for an opinion. They said, "Great idea, but in
theory the law says that this becomes an additional asset of the partner;
therefore, you are not solving the problem." In order to get around that,
we and other brokers in the market really had to sell the policy to the spouse,
and that became a major issue.
Senator Hervieux-Payette: They had to get married, and that is good.
Senator Kenny: No, no, they have to stay married. Let's get this thing in
Mr Rudnai: That was the drawback.
Mr. Christie: What did you do about same sex partners?
Mr. Rudnai: We ducked that one. We did get a lot of phone calls from people
saying, "We would like to do it. I am in a stable relationship with my
girlfriend. I am a lawyer, and the law, I think, would judge us to be a couple.
Therefore, can we buy into the scheme?" The scheme was very clear that, no,
it had to be a spouse, because we had to start from somewhere.
Ms Harrison: You don't have the common law concept here?
Mr. Rudnai: That was exactly what these people were saying, that they had lived
together for whatever the legal requirements were. Basically, they were saying,
"We are entitled to the benefits of the scheme in the same way that a
normal married couple would be."
Mr. Christie: The underwriters are members of the moral majority apparently.
Senator Kenny: Tell us how you got around the problem.
Mr. Rudnai: We simply had to issue a policy to the spouse for her insurable
interests in the assets of her partner. Let's assume that the partner is male
and that the spouse is female. We were basically issuing the policy in the name
of the spouse, and the policy had to be paid for by the spouse.
Senator Kenny: Why wouldn't the individual just put it all in his wife's name in
the first place? Why pay you a premium?
Mr. Rudnai: As I understand it, the creditors could then go to the assets of the
spouse, certainly if they had only been transferred over in the last five
years, and claim a percentage of those assets as well.
Mr. Christie: Why wouldn't the insurance be considered an asset for the spouse?
Mr. Rudnai: I don't know the answer to that. Legally, it was not.
Ms Smith: Because it wasn't a transfer. The bankruptcy rules, et cetera, kick in
when assets have been transferred between spouses within a certain period of
Senator Kenny: That period is five years in Canada.
Ms Smith: The rules differ depending on when the transfer occurs. If the
transfer occurred within 12 months prior to the bankruptcy, it is not
considered to have occurred. If it occurred more than 12 months before but
within five years, then the trustee has the right to challenge it.
Mr. Christie: That is an interesting point. If you insured the bankrupt's assets
which existed within the transfer period and then paid the insurance to the
Mr. Rudnai: To be honest, Peter, I think the way the product worked was a fudge.
What we wanted to do was to protect the partner, not the spouse, which really
required a change in the law which would allow the partner to take out an
insurance policy to protect his personal assets provided he had arranged a
reasonable amount of professional liability insurance and had run his firm as
prudently as he could, and a claim had gone through.
There is a public interest issue there as well from a creditor's point of view.
Rather than getting someone's house, I would rather they just pay me the value
of the house. I don't really want to go through the rigmarole of having 50
partners claiming 50 houses and trying to sell them. If there is a pot of money
available, just pay me the value of the house.
We thought we had a reasonable argument, but the barristers, in their wisdom,
said, "No. Great idea, but it won't work." The only reason we are
raising it here today is that you asked for additional ideas about this whole
issue of professional liability. If, ultimately, you decide that there is no
viable way of limiting the liability of partners, at least you might look at
how a partner's personal assets could be protected.
Certainly, there is a mechanism there. To make the product saleable, the law
would have to be such that this policy would not be regarded as a conditional
The Chairman: Does CAP not work for someone who does not have a spouse?
Mr. Rudnai: Under the current law, it could only operate for people who are
Mr. Christie: That has been fixed now. You just get married.
Senator Angus: That is not a fix.
Mr. Rudnai: If the law were changed to allow the policy to indemnify the partner
or to pay to any creditor on the partner's behalf the value of the partner's
assets without the policy itself being considered as an additional asset, then
it could become available to anyone regardless of marital status.
The Chairman: In its current form it is highly discriminatory.
Mr Rudnai: Under the current law, it does not work.
The Chairman: CAP doesn't work?
Senator Kenny: No, because there is no twig. But, if there were a twig it would
The Chairman: What do you mean by "a twig?"
Senator Kenny: A small branch in the law that allows it to happen; that is the
Ms Harrison: That is why you created this kind of artificial spouse thing.
The Chairman: I must have missed something. I understand how CAP works, but are
you telling me that CAP does not exist?
Senator Kenny: CAP doesn't work.
Mr. Rudnai: CAP could exist tomorrow if it could be marketed properly. The
problem we had --
The Chairman: You can't make a profit selling it to spouses?
Mr. Rudnai: Exactly.
The Chairman: That is the piece I missed.
Mr. Rudnai: The kinds of premium we were talking about were for individual
spouses, effectively. If a partnership were buying o5 million of professional
liability, if they wanted to insure o500,000 worth of personal assets, it was
going to cost them o345.
The Chairman: Per solicitor?
Mr. Rudnai: Yes, and that was a personal policy issued to the spouse. To go
through the process of selling that personal policy, we would have to talk to
the spouse, discuss the options with the spouse, discuss the products with the
spouse. Perhaps the spouse was in no way a legal or financial expert and
therefore needed explanation. The partner also would have to get involved in
that process, all for a o300 or o340 premium.
The Chairman: It would not be worth it.
Mr. Rudnai: However, if the law allowed the policy to be sold directly to the
partner, we then could talk not just to individual partners but to
partnerships. We could go to the firm and say, "You have 40 partners; this
is the deal". It is still not a lot of money, but at least it becomes a
viable proposition for us or Minet or whoever to sell.
Mr. Christie: In discussions with the big six, including in Canada, they came to
the same conclusion that it didn't provide coverage.
Mr. Rudnai: The problem with the really big firms -- and this is why I am not
sure it would really be applicable to the big partnerships -- is that, once you
have a claim going through the PI policy, if you attack one partner, you attack
all partners. With a large firm of 100 partners or 150 partners, each with
coverage of o1 million, the insurer has a o150 million aggregate exposure.
Because it was (a) not a compulsory scheme and (b) quite a difficult thing to
sell, there was not enough premium to provide that kind of aggregate exposure.
Senator Kenny: You would almost have to sell it to the Bar.
Mr. Rudnai: If it were legal to sell it to partnerships, then one could approach
associations. It could then be a program recommended not just in Canada, but
everywhere in the world.
Mr. Christie: It would mean a fairly massive change to the law because it would
be saying that the assets of someone who had been adjudged bankrupt would not
be at risk because they had bought an amount of insurance equal to the value of
Senator Hervieux-Payette: If they are insured for $500 and they owe more than
that, everything has gone with the wind except the basic amount to start over
Mr. Rudnai: They could insure for more than $500. They could insure for the
value of their assets.
Mr. Angus: But they wouldn't go bankrupt.
Senator Kenny: It seems to me that they would be hiding an asset somehow.
Ms Harrison: But who would be hurt? The plaintiff gets the value of the assets
because he still gets $500,000 from the insurance company.
Mr. Christie: If a corporation bought $100 million of insurance and had a $200
million dollar claim, why couldn't you equally say that, once it has paid $100
million, it is not responsible for the next hundred?
Senator Kenny: Because it has bought something else of value.
Mr. Christie: It has increased its assets.
Mr. Rudnai: I think, to a certain extent, you are looking at it from the view of
your client, the big six. We are looking at it from the broader spectrum of a
bunch of professionals out there who really can't make a judgment on how much
PI limit to buy.
Mr. Christie: I was not discussing whether it was a good thing to buy. I was
pondering what legal changes would be necessary to effect it. It would entail a
major change in bankruptcy law.
Mr. Painter: If you are considering going to a limited asset partnership, then
in that way you would have capped the assets. By allowing the partner to buy
insurance, you will have increased the assets.
Mr. Christie: According to the big six, they don't need this once they have
Mr. Rudnai: Bear in mind also that it could actually add to the pot. If I am a
partner under the present scheme unlimited liabilities, I am going to do
everything I can to hide my assets. I am going to transfer them or whatever. If
I could have a policy which would provide me with financial guarantees so that
I would not lose my assets, it would be in my interest to go through that
process. There is possibly a public interest from that point of view to say
that there would be more money in the pot rather than less.
Senator Hervieux-Payette: But I would not go to unlimited coverage. I consider
that a bit like the process of declaring bankruptcy and you are allowed to keep
a few things so that you can sleep in a bed, et cetera.
Senator Kenny: Different people have different needs.
Mr. Christie: That thought would apply to any bankruptcy for any reason. Why
wouldn't anyone be able to protect their assets?
The Chairman: Why would you just limit it?
Senator Kenny: Earlier you said that CAP would not be applicable to the big six
because they take care of the problem through trusts. Very briefly, how do the
big six take care of this problem?
Mr. Christie: The proposal -- and I think it was agreed that it would work --
was to set up an independent trust, with separate trustees, the sole purpose of
which would be to make an offer to a plaintiff to settle litigation in return
for waiving their rights against the partners.
You have years to build this trust up. Then, if you are sued and someone arrives
at your front door to take your house, you could say, "You can go through
all that hassle, which will be a long process of bankrupting us, or there is a
pot over here that will pay you this money. However, the terms of that trust
are (a) that it is not an asset of the partnership and (b) that they can only
pay you if you agree not to pursue us." Nobody, to the best of any
knowledge, has actually done that yet. I can't imagine why because I think it
is a great idea.
Mr. Rudnai: We considered that solution for CAP to get around having to sell the
policy to a spouse. With such a low premium, the problem was the cost of
setting up individual trusts for individual partners, bearing in mind these
people could be sued personally as well.
Senator Kenny: I don't understand when you say the premium is so low. You are
setting the premium.
Senator Angus: The underwriters are setting the premium.
Senator Kenny: That is what I don't understand. When you say the premium is so
low, you are implying that, if it was o500 instead of o300, nobody would buy
the thing. Is that what you are saying?
Mr. Rudnai: Absolutely. We did talk to a number of partners in medium and small
firms who said that, if they could get the product for the same kind of money
that they were paying for car insurance, they would buy it. However, if it
entailed a large premium, then they would try to do it another way or stay with
the coverage they already had.
Senator Kenny: What would the same person pay for life insurance, assuming he
was 40 years of age and had two young children?
Senator Angus: And a non-smoker.
Mr. Rudnai: I don't know the answer to that.
Senator Kenny: He would be paying a couple of thousand pounds, would he not?
Mr Rudnai: Life insurance to some extent is viewed as an investment. You
normally would buy it as part of an investment programme rather than as a pure
life policy. For a pure life policy, I guess it would be 20 or 30 pounds a
The Chairman: I suggest that we hear from Mr. Speare-Cole now on the reinsurance
Mr. Alastair Speare-Cole, Alexander Howden: There are many aspects of
reinsurance that I could waffle along about, but I am sure there are things
that you have focused on over the course of today's discussions. Let me start
by giving a bit of the background.
Senator Angus: Please don't assume that we understand what reinsurance is, what
a reinsurance treaty is and how it works. Give us a brief introduction of that
and how primary carriers lay off the risk.
Mr. Speare-Cole: The London insurance market has developed has developed in a
slightly different way from the insurance market on continental Europe. In
London, the structure that was born around Lloyds is very much a co-insurance
one, so you have many carriers taking small shares of risk.
Senator Angus: A subscription market?
Mr. Speare-Cole: A subscription market, exactly. The German market, for
instance, has regional insurance companies who need to lay off risks with
centralized reinsurance companies, so there is a much greater degree of
Reinsurance is either a sharing mechanism or a risk transference mechanism -
and I don't think we have to get into all the details of those. Sometimes
reinsurance is just a substitution for capital or a way of sharing the risk: "I
can't keep all of this; I can keep 10 per cent of it. I need to write all of it,
so will you take 90per cent of everything I do and follow my fortunes totally?"
Other forms of reinsurance are excess of loss reinsurance where essentially the
catastrophe risk is stripped out of the original book and placed with
reinsurers for an appropriate risk premium, and therefore, the bulk of the
day-to-day risk and the bulk of the day-to-day premium are retained by the
insurer, and a small percentage, but often a very large limit of liability, is
placed with reinsurers.
Senator Angus: Who have no direct contractual relationship with the insured.
Mr. Speare-Cole: Absolutely. In fact, a feature of all reinsurance is that there
is no direct relationship between the reinsurer and the insured. There are in
the United States and, to a lesser extent, in the Canadian market contractual
provisions which allow a defaulted insurer to be essentially removed from the
scene and the insured to cut through to the reinsurer, but that is a contractual
provision rather than an implied condition of the insurance and then the
reinsurance contract behind it.
Senator Angus: Without an appropriate cut-through provision, the insured can't
get at the reinsurer?
Mr. Speare-Cole: No.
Senator Angus: Even in the case of insolvency?
Mr. Speare-Cole: If reinsurance claims are due to the firm or the practice that
has become insolvent, then they become general assets of that liquidation. It
helps in the pence-on-the-pound or the cents-on-the-dollar recovery by whatever
creditor. That is how reinsurance works.
Senator Hervieux-Payette: Do you have a lot more insurers than reinsurers, since
it is a two-tier organisation?
Mr. Speare-Cole: In theory that should be the case. However, in recent years
there has been a proliferation of reinsurance carriers. As well, the larger
insurance will have set up dedicated reinsurance arms and subsidiaries, so the
ratio is not as extreme as you might imagine.
To give you a business statistic off the top of my head, I think in the U.K.
there are approximately 50 motor insurers who are carrying motor insurance and
probably 40 reinsurers who will quote reinsurance for those insurers. As well,
many insurers from the U.S., Germany and France are represented here. There is
an almost an equality of the back and the front ends.
Senator Kenny: Why would an auto insurer require a reinsurer? Is that not a high
volume, low --
Senator Angus: Perhaps he doesn't have the capital.
Mr. Speare-Cole: Precisely; that is why, in some cases, they buy reinsurance.
There was a notable and very sad death just recently in the insurance market, a
one Matthew Harding. If Matthew Harding had been killed in the car coming back
from Heathrow airport rather than in the helicopter to Heathrow, and there had
been someone at fault, there would probably have been about a o100 million or a
o150 million pound claim against an insurer for his loss of earnings going
forward to the future. If you are writing o100 hundred million pounds of
original business, o150 million pounds might bankrupt you. It would certainly
muck up your day.
A fundamental feature of reinsurance is to create balance in the original
portfolio to take out catastrophe risk so that you can concentrate on balance
within the income you have and the number of risk units that you insure.
The Chairman: Tell us about reinsurance vis-à-vis professionals in
general. If you have any comments specific to auditors, we would welcome those,
but vis-à-vis barristers, architects or whatever.
Mr. Speare-Cole: Insurers can be divided into two or three camps. There are
those who are almost totally independent of any reinsurance for the line they
write, and they might write o5 million or $10 million on a single professional
or professional partnership. There are others who will trade alongside them,
often with the same line size. The line size is a commercial tool rather than
The Chairman: What do you mean by "line size?"
Mr. Speare-Cole: The actual commitment that they can make to an individual
partnership. Insurer A might be able to subscribe a o10 million commitment to a
partnership; insurer B might be able to do twice that, and insurer C half of
The very large companies, the Signas and the AIGs of the world, can write their
line totally net of reinsurance, because , when viewed as part of their whole
portfolio, this is a line size for a single loss which is in balance with their
capital. There are others who will trade alongside them in the same market who
cannot do that. The point I am trying to make is that the line size, the size of
commitment one can make on a single risk, is often of commercial significance
rather than just a sort of theoretical thing.
Someone like Mr. Rudnai will not place business with people who have too small a
line size because it requires too much effort. It means another visit, another
negotiation and everything else. What he wants to do is place it with the
smallest number of people possible.
Mr. Rudnai: The insurers who have a larger line, whether that is fully reinsured
The Chairman: You don't care whether it is reinsured or not?
Mr. Rudnai: I don't really care whether it is reinsured, although I do have some
interest in that, possibly. Certainly they have a larger holding than I do in
terms of negotiating terms and conditions. The larger their line the more
likely it is that they will be able to influence me about the terms and
conditions that they are prepared to offer me; whereas, if they restricted
themselves to their net line, they would have very little influence because I
would really be talking to the bigger boys. It gives them more underwriting
influence as well.
Mr. Speare-Cole: Those people who need to get reinsurance get reinsurance and
those who don't, don't. They would come to someone like me and say "Alastair,
I am joining this new company. They have never written professional indemnity
before. I want to write o5 million worth of income. I need to make my stake in
the market. I need a o5 million line. Will you go out and buy me treaty
reinsurance. I can probably afford to keep a quarter of a million pounds on any
one insured myself."
I will go and buy them risk cover of perhaps o4.75 million in excess of
o250,000, so if they had a loss --
Senator Angus: Out of the premium paid for the whole fee?
Mr. Speare-Cole: Exactly. My client, being the reinsurer, will write the o5
million line. He adds up all the premium, and I will take a percentage of it to
the reinsurance market to pay for that o4.75 million in excess of o250,000. If
he has a o500,000 claim, then he would pay the first o250,000 and the next
o250,000 I would collect from the reinsurers.
The problem is that, particularly in professional indemnity, it is a class of
business which has a relatively small number of risk units. There are a
relatively small number of professionals or professional partnerships out there
relative to the sort of premium they can generate and the types of claims they
can produce. Therefore, it is a very much more volatile and less predictable
class of business than, shall we say, motor, personal or even property lines.
A lot of reinsurers are adverse to writing professional indemnity. A number of
things are difficult to judge, such as event definitions. How you define what
is contained within a single reinsurance claim, or a single insurance claim for
that matter, is a complex procedure. In both your country and ours there is
conflicting case law as to what is one error and omission or what is a series of
related errors and omissions or what is a series of unrelated errors and
A solicitor or an accountant may write to 200 people, saying, "I would like
to make this offer. I think you should invest in this." Of those 200
people, perhaps 100 will respond immediately saying, "Yes, here is my
cheque." End of story. Another 100 call him on the telephone looking for
advice and saying, "Will it fit with my investment portfolio?", or
I believe that in Australia that was judged by the court as being 101 separate
events. The people who had just sent their cheques they were considered as one
event because they had been given poor advice in the first place. All the
others who had asked for more advice were treated as separate event. How do you
treat that from the point of view of reinsurance? The reinsurers say, "Come
to me with the one event, but the rest are will have to be covered by your
quarter of a million." Time and time again, the reinsured says, "No,
no, I want this all treated as one event".
Senator Angus: As one transaction?
Mr. Speare-Cole: Many solicitors have been defeated when they have tried to come
up with a foolproof professional indemnity event definition which controls
where the reinsurance starts and where the net account ends. That is one area
that is very difficult for reinsurers. I think I mentioned as well the
volatility and the lack of risk units in comparison to the liabilities involved.
In the securities world and in the mergers and acquisitions world, there is
incredible potential for loss. It is almost impossible, statistically, to
predict how often such losses could arise. Moreover, the losses could amount to
o400 million, o600 million pound loss or even o1 billion.
Senator Angus: That is the story on accountants right there.
Mr. Speare-Cole: Absolutely, and the reinsurer is in a much more volatile
position, a much more vulnerable position, than the insurer. Suppose our
insurer writes o100 million of premium. He reinsures himself for just the
catastrophe exposure, and that probably costs him o10 million. The reinsurer is
now carrying 90 per cent of the catastrophe risk for o10 million. His
vulnerability is greater than that of the insurer because he is less able to
predict the sequence of claims that could arise from the Canadian solicitors
market or the Canadian accountancy market. The insurer can retain at least some
of the original premium; whereas, the reinsurer is being asked to take the very
high limit which could occur infrequently.
Reinsurers are not attracted to this class of business. The next question is:
Why can't they put the price up and get better returns? Ultimately, it is a
function of a complicated market as to where the attractiveness ends. It seems
to me that the insurance-plus-reinsurance market runs out of steam at about
o200 million. I imagine there are placements above o2 hundred million for
professionals, but it becomes extremely difficult to add another o100 million.
The Chairman: That is per firm, not per individual?
Mr. Speare-Cole: That is per firm.
The Chairman: To that extent, it is easier to insure and reinsure small firms
because small firms -- and I am thinking of accountants now -- are not auditing
major companies and any suit against them is not likely to be at a
stratospheric level. It is not going to be the billion-dollar lawsuit.
Mr. Speare-Cole: To give you sort of an example of that phenomenon in a
different form; every summer we have a sort of shindig in the London market
where solicitors renew their professional indemnity covers to be effective on
Senator Angus: Why is it September 1 as opposed to December 31?
Mr. Speare-Cole: Because it fits in with the underlying solicitors indemnity
fund scheme and it has become a fairly traditional event. Every year there is a
great deal of gossip about who is going to do what and what the prices will be.
A lot of money floats around on that one renewal date for that one class of
business, and special protections are geared up for it.
Reinsurers actually measure their peak accumulation on a professional indemnity
book by trying to find out how many of their insurance clients, the insurers,
have particular lines. Clifford Chance is the benchmark, because they usually
buys the biggest amount of professional indemnity. A reinsurer will go to all
his insurers and say, "Tell me what you have written on Clifford Chance, so
that I know what my maximum exposure to this book of business will be for a
It is an extraordinary phenomenon. For example, I have a client who sits there
with perhaps o10 million or o20 million worth of capacity, and he waits. He
does not use his capacity until the broker comes in saying, "I have
reached o150 million and now I am stuck." At that point my client will say
"I can help you", and he will write a line in excess of the figure the
broker has reached and then he will charge as much as he can get that firm to
part with, which is quite often more money than the underlying reinsurance
which is more exposed.
The Chairman: And which is going to be called on first?
Mr. Speare-Cole: Absolutely. The higher you go, the more expensive it becomes.
Those people who have still have capacity left can command a greater price. The
senior partner who is buying says, "To go from o150 million to o160
million cost me o100,000. Now I want to go from o160 million to o170 million,
and you are asking me for a further quarter of a million pounds. Enough is
enough; I have to stop." You can see how the reinsurance capacity dries
Senator Kenny: It is straight supply and demand?
Mr. Speare-Cole: Absolutely.
The Chairman: At some point the marginal cost to the firm becomes sufficiently
high that they prefer the risk to the marginal cost.
Mr. Speare-Cole: Absolutely right.
The Chairman: Some people said this morning that they would not insure
accountancy firms in the current climate, and everyone said they would not
touch the big six.
Senator Angus: They have been burned in the past.
Mr. Speare-Cole: There is another aspect to that. We have been talking about
insurance as though it were an annual business. If you look at it over time,
all the professions are very vulnerable to something happening out there in the
economy or in the legal environment which affects all of them in sequence. A
major recession means that people go bankrupt, and the first thing that happens
is shareholders start looking for --
Senator Angus: Someone to sue.
Mr. Speare-Cole: Yes, and all the accountants are hit with multiple claims in a
very short period of time. The same happened with surveyors when the property
crash hit; the surveyors were the fall guys. The surveyors' business over two
or three years has cost the insurance industry millions.
People who write professional indemnity are vulnerable to something like that
coming along. I am sure the people who said they were finished with accountants
not only have been badly burned but perhaps are seeing over the horizon
something in the legal socio-economic environment which is going to produce a
rash of claims against accountants.
Senator Angus: Let me ask a question unrelated to this subject, one which I have
been wanting all day to ask.
The Barings Bank situation received tremendous coverage in Canada. In fact, even
this committee was asked to look into it. The very integrity of the financial
system in Britain, I guess, was imperiled by the event at Barings, and everyone
suddenly had to look at how many gazillion dollars could be transferred in the
wink of an eye through computers, and so on.
First of all, what were the insurance and reinsurance implications of that
Mr. Speare-Cole: Panic, I think, was the first thing. The banks do have various
types of cover. They are limited by exactly the same constraints in the market
that accountants and solicitors are. In many cases the professional indemnity
policy is placed with the same carriers and their treated capacity is almost
There are other covers that banks buy as part of a blanket policy, which are for
much smaller limits and don't provide catastrophe cover.
Senator Angus: Is that similar to fidelity, as an example?
Mr. Speare-Cole: Exactly.
Senator Angus: Would there have been fidelity cover for Leeson's activities?
Mr. Speare-Cole: There would be certain provisions under certain circumstances,
but probably nowhere near the extent of the professional indemnity. The bank
might be indemnified for loss of its own funds, but certainly not for the
Senator Angus: The reason I ask is that, when we talk about the immeasurable
degree or unpredictable dimension of potential liability of the accountants and
the big six, it seems to me that with products like derivatives and other fancy
new financial products, it must be analogous in terms of uninsurability.
Mr. Speare-Cole: Let us move the conversation away slightly from the
technicality of insurance. If you compare the capitalization of the insurance
market with the capitalization of the financial markets, the financial markets
are far better equipped to deal with the indemnification of loss due to their
own malfeasance than is the insurance industry. That is probably an
over-simplification. I can't remember what the combined capitalization of the
American insurance industry is, but it is probably not even one-tenth of the
capitalization of the banks and the big financial institutions, the fund
managers. There comes a time when the risks generated by currency markets, by
futures and all those sorts of thing are beyond the capitalization of the
insurance industry's ability to absorb. If you want indemnification as opposed
to relying on the caveat emptor principle, you have to invent new structures.
Mr. Christie: The figures that come to my mind are that the global equity
capital of the insurance business is $1,000 million and the capital market is
Mr. Speare-Cole: Yes, I think that is the statistic.
Mr. Christie: And the U.S. is $450 billion. Don't ask me to write that down,
because I will not get all the zeros.
Mr. Speare-Cole: I have forgotten your question about Barings.
Senator Angus: It was really whether it is an uninsurable, and I was trying to
find an analogy. The Chairman was asking this morning whether there were other
situations where it was impossible to get insurance -- and this is quite apart
from the joint and several issue.
Mr. Speare-Cole: Are we talking across everything or just purely in the
professional indemnity world that we are talking about?
Senator Hervieux-Payette: No, in other sectors.
Senator Kenny: The question this morning was about other sectors.
Mr. Rudnai: On the crime side of the cover. If Barings were buying <#00A3>200
million, would it really make much of a difference? I think that was the issue
you were raising about the accountants as well. The exposure is so much greater
than the affordable capacity that they can access in the insurance market that
no, it probably doesn't make sense. They buy insurance as much for risk
management and day-to-day balance sheet control as they do to actually protect
I don't think there is the kind of capacity within the insurance market to
really save the company as such, but you are looking at day-to-day control of
the balance sheet as much as anything else.
Senator Angus: I have always had the impression -- and I am sure it is wrong --
that the reinsurance companies make more money than the primary insurers. Why
would that be the case?
Mr. Speare-Cole: If you actually drew a graph of the return on investment of
direct insurers, for instance, in the American market, you would find that the
cycle moved in little waves up and down, hopefully above the origin. The same
kind of graph for the reinsurance industry would show roughly the same sort of
cycle, but with much higher peaks and much lower troughs.
Mr. Angus: Is that because the catastrophe protection would cover more?
Mr. Speare-Cole: Yes. In very simplistic terms, there is a gearing effect such
that, when original rates are down and the reinsurance rate is calculated as a
percentage of that rate, reinsurers are doubly impoverished, and vice versa.
That is a fairly contentious remark, because I suspect one could cite all sorts
of sectors and all sorts of reinsurers where that is not the case, but I know
that was historic. If you were to looked at the casualty insurance industry in
America over the period from 1986 to 1996, you would probably find that that
was the case.
Senator Angus: Then, of course, we hear about Munich Re which is sort of the
ultimate repository for all the wealth of Germany and maybe some of the London
Mr. Christie: The accountancy profession is doing something about that at some
speed, and getting back at quite a rate.
Mr. Speare-Cole: They were very heavy reinsurers of the big six.
The Chairman: They are not doing it any more?
Mr. Speare-Cole: They sure are not doing it any more, and it will be a long time
until they do it again. I am going to answer your question which may not help
you, but I hope it will be of some interest.
The German market is in a rather unique situation in the industry in that they
have an amortization rule whereby they have to write down their assets with
time and the shareholdings have to be shown on the balance sheet at the lowest
value the shares have ever achieved, not at their current value. The result is
that the Munich Re have probably capitalized on a multiple of 5 or 10 of what is
shown on the balance sheet and what is shown on the balance sheet is fairly
substantial in itself. It also means that the return on capital, if it were
measured properly, is minuscule. I think that one day the shareholders of the
Munich Re, which are made up largely of a German industry and other German
insurers, as the pattern across shareholding in Germany is complicated and
reciprocal, will eventually say, "Hold on a minute here, we would actually
be better stopping you doing what you are doing, selling up the assets and
putting them into Daimler Benz or something." Munich Re will then be under
terrific pressure to change the way that they do business.
Yes, Munich Re is a very big company, much bigger than it appears to be.
However, whether their reinsurance business can continue in its current form, I
don't know. If they do decide ultimately to move away from reinsurance, they
will deny the world insurance and reinsurance markets an element of capital
that they now enjoy.
The Chairman: Senator Kenny, do you have a final question?
Senator Kenny: It is not so much a question as a comment.
The longer we sit here, the clearer it is becoming that the big six are not
going to be insured. The question that has to be asked is: What happens to the
economy if one or more of them goes down? What are their options besides
Those are the sorts of questions that are coming to my mind as we decide on
where we go after hearing these presentations.
The Chairman: We have got a lot of issues on the table, a lot of which I don't
think would have been raised had we not come over here.