Riskier legal environment warrants more proactive risk management: Lawyer

Companies are operating in an ever-changing, more litigious and rigidly regulated legal climate–both in Canada and abroad–that can expose them to all kinds of unexpected risks, says a legal expert speaking at the 2009 Aon Benfield Rendezvous.

Legal risk managers must realize that today’s legal environment is filled with aggressive regulators and a global upswing in litigation, Terrie-Lynne Devonish, Chief Counsel at Aon Canada, told attendees at the Rendezvous, held at Mississauga’s Delta Meadowvale Resort & Conference Centre on October 21, 2009.

 “We’ve seen regulators in all sectors become more vigilant,” said Devonish. “There is also an increasing trend for regulators to publish their findings,” she continued, “so whereas before you may have been able to settle with a regulator and have it go under the carpet, we are now seeing regulators publishing media releases and doing interviews on television,” trends that increase the reputational risk a lawsuits can cost a corporation.

The Part XIII risk

In Canada, Devonish identified the upcoming changes to Part XIII of the Insurance Companies Act and a greater propensity for class action litigation as two risks that merit specialized attention.

Amendments to Part XIII of the Insurance Companies Act will come into effect on January 1, 2010, and will change what falls under the Office of the Superintendent of Financial Institutions’ (OSFI) jurisdiction. “Prior to these changes, OSFI’s jurisdiction dealt with the location of the risk,” says Devonish, “if the risk is located in Canada, then OSFI has jurisdiction. That has now been moved and it has to do with the location of the insurance operations. As long as the companies insuring the risk are in Canada, OSFI will have jurisdiction over the business,” Devonish says, “and that will require the foreign insurer or reinsurer to be licensed in Canada and maintain a Canadian branch operation.”

Legal risk managers will have to ensure their organizations are in compliance with the new regulations, a job made difficult by the fact that there is still some confusion regarding the fine print. To add to the uncertainty, while OSFI has stated that anyone who is not compliant with the new regulations will be subject to supervisory actions, it has not elaborated on just what those actions would be, leaving companies guessing as to what penalties they may face.

Rising class action litigation

Another cause of concern is the rise of class action litigation in Canada. All provinces and territories except Prince Edward Island have class action legislation, and more class action lawsuits are being started than ever before. Devonish said that “the cost and time that class action lawsuits take is worth noting,” mentioning that lawyer fees alone can go into the millions (and if the suit is successful, settlements are likely to run millions more), not to mention the reputational risk that a long and public litigation is likely to incur. Compounding the problem is an increase in cross boarder suits – class action lawsuits that originated in the Unites States and resulted in companion actions in Canada.

Devonish also cautioned companies to pay attention to extra-territorial risks, which she describes as “risks that aren’t necessarily Canadian but can reach across the border and grab us.” In particular, Devonish highlighted the Foreign Corrupt Practices Act (FCPA) and the Office of Foreign Assets Control (OFAC) as two risks worth paying attention to.

The FCPA is a 1977 federal US anti corruption and anti bribery law that prohibits payment of any money or anything of value to any non-US government official or any non-US political party and/or candidate for the purpose of obtaining business or securing an improper advantage. What is unique about the bill is that it has extra-territorial reach. “You don’t have to be a U.S. company for this to affect you,” Devonish said, noting that the act affects foreign subsidiaries of US companies.

The global risk issue

OFAC is a part of the U.S. Department of Treasury whose prime responsibility is to administer and enforce economic trade sanctions based on U.S. foreign policies. OFAC accomplishes that goal by publishing a restricted list of countries and entities and prohibiting anyone who falls under its jurisdiction to associate with those on the list. As with the FCPA, OFAC’s jurisdiction goes beyond U.S. companies, affecting everyone doing business in the US as well as Canadian subsidiaries of US companies.

Devonish noted that major difference between U.S. and Canadian foreign policy is that Canada does business with Cuba, which is one of the countries on OFAC’s prohibited list. Furthermore, in 1992 the Attorney General of Canada issued an order forbidding any Canadian companies from complying with the U.S. order prohibiting them from dealing with Cuba, creating a source of tension and confusion between a Canadian subsidiary and its U.S. based parent.

Devonish says insurance companies who deal with global risk must be particularly attentive to this conflict. “Let’s look at a situation where we have a Canadian who travels to Cuba and buys medical insurance, a Canadian insurer, and a U.S. reinsurer with a Canadian branch,” Devonish said. “If the Canadian traveling to Cuba becomes ill and there is a medical claim, and it’s gotten to the point where a reinsurance claim is made, has the U.S reinsurer breached the OFAC rules?”

Devonish points out that OFAC does provide guidelines which state that “insurers and reinsurers have to require that policies that provide worldwide coverage have explicit exclusions when it comes to prohibited transactions.” However, many Canadian companies are not aware of the prohibitions or the guidelines, and do not find out about both until it is too late.

Shifting from reaction to prevention

When faced with such an uncertain and increasingly risky environment, successful legal risk management must shift from reaction to prevention when it comes to legal exposure. “The tone has really changed,” says Devonish. “It’s not just putting out fires, but looking at the root of those fires and putting plans in place so that the fires don’t happen in the first place.”

It’s crucial for companies to develop mechanisms that determine what legal risks the company faces and properly grades those risks in terms of likelihood and severity. “There may be some risks that are on your slate but are not pressing issues,” said Devonish, “but there could be others where the threat levels are high, and they are the ones you need to deal with first.” It is also important to put clear protocols in place and to establish a healthy compliance program that is reinforced with continuing review, training, and audits, she added

“It is impossible to avoid all legal risks,” Devonish concluded, “but by having a program you can expect the unexpected, bring down your legal costs, and be proactive in managing them.”

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