Tipping the hat: CI’s virtual roundtable on caps
May 18
Recent court decisions in Alberta and Nova Scotia are prompting discussions on the viability of minor injury regulation (MIR), aka: caps. We talked to industry leaders about caps and thresholds in provincial auto insurance legislation.
Irene Bianchi — vice-president, Claims & Corporate Services, RSA
Richard Halpern – Partner at Thomson Rogers LLP, chair of Ontario Bar Association (OBA)
John McKiggan — Founding partner of Arnold Pizzo McKiggan, Trial Lawyers, NS
Randy Bundus — vice-president, general counsel, Insurance Bureau of Canada (IBC)
By Karin Ots, senior vice president, Injury and Casualty Claims, Aviva Canada Inc.
Adjuster – anonymous
Due to their position in the industry, adjusters are directly and uniquely impacted by the current (and possible future) auto insurance system. As a result, many want to speak out on the issues surrounding the product, but are afraid of the ramifications. We offered an independent adjuster, located in Ontario, a chance to speak up without fear of identification and retribution. This is what we heard.
Question 1:
Briefly describe your position regarding the use of caps and whether or not caps (in all variations) help maintain price stability.
Anonymous Adjuster: The use of caps has become necessary given that our society has become highly litigious. Ultimately the person who pays is the insured. Caps are not, and should not, be the only solution to rising premiums. The use of caps is required at a moderate level in our current society [as] caps effect [auto insurance premiums] in three major ways: (1) Both the insurer and the claimant know the amount and can reach an agreement faster, reducing the time the claim is open, thus reducing the cost of the claim; (2) Caps can reduce the number of claims as people who might have otherwise submitted a claim for a minor injury, may decide not to if they know they will not get very much or may not get anything at all; (3) With a cap in place, the insurers can set more accurate reserves which prevent the high cost of over/under reserving.
Richard Halpern: Caps have not been justified on a sound economic basis and they impair rights. They introduce uncertainty for claimants and insurers. They drive up the costs in the system. For example, the Ontario verbal threshold stipulates that the determination of whether or not a cap will be met is not made until the end of a case—this increases transaction costs for the parties and costs for the judicial system.
A cap is a poor answer for cost issues facing the insurance industry. Limits on rights to claim for pain and suffering never have and never will result in product stability.
Despite claims by the insurance industry to the contrary, tort claims have never caused instability. Instability in rates is caused by a number of different factors, the most prominent of which is the insurance cycles that cause return on equity (ROE) to rise and fall. Third party liability claims do not cause the swings in ROE.
Tort limits, introduced by the legislature and later ruled unconstitutional, do create a degree of uncertainty, and therefore instability. That instability, however, is not caused by a problem with third party claims. Rather, the instability is due to the insurance industry advocating for a reform that is vulnerable to either attack constitutionally, or vulnerable to an interpretation by the courts that conflicts with industry expectations.
Irene Bianchi: The cap system assists insurers in offering policyholders more affordable premiums. Insurers can work with any legislation given the appropriate premium is in place. However, considering these economic times it is crucial that the legislators, with the support of insurers and the IBC, work towards affordable insurance. Since the inception of the cap legislation, insurers have been able to either maintain or decrease premiums. With the elimination of the cap premiums will inevitably increase.
[Caps maintain price stability as] it decreases treatment costs, legal fees, unnecessary treatment and assessment fees. Under the MIR, victims can have their injuries treated more promptly, which according to medical statistics, results in quicker recovery time and lower claim costs.
Randy Bundus: Caps were introduced because cash settlements for non-economic losses had grown significantly and produced the substantial rise in auto insurance premiums that occurred a few years ago. In all of the provinces where caps were introduced, premiums fell very significantly.
Today, auto collision victims in provinces that have a cap in place continue to enjoy generous accident benefits and the right to sue at-fault drivers for economic losses, regardless of the severity of their injuries. The caps relate only to compensation for non-tangible factors, such as the discomfort experienced during recovery, and only for minor injuries.
Ultimately, an auto insurance system must strike a balance between providing appropriate recovery for the few who make claims and affordable premiums for the many who drive. Before the caps existed, high pain and suffering awards for those with minor injuries were significantly driving up claims costs and triggering premium instability.
Karin Ots: While we are in the business of providing peace of mind to our customers, we also need to ensure that the auto insurance product is affordable, sustainable and stable. The institution and maintenance of minor injury caps helps keep bodily injury costs at manageable levels and insures we have a viable auto insurance product for years to come.
In fact, since the 2003 introduction of minor injury award caps in Nova Scotia and New Brunswick, Aviva's rates have dropped approximately 30% and 27% respectively in those provinces. And yet we have still been able to achieve our target return on equity.
John McKiggan: Although the minor injury cap legislation is unfair to anyone who has ever been injured in a car accident, the legislation unduly impacts young persons, seniors and the unemployed. Those cohorts are the ones most likely to be unemployed. Therefore, their claims are more likely to be limited to non-pecuniary damages for “pain and suffering” and therefore be capped.
The insurance industry has always claimed that, without limits on damage rewards, claims costs will increase out of control and, insurance premiums increase accordingly. This argument relies on two fallacies: (1) That damage rewards for personal injuries have been rising significantly; and (2) Without limits on damage rewards, insurance premiums will increase beyond control. However, after Newfoundland & Labrador introduced a modest deductible, insurance premiums remained stable, damage awards did not increase significantly. The free market effectively regulated insurance premiums, and insurance premiums in that province remain competitive and affordable and insurers remain profitable.
Question 2:
Two court decisions are having a big impact on the MIR debate. How will the opposing decisions in these Alberta and Nova Scotia MIR cases impact the industry?
Bundus: The legislation in each province is different, as are the definitions of minor injury. Also, the circumstances surrounding the individual cases are different. This can lead to different decisions in different provinces.
Ultimately, we expect the fundamental question, as to whether minor injury caps are compatible with the Charter of Rights and Freedoms, will be answered by the Supreme Court of Canada.
Bianchi: In Alberta, the associate chief justice presiding over the case ruled that the $4,000 cap on damages for pain and suffering for minor injuries resulting from motor vehicle collisions was unconstitutional because it treated those with minor injuries, specifically whiplash, different from those with other injuries. However, in Nova Scotia the court determined that the cap of $2,500 for minor injuries is constitutional and does not discriminate against accident victims.
Alberta, Nova Scotia, New Brunswick & PEI have different definitions of a “minor injury.” For example, Alberta’s definition of minor injury is directed to a more narrow class of whiplash and chronic pain sufferers whereas Nova Scotia has a much broader definition that encompasses largely temporary and less severe injuries. Each province will be viewed by the courts based on the definition that applies to their respective province.
Adjuster: Insurance is provincially governed and should be given the diverse cultures and social systems throughout the provinces. Nova Scotia and Alberta are currently at different places economically, socially, and politically. [The two decisions from these provinces are] a good example of the different values and views between these provinces [and the] split in court decisions could be due to the overall right wing view of Albertans placing values on individual needs, as opposed to the more left-leaning Nova Scotian system, which places values on spreading costs across the province and keeping insurance costs lower for everyone.
Ots: The approaches to both the courts and the provincial legislations are different, and in our legal system, these variables alone are enough to account for varied positions. We believe the Supreme Court of Nova Scotia got it right with their recent ruling and we are hopeful that the Alberta Court of Appeal will overturn the trial decision regarding minor injury award caps. It is likely that all of these issues will end up before the Supreme Court of Canada, where this can be dealt with collectively.
Halpern: Ultimately, the matter needs to be determined by the Supreme Court of Canada. Ideally, the court will consider not only the appeals from Alberta and Nova Scotia, but also whether the Ontario threshold and deductible are constitutional.
Question 3:
How will a no-cap system affect the industry?
Bianchi: In a no cap system there would be no change to the investigation of a claim nor more scrutiny given to injury claims. However, more money would be spent on legal fees, multiple medical assessments, treatment costs and more time will be wasted by victims waiting to receive proper treatment. With the elimination of the cap the 12-month minor injury limit would not exist.
Adjuster: The no-cap system will, at least initially, increase the cost of claims. The insurers will have to adjust their structure, staffing, policies, procedures and pricing. Initially more money will be spent on investigation (adjusters, medical reports, accident reconstruction, etc...). Should the claims volume exceed the ability of the staff to handle and administer the investigation, claims payouts will increase. They will increase because the insurers will be more inclined to pay for a claim with less need for medical assessments and legal fees, etc. as it may be more cost and time effective to close a file.
Bundus: Ultimately, a no-cap system would lead to higher claims costs and legal fees. We would return to the days of the early 2000s, when every sprain and strain injury potentially commanded a sizable cash payment for pain and suffering for the claimant, with a major portion of that payment going to the lawyer.
For drivers, there is a risk that this would result in the cost of auto insurance returning to the high levels experienced a few years ago.
Ots: Bodily injury claims costs, including legal fees, will increase. This will force us, as an industry, to take a look at the expanded accident benefits coverage we provide. The industry cannot continue to support both increasing bodily injury claims costs and expanded accident benefits without significant price increases, which we do not think are necessary.
Question 4:
Are settlement conferences or the administration of individual settlement agreements options to deal with claims?
McKiggan: Mandatory settlement conferences are rarely effective and simply introduce an added layer of bureaucracy and administrative costs.
Adjuster: Settlement conferences really do one thing: They get both sides together to talk about their differences and then determine if they can agree. It forces face-to-face contact to get the job done promptly. We believe a no-cap system will result in a huge increase in claims thus one of the most cost effective and time efficient ways to deal with these will be through settlement conferences or in person meetings where settlement can be reached.
Bianchi: Both of these would be plausible solutions. We always look for ways to resolve claims expeditiously and have used industry-sponsored settlement conferences and our own conferences for years with great success.
Bundus: Settlement conferences are already a very common event in bodily injury claims. If the caps were eliminated, there would likely be more settlement conferences for minor injuries and the final cost would be a lot higher.
Legal Challenges
Question 1:
What happens to a claim settled at or below an MIR if these caps are removed by the courts?
McKiggan: The Supreme Court of Canada has indicated that releases granted pursuant to unconstitutional legislation are unenforceable. At the very least, I think there is a strong argument to be made that claimants who were not represented by counsel who settled their claim at or below the minor injury cap would not be bound by any release if the legislation is ultimately found unconstitutional.
Bianchi: Unless the government deems otherwise, I believe that when a release is signed, the case would not be subject to further claims. A final release is a final release.
Adjuster: A full and final release will be upheld. Reverting to previous or future laws is not a door the legal system will want to open. It would cause a large increase in the amount of cases in the court system, which is already a large problem.
Bundus: The cost of claims made on policies in force would immediately rise if caps were legally removed. It is also highly likely that most insurers would seek rate increases from the provincial rate boards to enable them to pay higher claims—these new rates would be reflected in a customer’s premium when the policy renewed. Insurers will not have received sufficient premiums on the policies in force to cover the higher costs associated with the removal of the cap.
Ots: We believe a signed release is a final settlement. Our current release contains references to legislative challenges and states that settlements are final. Most plaintiff lawyers will advise their clients of any impending challenges to legislation.
The removal of a cap will add a variable into our pricing model, likely resulting in an increase in premiums. While the wording of the policy doesn’t immediately change, cap removal would create an unfunded liability – which is unsustainable for our industry.
Question 2:
Even if MIRs are ruled to uphold the constitutional rights of claimants are there other potential legal attacks?
Halpern: If liability limiting provisions are considered constitutional by our courts, but economic evidence does not support the underlying rationale the insurance industry argued for the changes, I think they should be vulnerable to attack.
The people who really have a vested interest in this are the consumers purchasing auto insurance and the accident victims required to access protection from their insurance. Any attack, therefore, ought to be in public, with the media and the legislature.
The fact is, at least in Ontario, that the economic data has never justified the reforms advocated by the insurance industry. The limitations have undoubtedly served to increased industry profitability, but there was always a better way to do that. There should be a very heavy onus on any one advocating for the reduction of a person’s access to justice and compensation for losses caused by others. It is insufficient simply to trample these rights by offering cost cutting measures. Those who advocate for liability limiting rules ought to bear a heavy onus to show cause why these important rights are to be impaired. In doing so, they should be required to show that the rights targeted are in fact the source of the problem and that there is no other reasonable alternative to achieve the desired end. Even then, there ought to be a presumption against any provision that limits access to justice.
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