Pulling the Plug on Risk Premiums

The Supreme Court of Canada has recently ruled against the practice of losing defendants having to pay so-called “risk premiums” to victorious plaintiffs. The ruling has broad implications not only for personal injury and medical malpractice lawsuits, but for shareholder class actions as well.

The ruling is a significant victory for insurers and public companies. If they find themselves as losing defendants in a lawsuit, they no longer have to pay what amounts to a high-priced “tip” to the plaintiff’s attorney (in addition to settlement and related court fees). It’s also an indirect benefit for insurance policyholders: since insurers will no longer be blindsided by these punitive gratuities, they can gauge the real cost of a lawsuit going forward. In turn, this will allow them to underwrite their products more accurately.

As vice president of claims for Zurich Canada, I’m especially aware of how important this case is to insurers. N ot only did Zurich insure the original defendant in the case, it also brought the case to appeal and the Supreme Court.

WALKER V. RITCHIE

The original case, Walker vs. Ritchie, involved a 1997 accident between a van and a tractor-trailer. The van’s driver was left with crippling physical injuries and neurological damage. In the 2003 trial decision, a judge awarded the plaintiff more than Cdn$5 million in damages and Cdn$500,000 in legal expenses.

The judge also determined the plaintiff’s attorney deserved a “risk premium” of Cdn$192,000 because he had fought the case for four years. During this time, he paid for expenses out of his own pocket, including Cdn$130,000 for an expert witness. From the outset, a risk existed that these costs wouldn’t be paid.

Instead of taking this risk premium payment out of the plaintiff’s award, the judge insisted on holding Zurich, as the defendant’s insurer, responsible for both the premium and the plaintiff’s assessed legal bill.

After taking (and losing) its case before the Ontario Court of Appeal, Zurich decided to push forward with a legal challenge to the concept of risk premiums. These payments, while rare, are within a judge’s discretion in Canada, although the practice is prohibited in the United States.

“Although challenging the risk premium was costly and time-consuming, our counsel supported an appeal on principle,” said Zurich claims specialist Wendy Glenn, who was involved in the process. “We were disappointed with original trial results and appeal. We felt this would be a good case to test the Courts of Justice Act in the area of risk premiums. After all, plaintiffs’ counsel are already quite adequately compensated by the rules. If they want a bonus when they do a good job, it should be awarded from their client, not the defendant.”

THE SUPREME COURT DECISION

In its 13-page decision, the Supreme Court of Canada strongly emphasized the importance of predictability and consistency in cost awards. It found risk premium cost awards disrupted that stability. “Unsuccessful defendants should expect to pay similar amounts by way of costs across similar pieces of litigation involving similar conduct and counsel, regardless of what arrangements the particular plaintiff may have concluded with counsel, since a defendant has no knowledge of these private arrangements and thus has no means of measuring the risk of engaging in litigation.”

The court also made the point that using the risk of an adverse finding of liability as a basis for awarding a costs premium would create an incentive for defendants with meritorious defences to settle. After all, the riskier a case is to the plaintiff, the more defensible it is to the defendant, but the more exposure a defendant would have to a risk premium.

Finally, the ruling states that although legal counsel should be provided with incentives to take on cases with a risk of non-payment, these incentives should come from the client, not the opposing party.

FUTURE IMPACT

Needless to say, Zurich and others in the insurance industry are pleased with this ruling. “The Supreme Court decision is good law,” said Gordon Thompson, executive vice president and general counsel for Zurich Canada. “It is debatable whether the situation in Walker vs. Ritchie would come up today, now that the law has changed and contingency deals are allowed,” Gordon said. “Today the case would be taken on a contingency basis, instead of a private arrangement between the plaintiff and his attorney, so the factors have changed.”

Still, this is an important ruling because the risk premium issue is still likely to arise in non-contingency fee cases that typically involve commercial litigation, Gordon said. “When two parties have money and one party is successful, they may have a private arrangement to pay their counsel a bonus,” he said. “This case ensures that such private bonus arrangements will not be shouldered by the defense.”