Law Society of B.C. expands lawyers’ professional indemnity coverage to respond to “bad cheque” scams

The Law Society of B.C. (LSBC) has broadened the scope of lawyers’ professional indemnity coverage to respond to trust fund shortfalls resulting from various forms of “bad cheque” scams.
Typically, the scams involve between $200,000 and $350,000, with one matrimonial scam approaching $2.6 million, noted a report presented to the law society’s board of directors in December.
The report says a common version of the scam has a client retaining a lawyer to recover an outstanding debt from a third party.
The lawyer sends a demand letter to a third party on behalf of the client. The lawyer will subsequently receive a bank draft from the third party that covers all or a certain portion of the debt owed. The lawyer will then deposit the cheque into a trust account, deduct his or her legal fees, and then issue a trust cheque to the client for the balance.
Later, it is discovered the bank draft from the third party is counterfeit. The pooled trust account of the lawyer is then short by the amount paid to the client.
Up until this month, the lawyers’ insurance coverage did not cover the shortfall in the trust fund, because the basis for coverage under the professional liability policy was negligence. But in this scam, the lawyer is not “negligent,” but rather the victim of a successful fraud.
The LSBC noted the scam has been happening across Canada, and not just in B.C.
“We understand trust shortfalls have been paid by two other programs in Canada,” the LSBC report says. “Ontario calculated that it would pay $2.6 million on a spate of 16 trust shortages that occurred when the scam was first surfacing. Manitoba paid $150,000 on a phony debt collection scam.”