Insight: Ontario Insurers & Paralegals: Bitter; Rivalry

Last December, the Financial Services Commission of Ontario (FSCO) laid seven charges against a Toronto-base paralegal for alleged improprieties in the settlement of an insurance claim. This was followed by the passage of Bill-198 and a subsequent first draft of regulations governing the conduct of paralegals in the auto claims process. This would seem to indicate a tougher stance on the part of the government and the insurance regulator in dealing with paralegals. However, auto insurers are reluctant to ease up in the battle against the paralegals. And, it would appear that the paralegals are gearing up to challenge the insurance industry with their own thoughts on regulating a profession that has expanded rapidly in both numbers as well as market impact.

The antagonistic relationship of insurers and paralegals, specifically in Ontario’s auto claims arena, has produced harsh words, particularly in the past few years as insurers watched loss ratios rise and profits drop in the Ontario auto insurance marketplace, the largest single market in the country for any product (Ontario auto accounts for just over 25% of all premiums in Canada).

The bitterness came to a head late last year with two landmark events: the passage of Bill-198 to revise the role of paralegals in the Ontario auto claims process, and the laying of charges by the Financial Services Commission of Ontario (FSCO) against one paralegal. While Bill-198 had been in the works for some time, the charges of alleged misconduct against paralegal Michael Ricci caused a stir through the industry. Would FSCO finally start to crack down on paralegals, long viewed by the industry as a source of frivolous and fraudulent claims? In this case, the superintendent’s office was responding to the filing of 36 charges by Metro Toronto Police in September of last year for forgery and fraud – complaints initiated by the claimant, not the industry. In December, FSCO filed seven charges under the Insurance Act of “making a false or misleading statement or representation to an insurer in order to obtain payment for goods or services provided to an insured”, each of which could carry a fine of up to $100,000 if Ricci is found guilty, explains FSCO spokesperson Brian Donlevy.

All of this came at a time when one insurer, Kingsway General Insurance Co. was taking a very public stand against paralegals, refusing to deal with those they suspected to be fraudulent. Although Kingsway received threats of legal action from some of these cast-off paralegals, none have yet to file or take any action against the insurer.

The provisions in Bill-198 to control paralegal activity are “the strongest parts of the bill”, says Mark Yakabuski, Ontario region vice president for the Insurance Bureau of Canada (IBC). The IBC has been lobbying hard for some type of regulation of paralegals in the auto claims system.

However, paralegals, through the Professional Paralegals Association (PPAO) of Ontario, have been lobbying themselves. As an advocacy group for paralegals – those affiliated with law firms and independents, including members of the Paralegal Society of Ontario (PSO) and paralegals with the Prosecutors Association of Ontario (PAO) – the PPAO is both fighting for a province-wide system of regulation and against certain provisions of Bill-198. Despite insurer’s continued “paralegal-bashing”, PPAO president Paul Dray says, “our members provide a capable service, and it’s one people can afford”. However, he acknowledges, “they’re [insurers] trying to eliminate paralegals [from the process] through regulation,” but adds, “we are necessary to people, we provide a necessary service”.

POINT OF AGREEMENT

“The biggest problem with paralegals is that anyone can be a paralegal, all they need is a business card,” says Bob Tisdale, president and CEO of Pembridge Insurance Co. “The reason there is so much focus on paralegals is they were subject to nothing.” This is unlike lawyers who have a code of conduct through the Law Society of Upper Canada and can face penalties for not adhering to this code. “The government regulates so many things, that why this particular group [paralegals] is unregulated is beyond me.” Tisdale says there should be basic requirements for paralegals in terms of education and knowledge, as well as sufficient errors and omissions (e&o) coverage.

Under Bill-198 (sections 127-130), paralegals will be subject to having to pay arbitration costs if they fail to inform the claimant that the claimant will have to pay in the event they lose the case, launch frivolous or vexatious claims or delay the process. However, those working for law firms are exempt from this provision.

Dray takes exception to the concept that no paralegals are subject to standards, as members of the PPAO do have to adhere to the association’s code of conduct. However, he admits that paralegals are unregulated, something the PPAO has been working for several years to change. Paralegals who belong to the PPAO, PSO and PAO all favor an overarching code of conduct being put in place on a province-wide basis and have a stake in “weeding out” those paralegals who engage in fraud or misconduct and cause a negative perception of the profession.

Insurers suggest that many paralegals do not join these associations to avoid being subject to “codes of conduct”. “The problem has been that so many of the paralegals started up have had no controls, they’ve not been joining the association,” says Bill Star, president and CEO of Kingsway General Insurance Co. There are a number of paralegals working for lawyers even, who are not part of the association, points out Cecil Jaipaul, president of Jaipaul Consulting. In an article published late last year (see CU, September 2002), Jaipaul outlined provisions for a possible system of paralegal regulation in the accident benefits process. He notes that there are an estimated 1,000 legal representatives in Ontario and that in an audit of SABS (statutory accident benefits system) claims, he found 56% were represented by someone who was not a member of the PPAO.

Jaipaul points to a report by Justice Peter Cory, published in 2000, which sets out terms of paralegal regulation. The “Framework for Regulating Paralegal Practice in Ontario” has spawned discussions between the Law Society and the PPAO on how to implement a regulatory system.

AT LOGGERHEADS

So, with insurers, paralegal associations and the government all in agreement that a system of regulation is needed, why has it not happened? Simply, the PPAO and the Law Society have stumbled on key points of dissention, most notably that the PPAO’s members want to be overseen by an independent body and not the Law Society.

In a survey of its membership, the PPAO found that, “those that responded objected to the Law Society as being the regulating body for paralegals because it is perceived to be unfair and oppressive”. The PPAO has put forward alternatives including self-regulation, which was proposed in the Cory Report, or regulation by a government-funded body. Stakeholders are set to meet in June for further discussions.

Dray is concerned however, that in absence of a larger regulatory framework, the insurance industry and its regulators are going to put in place a specific system relative to auto claims through Bill-198. “We have great difficulty with the fact that it [Bill-198’s regulation on paralegals] is in isolation”, with members supporting a broader system of regulation. “It doesn’t make great sense, it should be a province-wide system.” Paralegals fear being subject to a variety of codes of conduct for different legal arenas, with the rules being different on each playing-field. For example, an overall code of conduct would not exempt paralegals belonging to law firms, and would apply to both independent and affiliated paralegals.

Yakabuski concedes that there are paralegals working on a system of regulation. “There has been no end of efforts to regulate paralegals…but there has never been a strong enough consensus.” And with insurers facing rising loss costs and an unprofitable market th at is seeing significant withdrawal of capital, “we don’t have the luxury of waiting”, he adds.

LEGISLATIVE FRACAS

Even in light of Bill-198, insurers are not quite jumping up and down in glee. Some provisions have gone over very well, such as the moratorium on cash settlements in the first 52 weeks of a claim. Star equates cash settlements to “legalized extortion” with insurers facing the threat of $500 in mediation fees, $3,000 for an arbitration and $4,000 for a DAC (designated assessment center) report, at the least, used as leverage to force a quick cash payout. Kingsway has, in lieu of regulations being in place, used requests for information under section 33 of the Insurance Act as a means to forestall making fast settlements.

“Unfortunately a lot of less than reputable paralegals feed off the quick money they can get off clients,” says Yakabuski, who adds that if regulations can cut off the “money pipe” to paralegals, and still provide necessary benefits, it will be a strong disincentive to fraud.

Dray says that some paralegals believe that the 52-week delay is too long, but the PPAO did not object to this formally in its response to Bill-198 regulations. Paralegals are more concerned about begin told they cannot charge contingency fees when lawyers are still afforded the ability to do so. “Now, a limit on contingency fees would be more acceptable than saying a paralegal can’t charge it, but a lawyer can,” says Dray. He sees no “deceptive practice” at work in contingency fees, and notes that through such an arrangement the insured knows up front what the fee will be.

Insurers are taking issue with the distinction between lawyers, or representatives belonging to a law firm, and paralegals, as set up in the new legislation. In its submission in response to the draft regulations, amongst the IBC’s suggestions, “the most important is to circumscribe the exemption for paralegals who work for law firms”, says Yakabuski. “Our concern is there may be a whole number of paralegals who might be able to claim some sort of relationship to legal firms.” Star is deeply concerned with the distinction being made and fears paralegals will simply become affiliated with law firms to avoid being subject to the penalties for frivolous and vexatious claims. “My main concern is I don’t think the paralegals will be able to buy e&o insurance, so I expect them to join law firms.” Star notes that in his original presentation to the Auto Insurance Review Board, he said that no one, not even lawyers, should be exempt from the bill’s provisions for conduct.

Jaipaul sees the same potential for an end-run around the provisions. “The problem I’m seeing is you will just have lawyers heading these paralegals and they will not fall under the regulations…The cop-out will be, we will just get a lawyer to head our firm.” Yakabuski is calling for stronger wording in the regulations, where only paralegals covered by e&o through the Law Society, who are working directly for lawyers, and “where it is the law firm that is being retained, and the paralegal is being paid nothing but a wage or salary [by the law firm]” would be exempt.

Dray says the PPAO has no objection to the e&o requirements in the bill, but there is a great deal of concern about how this or any other regulation might limit the independence of paralegals. They fear a system that “is not an affiliation, it’s a supervisory position”, where the paralegal ceases to be an independent seeking legal advice from the lawyer, but becomes essentially an employee of the law firm.

Another fear for insurers is that paralegals may avoid the FSCO process by taking claims to small claims court. Jaipaul notes that there is a $10,000 limit on small claims court cases, but what could happen, and is already happening in some cases, is splitting a claim into multiple cases in different jurisdictions to collect beyond the single case limit.

Looking for “teeth”

Jaipaul adds that more is needed from the regulations to really deter fraudulent or vexatious claims. What is needed “is something that regulates all paralegals, ones that are supervised by lawyers and independents, and something that has some teeth”, in the form of fines and sanctions for improper behavior.

Insurers also are critical that the new regulations do not have sufficient “teeth”, specifically that there is no system of fines in place. Tisdale notes that through FSCO, insurers are subject to a plethora of fines and sanctions, but paralegals will only be required to remunerate costs if they are found to have put forward a frivolous case. “We [insurers] are under a very disciplinary regime, and yet on the other side [paralegals] it’s very lax. There should be a downside [for frivolous arbitration], more than just costs.”

In the end, however, Tisdale acknowledges it will be up to FSCO to put the regulations into practice and make them work. “They [FSCO arbitrators] have to have the ability and they have to be prepared to do it. I’m not sure if either exists right now.” But, he does note there are some “encouraging signs” that FSCO may be cracking down on fraud and abuse of the system.

This relates to the charges against Michael Ricci, as well as another recent decision to charge costs against a claimant who did not show up for arbitration. The arbitrator in that case felt the claimant had no real intention of pursuing the case and was using it as a threat to force a settlement from the insurer. Although this case did not involve charging costs to a paralegal, this change in what was perceived as a bias against insurers could be a signal of things to come when the new regulations are put in place. “I think the arbitrators at FSCO are becoming unhappy with paralegals coming at them with frivolous cases,” notes Star.

Yakabuski also sees signs of a change in attitude on the part of some arbitrators, acting independently, who see they have a role in controlling abuse of the system. And, he adds, “I give the highest marks to [FSCO superintendent] Bryan Davies for using his powers as superintendent, for example to place charges against Michael Ricci. It is sending a very powerful message.” Donlevy points out, however, that the charges against Ricci are “an isolated incident”. That said, he notes that FSCO has a consumer protection role to play in stopping fraud and abuse. “Fraud costs everyone.”