Canadian Underwriter

One for All…Or the “Deepest Pocket”?

September 1, 2002   by Craig Harris

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While numerous class action lawsuits have grabbed insurance headlines recently, the long-held legal rule of joint and several liability may generate just as much, if not more, controversy in the coming months.

In April, British Columbia attorney general Geoff Plant released a consultation paper discussing potential reforms of many civil liability principles and procedures. One of the more contentious areas was joint and several liability. The principle holds that in cases where a plaintiff has not contributed to his or her own loss, all defendants are jointly and severally liable for the full amount of the loss, regardless of their respective degrees of fault.

In other words, if one party is partly or minimally responsible for a loss and other potentially liable parties cannot pay, that remaining party – the “deep pocket” – picks up the tab for as much as 100% of the award. Hence, the “1 percent rule.” The B.C. proposals can be placed in the context of recent overhauls in Australia and the U.S. to what many regard as an unfair legal principle. In Canada, there has been much discussion about reforming joint and several liability over the past 10 to 15 years, particularly in Ontario and New Brunswick. Indeed, the federal government recently enacted reforms to modify the joint and several liability principle for claims involving financial statements, mainly to protect auditors and accountants (and this reform process began in the pre-Enron/WorldCom days).

Tort reform

Changes to joint and several liability can not come soon enough for insurers and defense lawyers, who have seen many cases of disproportionate awards, in which defendants or co-defendants may only be found 5% or 10% liable, but end up paying most of the costs. They argue that joint and several liability is an ancient legal principle that does not apply to modern society, where large organizations end up picking up the tab for someone else’s wrongdoing.

Randy Bundus, vice president of general counsel at the Insurance Bureau of Canada (IBC), observes “joint and several liability is a perennial item on our list of tort reforms. We would be delighted to see it changed, but, politically, it is an unpopular idea.”

Murray Davison, a lawyer with Paterson MacDougall with more than 35 years experience in handling lawsuits against municipalities and insurers, says “there is a number of cases in my cabinet that clearly demonstrate in a graphic way the unfair consequences that fall upon public bodies as a result of the rule [of joint and several liability]”.

Jamie Halfnight, a lawyer with Poss & Halfnight, says joint and several liability is “a huge issue in dealing with consideration of exposures. Many are the cases where the actual liability is little or non-existent, but the risk is hugely magnified by a lack of or under-insurance on those who will definitely be found liable. The consequences of the application of the ‘1 per cent’ rule are severe and cause insurers to pay more, sometimes far more, in settlement than is justified on a straight evaluation of their insured’s liability.”

Predictably, trial lawyers do not see things quite the same way. In an August 6 letter to all members that amounted to a call to arms, Trial Lawyers Association of British Columbia president Maris McMillan argued against reforms to joint and several liability and other proposals outlined in the B.C. attorney general’s paper. “If these changes are advanced, governments and businesses will be free from responsibility for the harms they create or contribute toward,” McMillan stated. “Tort reform is the euphemism used by governments and insurance companies for removing the rights of innocent individuals and restricting their access to justice.”

B.C. scenario

The B.C. legal review did not come out of the blue. Last year, the B.C. Supreme Court issued what many in the municipal government sector consider a landmark decision, in Strata Plan vs. Canlan Ice Sports Corp (2001). The case involved a leaky condominium in the lower Fraser River community, where owners sued a number of parties, including the construction company, architect, engineers and the municipality of Delta. The municipality was assessed to be 20% at fault for damages resulting from building deficiencies, but it will shoulder a much higher proportion of damages if other at-fault parties are unable to pay.

As BC attorney general Geoff Plant says, the decision left the municipality of Delta “exposed to the full force of the judgment”. He raises questions about the legal doctrine’s justness and hints that it may be an anachronism. “The changing economic and legal landscape requires a rethinking of the fairness of the law of joint and several liability,” Plant says.

There is little doubt the B.C. Supreme Court decision has had a cascading effect on municipalities, with building inspections at the apex of concerns, but many more exposures trickling down, such as highway maintenance, occupier’s liability and water quality. Today, government is named as a party in 40% of all litigation commenced in Canada. In British Columbia alone the average number of cases launched against the province tripled from 123 per year in the early 1990s to 383 cases per year over the last five years.

“Joint and several liability risk can cause financial nightmares, especially if the loss is uninsured,” says Keith Gibson, risk manager for the Municipal Insurance Association of British Columbia, which represents 153 of 182 municipalities in the province. “Building inspections risk are a problem in that the original builder, developer, architect and/or engineers may no longer be in business. If the court awards joint and several, then local government and its insurer are exposed to additional costs.”

“The deck is usually stacked against the municipality,” says Sylvia Lawrence, vice president of claims for Frank Cowan Company Limited, a specialist in insuring public sector risks. “It is virtually always the municipality, with high insurance limits plus assets, that stands to lose the most . . . Architects usually carry from $250,000 to $1 million limits, subject to a yearly aggregate, and engineers typically insure themselves for similar amounts.”

Ontario reacts

The issue of joint and several liability extends, of course, beyond B.C. In Ontario, municipalities have long been concerned about similar issues related to exposures like building inspections. The provincial government has tried to address those concerns through Bill-124, a legislative attempt to mandate certain levels of insurance for those in the construction industry – from builders to architects to engineers.

The bill, sponsored by the Ministry of Municipal Affairs and Housing, has received second reading and is set for royal assent in the fall. Insurers and government are currently negotiating the all-important regulations, in which there are several disagreements, according to Bundus. “For example, the Ontario government wants to mandate a period of seven years for a policy to be in force, which is certainly not the standard in our industry. There are many other issues that have to be worked out over the next 18 months. In fact, one has to wonder if this is the way to address this at all. The question is: why not look at joint and several liability, which is the root of the problem?”

It is not just municipalities, but industries from builders to architects to insurers that are concerned that joint and several liability is just one more legal exposure that tends to force defendants to settle. Simply put, many do not want to run the risk of defending a lawsuit if they know that a finding of minimal liability can lead to an award of 100%, commentators note.

“A review of joint and several liability will be a welcome opportunity to discuss and hopefully reform many existing inequities,” according to Murray MacLeay, president of the B.C. Construction Association. “Although motivated by a desire to ensure that plaintiffs are made whole, the rule leads to a search by plaintiffs’ lawyers for deep pockets and to a proliferation of lawsuits against those who ar
e minimally liable or not liable at all.”

The perceived unfairness of joint and several liability is partially what prompted the B.C. attorney general’s civil liability review (there are other areas of legal reform). Responses to the consultation paper are due by October 1 and several groups, such as the Union of B.C. Municipalities, will prepare replies. Many are hopeful of substantive reforms.

Lack of action

Some defense lawyers, however, argue the general approach of governments in Canada to legal reform is more smoke than fire. Lawyer Murray Davison put together a comprehensive research package on joint and several liability to an Ontario government committee looking into tort reforms in the insurance liability crisis of the mid-1980s. “The committee listened politely and eventually issued a report that provided me with the first evidence supporting my now long-held view that, for some unknown reason, no Ontario government has what it takes to abolish the rule,” says Davison. “They appear to apprehend the silliness of applying such an ancient rule to modern cases, but are reluctant to remove the rule’s application across-the-board.”

There are some examples of various jurisdictions that have made progress on reforming joint and several liability, such as Australia and the U.S. A number of Australian states have legislatively abolished joint and several liability in building actions to protect local government and building professionals. Several American states have adopted a range of legal reforms over the past 20 years, from establishing a threshold percentage of fault necessary to trigger joint and several liability to abolishing joint and several liability for certain types of damages. As of August 17, the state of Pennsylvania has scrapped joint and several liability in favor of a more proportional liability system.

Whether any of these models gain prominence in the Canadian legal system over the next several years is anyone’s guess. “I wouldn’t say it is impossible, but it is not going to steamroll ahead,” says Bundus. “There are many groups pulling in different directions and it seems few provinces in Canada want to take the lead in reforming joint and several liability.”

Some argue that if Canada is adopting elements of the American legal system, such as class action lawsuits and contingency fees, perhaps it is time to consider its reforms as well. Many defense lawyers say it is time for a second look at joint and several liability. Insurers – and many of their larger clients, such as municipalities – could not agree more.

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