Auto Insurers, Watch Out for That “Strike Suit”

The Canadian legal system only gained experience with class legal actions over the past decade. In theory, a class action is a good thing: a mechanism for processing and case managing complex litigation involving multiple plaintiffs, resulting in benefits and cost saving for plaintiffs and defendants alike.

However, class action proceedings in the U.S. have become a “growth industry” for enterprising lawyers. Class actions are sexy. They attract enormous media coverage and potentially billion dollar payouts in cases involving defective tires, tobacco litigation, breast implants, tainted blood, vanishing insurance premiums and security fraud. An alarming American trend has been what the courts have characterized as “strike suits”. These are class actions initiated without merit in an attempt to extort a sizeable settlement out of a corporate defendant.

Previously, no common law jurisdiction allowed plaintiffs to proceed by way of class action. Successive provincial governments, suspecting that they might well end up the potential target of class actions, delayed the passage of these bills. Quebec initiated its class action legislation in 1978, but Ontario and British Columbia did not follow until the mid-1990s.

The “Ontario Class Proceedings Act” has become the most frequently considered of the three statutes, and in future insurance related class actions, Ontario is likely to be the testing ground. In the U.S., the “Federal Rules of Civil Procedure” have established that for a class to be certified, the questions of law or fact common to the members of the class must predominate over any questions affecting individual members. A class action must be superior to other available methods for the fair and efficient adjudication of the controversy in order to be certified.

The life insurance industry has had to face numerous class actions seeking certification on behalf of purchasers of “premium off-set” whole-life insurance policies. In these “vanishing premium” cases, the plaintiffs have typically alleged negligent misrepresentation by the insurer or its agents. Motions for certification have, however, been met with varying degrees of success.

New auto class actions

The experience of the life insurance industry in policy misrepresentation cases is likely to be of considerable interest to property casualty insurers in the next few years. Following the decision of the Ontario Court of Appeal in “McNaughton Automotive Ltd. v. Co-operators General Insurance Company” (2001 O.J. No. 2312 (Ont. C.A.)), the property casualty industry faces one of the largest potential class actions in its history.

The appeal in this case arose out of an intended class action proceeding brought on behalf of automobile insurance policyholders. While the respondent in this instance was the Co-operators General Insurance Company, the principles at stake are universally applicable to any automobile insurer.

The circumstances of the loss were simple, and involved very minor amounts. The insured had a commercial fleet policy issued by the Co-operators in April of 1998. The policy provided for a deductible of $1,000 to be applied to all claims for loss or damage, except for claims resulting from fire, lightening or theft of the entire vehicle. In March of 1999, one of the fleet vehicles was involved in a collision and damaged beyond repair.

Initially, the insured and the Co-operator’s adjuster could not agree on value of the vehicle. The adjuster valued the vehicle at $7,150, but the insured was dissatisfied with this amount. The claim settled on the basis of a total loss of $8,100 less the $1,000 deductible, providing a total payout of $7,100. The Co-operators then took the damaged vehicle and sold it for $1,900. After paying expenses for towing, storage and auction fees, they recovered $1,419.

Still dissatisfied, the insured commenced a proceeding by way of application proposing to initiate a class action on behalf of all persons who owned a motor vehicle insured by the Co-operators in Ontario, Alberta, New Brunswick, Newfoundland, Nova Scotia or Prince Edward Island. While the decision of an Ontario Court is not binding on other jurisdictions, the statutory conditions are identical for automobile policies issued in these provinces.

The application purported to attempt to determine whether the Co-operators had the right to collect the salvage for the motor vehicle in an instance where they had insisted on the full deductible after a total loss. As in the life insurance cases, the notice of application alleged that the respondent was in breach of its duty of good faith in failing to reveal the terms of the statutory condition and in failing to pay the class members the amounts recovered for the salvage of their vehicles. The “Statutory Condition” considered by the Court of Appeal was “Condition 6 (7)”. This states, “there shall be no abandonment of the automobile to the insurer without the insured’s consent. If the insurer exercises the option to replace the automobile, or pays the actual cash value of the automobile, the salvage, if any, shall vest in the insurer.”

Other parts of “Condition 6” limit the liability of the insurer to the actual cash vehicle of the automobile at the time any loss or damage occurs, and gives the insurer the option of repairing, rebuilding or replacing of the damaged vehicle, instead of paying its actual cash value. The Motions Court judge agreed with the insurer that the deductible provision of the policy should apply where the insurer elected to take ownership of the salvage. He noted that if the insured kept the damaged vehicle, the insurer would be credited with its salvage value, and the deductible would apply. To achieve the same financial result, he reasoned that the deductible should also apply where the insurer elected to take the salvage.

Setting the stage

The approach taken by the Motions Court judge rested on the assumption that the policy had to be read as a whole, with no priority given to the “Statutory Conditions”. This would have the result that the deductible would be applied consistently and accorded with widespread insurance practice for more than 30 years.

The Court of Appeal noted that the real issue was whether in law the terms of the “Statutory Condition” must be given priority, or whether they can be qualified by other policy provisions. The Court of Appeal ruled that the legislature had answered that question with section 234 (2) of the Insurance Act, which stipulates that “no variation or omission of or addition to a statutory condition is binding on the insured”.

The Court of Appeal reasoned that the legislature intended that the “Statutory Conditions” should prevail over other policy terms and conditions. It was unable to accept the proposition that the phrase “actual cash value” in “Statutory Condition 6 (7)” meant “actual cash value minus any deductible”.

Because the Motion Court judge had ruled against the insured with regard to the question of the policy interpretation, it did not deal with the question of whether or not the applicant’s claim should be certified as a class proceeding pursuant to the “Class Proceedings Act, 1992”. The Court of Appeal held that as an appellant court it was not able to carry out the function of dealing with certification as if it were a court of first instance. They noted that the “Class Proceedings Act, section 34 (1)” required that all pre-trial motions were to be heard by the same judge and class managed.

It would therefore appear that the Court of Appeal had entertained the possibility that the applicant would be successful, or at least have an argument to make with regard to the class certification. It is safe to assume therefore that within the next year, most insurers carrying on automobile underwriting in Ontario will face a class action or an attempt at a class action brought by this potential plaintiff’s counsel eager to capitalize on a windfall. For some automobile insurers, particularly direct writers, if classes were successfully certified, the potential payout to the class in addition to lawyers fees,
could amount to millions of dollars.

The insurance industry should take some relief from the fact that the test for class certification in these circumstances is quite stringent. “Section 5 (1) (c) of the Class Proceedings Act” requires there to be “a common issue of fact or laws” as a prerequisite to certification. It is anticipated that in such cases the plaintiffs will assert that common issue arises from the allegations of negligent misrepresentation by the automobile insurers and their adjusters in the adjustment of total loss claims where the salvage is retained.

This may be one of the exceptional circumstances where the court could find that there was a single representation made to all class members if it can be proven that the insurance industry universally applied the deductible in total loss adjustments where the salvage was retained.

In cases of class actions against insurers, the causes of action are asserted by all class members, but the fact of a common cause of action does not in itself give rise to a common issue. While the theories of liability can be phrased commonly, the actual determination of liability for each class member can only be made upon an examination of the unique circumstances with respect to each class member’s policy and the circumstances of any claims made against it.

Strike suits

In considering “section 5 (1) (c) of the Class Proceedings Act”, the courts will have to consider whether the three policy objectives underlining the “Class Protections Act” would be met through certification. These objectives are: access to justice for claimants, judicial economy, and the modification of wrongful behavior. As well, the court must consider whether certification would be a fair, efficient and manageable way of advancing the claim.

There are very convincing arguments against certification. In the case of the proposed class actions against automobile insurers there would be an unknown number of class members, many of whom are unidentifiable. In addition, the claims would have involved negotiations with thousands of different adjusters and for different reasons. The class members may well request different remedies depending upon the status of their policies and damage claims would require individual assessment.

While these factors are not bar to certification, the cumulative effect suggests that the Courts will apply caution in considering certification. At some point, the individual issues can be overwhelming, and a certified class proceeding becomes completely unmanageable. While class actions in a circumstance such as this may momentarily appear to have the short term advantage of streamlining the legal process and minimizing defense costs, these claims are the first such “strike suits” to be brought against the property casualty industry to date. For that reason alone, they must be met resolutely.