In the broad framework of the policy factors above, this part of the report presents the arguments for reform to proportionate liability and statutory caps on damages, as well as the arguments for maintaining the status quo.
A. Reform to Proportionate Liability and Legislative Caps
Many arguments are made for reform away from joint and several liability to some variant of proportionate liability and/or statutory caps. Submissions supporting reform of Ontario’s joint and several liability system came primarily from the audit and engineering professions. Seven key arguments are set out below.
Stakeholders, particularly from the audit industry, argue it is unfair to make defendants liable for one hundred percent of a plaintiff’s loss.
Just as proponents of joint and several liability frame their arguments around fairness, supporters of liability reform likewise stress the inherent unfairness of the joint and several liability system with respect to the defendant. It is argued that it is unfair for a defendant, whose degree of fault is minor when compared to that of other defendants, to have to fully compensate a plaintiff should the other defendants be insolvent or unavailable. The ICAO stressed that auditors should only be liable for what they actually did or did not do:
The audit profession accepts that it should be responsible for its fair share of a loss to the extent it is responsible for the loss. However, we are strongly of the view that it should only be responsible for what it did or did not do, rather than for the acts or omissions of others. In the context of joint and several liability, the burden of satisfying judgments and settlements falls on those who can pay. The profession is not and should not be seen as the guarantor of issuers whose financial statements it audits, or of other parties who are unable or unavailable to pay their share of the losses.
In theory, the less blameworthy defendants can recover contribution from the more blameworthy defendants; however, in practice the former, particularly where they are insured professionals, are left to bear the majority share of liability when other defendants are insolvent or unavailable.
Fairness arguments formed the bulk of concerns expressed in one submission, were explicitly identified as one of the advantages of a proportionate liability system by the ICAO, and remain prevalent in the background of several others.
A proportionate liability regime would ensure that defendants are not liable for more than their individual share of the fault, as determined during court proceedings. Stakeholders argue that this is inherently more fair to defendants, particularly specific groups of professionals who regularly only play a small role in the proceedings but, for reasons such as the availability of insurance or the non-availability of other co-defendants, are liable for more than their “fair share” of the damages.
2. Deep Pocket Syndrome
A second argument for reform away from the current regime concerns strategic litigation. Proponents of proportionate liability contend that joint and several liability encourages plaintiffs to unfairly target defendants who are known or perceived to be insured or solvent. These “deep pocket” defendants may be able to fully compensate a plaintiff – far beyond that which is owed by them– in the event of a co-defendant’s insolvency.
For example, the accounting industry argues that, because auditors are known to be insured, plaintiffs seek them out as defendants. The same can be said for lawyers and other professionals. Given that plaintiffs decide when, where and whom to sue, it is argued that plaintiffs will sue persons they believe afford the best opportunity for recovery.
This unfair targeting was identified as a particular problem in submissions by Richard Hardingham and the Association of Municipalities of Ontario (AMO). Mr. Hardingham notes that fraud committed by a CFO or CEO may be very difficult to detect and even beyond an auditor’s means of control, thus it would be unfair for the auditor to face increased liability and the potential for 100% payment. Moreover, this risk puts increased pressure on “deep pocket” defendants such as auditors, other professionals or municipalities to avoid protracted, expensive litigation by settling for amounts that may be excessive. The ICAO suggests that auditors are uniquely situated: compared to other professions, whose work product passes directly to another party, auditors’ works are widely disseminated among numerous parties, increasing their exposure to liability.
It is argued that proportionate liability would prevent these well-placed defendants from being unfairly targeted for undue compensation by aggrieved plaintiffs.
3. Rising Costs of Litigation, Insurance and Damage Awards
Opponents of the joint and several liability regime are concerned about the rising costs of litigation, insurance and damage awards.
The current system involves two sets of proceedings: one to determine the liability for the loss and one to establish the measure of contribution among co-defendants. The argument is that with proportionate liability, both issues would be settled in one trial, potentially saving time and money.
The ICAO recently conducted a survey of just over 1,700 small to mid-sized firms and sole practitioners. Among the findings, 73% of respondents stated that they have faced a moderate to significant increase in liability insurance costs over the last five years, while 64% of respondents said they are being deterred from taking on assurance engagements. Fifty-eight percent said that the liability crisis is creating difficulty for clients to access assurance services.
The ICAO makes the argument that “[t]he current system of joint and several liability makes audit firms in Canada today the de facto insurers of our capital markets.” The ICAO estimates that the number of suits claiming damages of over $100 million filed in the last 10 years in Canada is 12 and that the estimated number of those suits claiming damages of over $1 billion is 3. The ICAO expresses the concern that lawsuits in such large quantums “[have] the potential to do serious damage to the audit industry or to cause the failure of an audit firm.”
The ICAO also indicates that the dollar value of “incurred claims” against five of the biggest six audit firms in Canada increased from $190.96 million, as at December 1995, to $673.11 million as at December 2005. Incurred claims are not the total of damages sought but instead reflect the amounts firms must set aside in anticipation of prospective case settlements, plus amounts paid up to that point and related defence costs. They also highlight that the trend line for the dollar value of amounts actually paid by those audit firms was even “more ominous”: the amounts paid out increased from $12.65 million as at December 1995 to $298.67 million as at December 2005.
The argument is that these rising litigation costs are making it more difficult for audit firms to access insurance. Moreover, the difficulty in quantifying expected loss makes some insurance companies unwilling to engage with auditing firms. Proportionate liability would introduce a solution:
Bringing this problem under control through proportionate liability will see insurance companies re-enter the market, which would enable them to ‘price’ that risk and create a source of recovery for shareholders.
The ICAO argues that while all firms carry insurance, none is able to insure against the sort of “catastrophic exposure which can arise from joint and several liability.” A further submission on behalf of the ICAO and the large accounting firms states that “in the past twenty five years, no insurance market has developed to provide the large audit firms with catastrophic loss insurance for professional liability”. The result is that “each of the large global accounting firm networks has had to form a captive insurer” to create self-insurance “with layers of reinsurance at certain upper levels when available and supplied at commercially reasonable rates”. Consequently, it is “virtually certain” that an audit firm facing catastrophic loss that required reinsurance “would no longer have access to the reinsurance markets….”.
Opponents of joint and several liability often point to the system’s alleged negative effects on Canadian competitiveness.
Mr. Hardingham posits that by introducing some form of a proportionate system, the costs of liability insurance would decrease and more insurers would enter the market due to a reduced risk of catastrophic damage claims against audit firms, making Ontario a more attractive market for auditors and accountants.
The ICAO also notes that Canada must remain competitive with other jurisdictions, particularly the jurisdictions in the United States that have abandoned joint and several liability.
5. Provision of Services
Supporters of liability reform frequently argue that joint and several liability is responsible for reducing the amount of talent entering and remaining within the professions. This is due to the exposure to liability created by joint and several liability that discourages entry into the profession or subsequent retention. Data are presented to support these fears. For example, in 2001 there were 400 public company audit firms in Canada. In 2008, that number had been reduced to 230. While this argument is generally made in relation to the audit profession, the Ontario Society of Professional Engineers fears that the burden of indeterminate liability is squeezing engineering firms out of the marketplace. The argument is that a move to proportionate liability would increase the supply of talent by reducing risk and attracting young professionals.
Concerned about the effects of this loss on the public, the ICAO argues that:
Firms, both large and small, are being driven out of the audit and assurance services market because of skyrocketing insurance costs and exposure to disproportionate liability. Access to vital audit and assurance services for enterprises of all sizes is becoming more expensive or unavailable, and as a result,