Canadian Lawyer

an office until September when he set up his own separate office. ���The firm was victimized by an individual who was recommended by a large national recruiting firm who came with good credentials,��� says Kaufman���s counsel George Pollack, a partner at Davies Ward Phillips & Vineberg LLP in Montreal. ���We didn���t know to what extent he was abusing the hospitality that was accorded to him.��� Making matters worse, Kaufman is on its own to defend the actions. Quebec���s professional liability insurer has denied coverage and refuses to defend the firm and its partners because it felt they did not provide professional services ��� a position Quebec Superior Court Justice David Collier endorsed in a ruling released just days before the blaze struck Perras��� residence. ���It cannot be concluded that Perras or Kaufman rendered professional services to the plaintiffs by accepting deposits, acting as escrow agent, or transferring funds from one trust account to another,��� Collier wrote in one of the few decisions in case law that examined the interplay between insurance coverage and professional legal services. ���A solicitor-client relationship does not arise from the mere receipt of funds for deposit. . . .Taking the pleadings at face value, it appears they provided invest- ment services to the plaintiffs.��� That was also the conclusion the Ontario Court of Appeal came to six years ago in a case pitting Cassels Brock & Blackwell LLP against LawPro. In considering a number of transactions similar to the Kaufman case, the appeal court found a trust account transaction was not a professional service, and that it fell under the policy���s investment exclusion, because it was not ���ancillary��� to legal services. ���A person who is a lawyer may wear more than one hat, but just because at most times that person wears the hat of a lawyer does not mean that he always acts qua lawyer,��� wrote the court in a brief three-page ruling. Those are the kinds of decisions that reassure professional liability insurers. All law societies in Canada provide professional liability insurance for negligence, but its scope varies from jurisdiction to jurisdiction. All law societies also have funds set aside to provide trust protection coverage to ensure innocent members of the public do not suffer a loss through theft by a lawyer ��� as long as the lawyer who received the monies and deposited it in the trust account performed legal services. Indeed, in Alberta lawyers are prohibited from depositing money into their Avoidinginternalfraud F raud arises from a combination of motive, means, and opportunity. Internal controls can never entirely eliminate the risk of fraud, but there are simple and practical steps law firms or solo practitioners can take to minimize the ���very real risk of internal fraud,��� says Jim Patterson, co-leader of the fraud law practice at Bennett Jones LLP. Review the firm���s internal controls with an auditor or accountant to ensure they are robust. Segregate office duties, even in small offices. Make sure one employee is not responsible for accounting, bookkeeping, and banking. In small offices all-too-often the same person handles bank deposits and bank account reconciliation. ���That is a recipe for disaster because that employee could be stealing from you and you would never know it because they have complete control over that process,��� says Patterson. Establish and enforce a policy of countersigning cheques. Cheques being paid out of the office should go out under two 36 March 2013 www.CANADIAN L a w ye r m a g . c o m trust account if it is not in conjunction with legal services, notes Steve Raby, the outgoing president of the Alberta Law Society. Other compensation funds, like Manitoba���s, are discretionary. ���We protect against legal service,��� says Allan Fineblit, chief executive officer of the Law Society of Manitoba, echoing the way many other law society compensation funds are managed. ���We never had to go to court to establish that because it is a discretionary fund. We have no contractual obligation with the party.��� In Nova Scotia, the Lawyers Fund for Client Compensation takes a slightly different tack. It is a fund of first resort, and claimants are not required to exhaust other remedies, which is not necessarily the case with other compensation funds. ���The approach we take is if a lawyer committed a defalcation and the victim is truly innocent, payment will be made,��� says Darrel Pink, executive director of the Nova Scotia Barrister���s Society. The liability and exposure law partners face when one of theirs misappropriates raises ���interesting legal issues,��� adds Pink ��� not just in Nova Scotia, though, but across the country. In Nova Scotia if a lawyer practising in a law firm steals money from a trust account, then signatures. Do not pre-sign cheques for the sake of expediency; that defeats the purpose of countersigning. ���Over the years, I have seen so many frauds where that control is circumvented,��� says Patterson. Purchase fidelity insurance coverage with adequate limits. This type of insurance provides coverage for employee theft. Though often included as part of the overall insurance package, limits typically are not sufficient. Depending on the size of the practice, coverage should range between $500,000 and $1 million. Be vigilant and on the lookout for red flags. Know your employees, and be alert to lifestyle changes, especially if an employee seems to be living beyond their means. Also watch for signs of substance abuse or depression. Be on guard for overly diligent employees who refuse to delegate, work long hours, never miss a day of work, and forgo vacations. ���The reason the employee never misses a day of work is because they have to be at their desk minding the fraud,��� points out Patterson. ����� LM

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