E&O Insurance >FAQS>LAWYERS in Private Practice FAQs
LAWYERS in Private Practice FAQs
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About LAWPRO's enhanced coverage for counterfeit certified cheques, bank drafts
The following FAQs address the most common FAQs we are being asked about the enhanced protection provided under the 2010 LAWPRO primary insurance program regarding counterfeit certified cheques and counterfeit bank drafts.
The expanded coverage regarding counterfeit certified cheques and counterfeit bank drafts that comes into force on January 1, 2010, is an enhancement to coverage already provided under the Law Society insurance program. See Question #2.
The existing LAWPRO program has generally provided protection in situations where funds of legitimate clients were inadvertently paid out to fraudsters prior to the lawyer discovering that they were dealing with a counterfeit certified cheque or bank draft. In other words, if you had deposited a counterfeit certified cheque and then acted on the (fraudster) client's instructions to disbursing funds prior to learning from your financial institution that the certified cheque was counterfeit, you would generally have had protection under the insurance program for any client funds that were paid out inadvertently.
This protection afforded in relation to the funds of legitimate clients is not changing – and you do not need to make any changes to your practice for this protection to continue to apply.
However, to the extent that a shortfall resulted between the lawyer and the bank – i.e. no legitimate client funds were taken, or the amount of funds disbursed exceeded that belonging to legitimate clients – no coverage was available under the program for the amount of the shortfall in LAWPRO's view. This is because the claim of the bank is for payment of a debt based on contract, not for damages arising out of the performance of professional services – which is the basis on which coverage is generally provided under a professional liability insurance policy.
As of January 1, 2010, provided certain requirements are met, some overdraft protection will effectively be provided to lawyers in relation to their trust accounts where liability for the overdraft results from the handling of a counterfeit certified cheque or counterfeit bank draft in the capacity of a practising lawyer.
This enhancement to the protection already provided under your insurance program comes at no additional cost to you. Moreover, it provides broader protection than that generally afforded under other professional liability programs, some of which would not necessarily even cover the loss of disbursed trust funds belonging to legitimate clients.
Expanding coverage such as we have done potentially increases program claim costs – which are normally passed on to lawyers through increased insurance premiums. But because of the strains that a weakened economy is putting on law practices, and the fact that the base premium was already increasing $500 in 2010 to address other cost pressures, we chose not to go this way.
At the same time, however, LAWPRO is mandated by the Law Society to operate in a commercially reasonable manner, and to ensure that the cost of insurance under the program generally reflects the risk. This includes responsible underwriting and encouraging active risk management on the part of lawyers and law firms: The requirements that are attached to this enhanced protection moderate the risk of claims against lawyers as well as the insurance program, and strive to equalize the likely impact on the insurance program arising from the different practice areas of the bar.
What the stated requirements do not do is equalize fraud risk for lawyers as business people across all different practice areas and types of retainers. That would likely require specific risk-rating of the coverage per area of law and/or law firm. Also, having lesser requirements for any segment of the bar (even at a higher premium) is providing a roadmap for the fraudsters. At some point, the risk-rated premium would become unbearably high.
The enhanced protection for counterfeit certified cheques and counterfeit bank drafts is subject to the following conditions and limitations:
You must have waited at least eight business days following deposit of the instrument into your trust account before disbursing funds as instructed;. or you must have received confirmation from either your financial institution or the drawee financial institution that the drawee financial institution has verified the validity of the instrument. As well, this confirmation must be documented in writing (whether by you or the financial institution) before payment instructions are given.
The drawee financial institution indicated on the counterfeit certified cheque or counterfeit bank draft must be a Canadian financial institution, and the instrument must have been inspected and deposited by you, or a partner or employee of yours.
Note that the amount of coverage provided is subject to a sublimit of $500,000 per claim and in the aggregate (i.e. for all such claims reported by the lawyer or lawyers in the firm that year), inclusive of claim expenses, indemnity payments and/or costs of repairs. The coverage does not apply to retainer deposits, untransferred fees, or other amounts relating to legal fees, accounts or fee arrangements. As well, some limitations in deductible may apply.
This new enhanced coverage does not replace nor limit the current protection offered under the policy. As explained in more detail above, provided certain requirements are met, some overdraft protection will effectively be provided to lawyers in relation to their trust accounts where liability for the overdraft results from the handling of a counterfeit certified cheque or counterfeit bank draft in the capacity of a practising lawyer.
As explained in more detail above, you have coverage for shortfalls that are strictly between the lawyer and the bank – i.e. no legitimate client funds were taken, or the amount of funds disbursed exceeded that belonging to legitimate clients – only if you follow the requirements explained in FAQ #4 above.
The program generally provides protection in situations where funds of legitimate clients were inadvertently paid out to fraudsters prior to the lawyer discovering that they were dealing with a counterfeit certified cheque or bank draft.
To be able to call on this enhanced protection, you will need to verify the transaction-specific certified cheques and bank drafts in accordance with the steps outlined in the policy coverage. Lawyers may need to modify their practices to request that clients give advance notice of who the lender is some time before closing, so you can satisfy yourself as to how funds will be delivered by the lender.
No, as described in question #4, you may either obtain the required confirmation and have this documented in writing (either by you or the financial institution), or wait at least eight business days following deposit of the instrument, before disbursing funds as instructed by the client.
If the certified cheque or bank draft has already been deposited, and the financial institution refuses to verify that the instrument is valid, you can as an alternative wait the required eight business days after deposit of the instrument before disbursing funds as instructed by the client. If the certified cheque or bank draft has not yet been deposited, you could seek instructions from your client to have the person or entity provide the funds by wire transfer using the Large Value Transfer System (LVTS).
You may want to contact your own financial institution and ask them to make inquiry of the drawee financial institution to see whether it has confirmed the validity of the certified cheque or bank draft instrument.
No, as indicated in the policy coverage, the confirmation can be documented in writing by either the financial institution or the lawyer. If you are the one undertaking the documentation of the confirmation, you would send the confirmation to whomever provided you with the verbal confirmation.
No. There is no specific format or form that needs to be followed. As the policy wording indicates, you are looking for confirmation that the Canadian financial institution indicated as the drawee financial institution on the face of the certified cheque or bank draft has verified the validity of the certified cheque or bank draft.
In inquiring as to whether the drawee Canadian financial institution has verified the validity of the certified cheque or bank draft, and in documenting in writing that confirmation, it is best to avoid any reference to words such as "clearing" or "settling," as these terms may not be understood by all to indicate the final and irrevocable movement of funds.
Aside from confirming that the drawee Canadian financial institution has verified the validity of the certified cheque or bank draft and that it is now safe to withdraw from deposit, other information that is helpful to have documented in the written confirmation may include:
the date that the confirmation was given,
who provided the confirmation to you,
the instrument type and number,
the client/file name/number, the drawee name on the instrument, and
the dollar amount of the certified cheque or bank draft.
In asking for confirmation, you are looking for verbal confirmation that the drawee financial institution has verified the validity of the certified cheque or bank draft. The drawee financial institution may not be in a position to provide you with the requested confirmation if they have not yet completed this process and do not feel that they are able expedite the process.
In the absence of any confirmation that the drawee financial institution has verified the validity of the certified cheque or bank draft (and documentation of such in writing), you will need to wait the required eight business days after deposit of the instrument before disbursing funds as instructed by the client in order to have the enhanced coverage for a possible overdraft under the policy. In any given situation it is up to the lawyer to decide whether or not they wishe to take steps to ensure that the overdraft coverage will be available.
If it is known beforehand that the particular drawee financial institution is not prepared to provide verbal confirmations as a matter of course, you may wish to address beforehand the possibility of wiring funds using the Large Value Transfer System (LVTS).
If it becomes your bank's practice to charge for confirmations, you should consider alternatives with your client, such as the wiring of funds using the Large Value Transfer System (LVTS), waiting the required eight business days after deposit of the instrument before disbursing funds, or perhaps approaching the drawee financial institution for confirmation directly. For information on disbursing out-of-pocket fees to clients, refer to Rule 2.08 of the Rules of Professional Conduct.
If you cannot wait the eight business days, you may prefer to obtain confirmation from either your own financial institution or the drawee financial institution that the drawee financial institution has verified the validity of the certified cheque or bank draft, and had this confirmation documented in writing (whether by you or the financial institution) before payment instructions are given. If no financial instrument has yet been received, you may wish to address the possibility of receiving funds by wire using the Large Value Transfer System (LVTS).
Yes, advising the client about your new approach to funds handling will clarify expectations from the outset. You may also want to include in the retainer letter a requirement that the client give you notice of who the lender is some time before closing, so that you can satisfy yourself about how funds will be delivered by the lender.
Lawyers should use their best judgement in determining what due diligence should be done with respect to certified cheques and bank drafts. However, in using that judgement, if the steps outlined in the policy coverage are not followed, no coverage for any overdraft would be afforded under the policy.
No. The written confirmation that the drawee financial institution has verified the validity of the certified cheque or bank draft must be sent by the lawyer to the Canadian financial institution providing the confirmation or be received by the lawyer from the Canadian financial institution.
Unfortunately, lawyers may not be able to do "business as usual" and will need to modify their practices, including requesting funds to be exchanged via wire transfer. Confirm with your bank that wire transfers are to be done using the Large Value Transfer System (LVTS).
The extra fees associated with using wire transfers through LVTS (Large Value Transfer System), may be a small price to pay when compared to the costs of a fraud claim – or worse, the reality of a trust account shortfall for which there is no coverage.
Another way to approach the issue may be to educate your client about your new approach to funds handling. For example, in your retainer letter you could require that your client wire you funds for the cash portion of the transaction and give you notice of who the lender is some time before closing, so you can satisfy yourself as to how funds will be delivered by the lender.
Call LAWPRO at 1-800-410-1013 (416-598-5899) if you suspect you have completed or are acting on a matter that appears like it might be a fraud. We will talk you through the common fraud scenarios we are seeing and help you spot red flags that may indicate you are being duped. This will help you ask appropriate questions of your client to determine if the matter is legitimate or not. In the event the matter you are acting is a fraud and there is a potential claim, we will work with you to prevent the fraud and minimize potential claims costs.
Funds can be electronically transferred to a trust account in several ways: as wired funds through the Large Value Transfer System (LVTS); as an automated funds transfer (typically used to move funds from one bank to another); or as an inter-branch wire. Transfers made by wire through LVTS are irrevocable. Transfers by automated funds transfer (one bank to another) and inter-branch wires (different branches within the same bank) may be pulled back by the bank that made the transfer. They are essentially the equivalent of an uncertified cheque. Care should be taken especially in the case of inter-branch wires which, despite the name, are not typically done through LVTS and therefore do not carry the LVTS benefit of irrevocability.
Be aware of the differences in these transfer types and understand how to recognize from the transfer confirmation what type of transfer has occurred.
No. If your client makes the deposit, you have no opportunity to examine the cheque or bank draft for validity before it goes into your account, nor do you have an opportunity to verify the validity of the instrument with a financial institution before it is deposited. Both of these steps are critical for preventing fraud. As well, if you want the benefit of the enhanced coverage for overdrafts, you must either wait eight business days before disbursing funds or have taken the required steps to verify the validity of the deposited funds.
No. While in many cases the fraudster has been a new or first time client at a firm, we have also seen attempted and successful frauds where a client will retain and pay a firm to do work on a smaller apparently legitimate matter (e.g. an incorporation), and then come back with the fraudulent matter several months to a year or more later. Knowing your client and recognizing potential fraudsters goes beyond the simple fact that you have acted for a client once before.
Probably every lawyer in Ontario has received an email that is clearly an attempt at fraud. The clues can include one or more of the following: promises of large sums of money, a scenario that doesn't add up, bad grammar and many spelling mistakes. While the really bad emails are easy to spot, the really good ones are not. LAWPRO has seen attempted and successful frauds initiated by emails that had little or nothing in them that would raise suspicions. In some frauds, we have seen emails that appear to come from another lawyer (or the staff person of a lawyer who has conveniently gone on vacation). The email will include links to a real law firm's website, where there will be information on the lawyer who allegedly sent the email. However, a careful inspection will show that the email address and phone number for the supposed sender will not be legitimate (i.e., consistent with the correct information on the real firm's website). They will put you in touch with the fraudster instead.
No. While the initial contacts on a fraudulent matter might be an email message or phone call, we have seen frauds in which the perpetrators visit a lawyer's office multiple times over weeks or even months. Fraudsters will provide valid-looking identification, including an Ontario driver's licence. See the next point.
No. In LAWPRO's experience, the driver's licence provided by a fraudster client is almost always fake. To confirm that a driver's licence is valid, use the Ministry of Transportation's online Driver Licence Check at www.dlcheck.rus.mto.gov.on.ca/Scripts/OrderForm.asp.
Some of the counterfeit cheques or banks drafts we have seen were obvious, others where of high quality and would appear valid to all but the trained eye. Note that fraudsters will provide fake contact info on documents, including the phone numbers on counterfeit cheque of bank draft. While an branch address may be correct, phone numbers will connect you with the fraudster or someone in cahoots with the fraudster. This ensures that any call to verify the validity of the document reaches a person that is in on the fraud, not real bank employee that could end the fraud by indicating that the financial instrument is not valid. When verifying important information (such as the validity of a certified cheque or bank draft), always find the phone number to use from an independent source.
Some of the frauds we have seen have been very sophisticated and have involved multiple people who pretend to be the different parties to the transaction e.g. the client, lender, seller, buyer etc. The frauds are getting much more sophisticated, and there are usually multiple accomplices involved. All of the documents will look real and be drafted to make the transaction look legitimate. They will put you in touch with the co-conspirators. In one commercial loan fraud, the target lawyer spent many hours over several days going back and forth with a representative of the supposed lender negotiating terms of the loan and security documentation. On another fraudulent matter, loan instructions came from someone pretending to be a major bank employee.
Several of the lawyers targeted by attempted and successful frauds have said that in hindsight they were surprised at how friendly and talkative the fraudsters were. The fraudsters seemed to have all the right answers to any questions they were asked. The fraudsters even played on cultural connections where they existed. Remain on high alert and don't let your guard down. Frauds are becoming ever more sophisticated, and the fraudsters appear to be going to ever greater lengths to try to trick lawyers into accepting bogus cheques or bank drafts and disbursing good funds from their trust accounts.
This is a complex issue involving many parties: lawyers, clients (legitimate and fraudulent), and financial institutions, among others.
Among the steps LAWPRO has taken to deal with this issue are the following:
We've provided lawyers with many materials to help educate them about frauds and how to avoid being duped.
We have helped dozens of lawyers who have found themselves handling matters that were real or suspected frauds. We have helped them recognize fraud red flags, take the steps necessary to determine if the matter was legitimate, and provided guidance on how to prevent the fraud and avoid a claim.
The enhanced coverage under the 2010 program provides protection for an exposure that was not covered in the past.
This FAQ document is a direct response to the valuable feedback and questions we have received from lawyers in many practice areas. We look forward to continuing this dialogue, especially with the residential real estate bar whose transactions often have particular time pressures associated with them.
As well, we are leveraging our existing relationships with the banks to explore how financial transactions involving lawyers' trust accounts can occur in a way that minimizes exposure to fraud.
What is clear is that it cannot simply be "business as usual." Frauds targeting lawyers are the new reality. Lawyers must be prepared to assume fraud-related costs, either personally in the event of a shortfall that is not covered by insurance, or through pooling across a group of insureds, as we have done with the enhanced coverage for counterfeit certified cheques and bank drafts in the 2010 program.