Changing Directions On Claims Costs In Alberta

Whether or not the Supreme Court of Canada will hear the case of the Alberta cap or not remains to be seen — but the plaintiffs in the case have sought leave to appeal.

Once again insurance companies are left to determine a direction to take while handling minor injury claims, until a final answer surrounding the cap is received.

The Minor Injury Regulation (MIR) imposes a $4,000 limit on non-pecuniary damages with respect to minor injuries — a sprain, a strain, or a WAD injury caused by an accident — which do not result in serious impairment. The impetus of the cap was to help curb rising insurance premiums, and reduce the number of uninsured drivers in Alberta. The constitutionality of the MIR was first called into question when two plaintiffs submitted that their rights under s. 7 and s. 15(1) of the Canadian Charter of Rights and Freedoms had been violated as a result of the MIR.

This past June, the Alberta Court of Appeal struck down the ruling from the lower court, determining the cap on claims for minor auto injuries does not infringe on the Canadian Charter of Rights and Freedoms.

The plaintiffs in the Alberta Court of Appeal case, Peari Morrow and Brea Pederson, — who were injured in two separate automobile accidents — have sought leave to appeal the decision of the Alberta Court of Appeal to the Supreme Court of Canada.

And insurance companies once again brace themselves for the unknown. If the Supreme Court agrees to hear the case, how much longer will claims be in a state of flux? What will happen to claims costs if the Supreme Court ultimately decides the cap is, in fact, unconstitutional?

“One of the things that I think all insurance companies look at is they try to have a balance,” Murray Lennie, regional lines manager, Western region, The Economical Insurance Group, says. “When new laws or legislation comes in, it throws that balance out. It’s very hard to predict on a new set of rules where you’re going to end up. Justice Wittmann’s decision was one way, then the Court of Appeal is another way and now there’s been an application for leave to have this heard by the Supreme Court of Canada. So you are looking at a fluctuation in the rules that you are playing with, and that, for insurance companies, is a difficult obstacle to overcome. It’s not impossible, it’s just that everybody throws a wrench into the works and the machinery has to change direction, so to speak.”

Court of Queen’s Bench

Morrow suffered soft tissue injuries to her neck and upper back, diagnosed as a grade two whiplash associated disorder (WAD II), as a result of an auto accident in October 2004. She was still suffering from pain, which was affecting her life at the time of the trial in April and May 2007.

Pedersen suffered soft tissue injuries to her neck, shoulders, back and wrists from an auto accident in March 2005. All her pain resolved within a month except for pain in her wrist, which was still present at the time of the trial and affected her daily life and household chores.

The trial judge, Chief Justice Neil Wittmann, found that if not for the cap, the respondents would have been entitled to non-pecuniary damages in excess of $4,000. He assessed general damages for pain and suffering of $20,000 for Morrow and $15,000 for Pedersen.

The plaintiffs had challenged both section 7– the right to life, liberty or security — and section 15 — the right to equal protection and benefit of the law without discrimination based on disability — of the Charter.

When looking at whether the cap, which restricts the right to sue a tortfeasor for the recovery of damages for pain and suffering to $4,000, was in violation of s. 7 of the Charter, Wittmann determined that it does not violate s. 7 in this case.

When it came to section 15, Wittmann noted minor injury victims are subject to stereotyping and prejudice and are often viewed as malingerers who exaggerate their injuries. Having assessed the cap against the four contextual factors set out in Law, he determined a reasonable and dispassionate person would conclude the MIR is demeaning to the dignity of that group and would make them feel less worthy as human beings.

On Feb. 8, 2008, Wittmann ruled to eliminate the cap, stating that it “constitutes an unjustified breach of the s. 15(1) equality rights of minor injury victims based on the enumerated ground of disability.” He found the only appropriate remedy for the case was the nullification of the MIR.

Court of Appeal

Then it was off to the Court of Appeal. This time the outcome was different. Justice Patricia Rowbotham allowed the appeal, noting the trial judge failed to assess the entire legislative scheme when analyzing impugned legislation under section 15 — he had focused solely on the MIR. She noted the MIR was enacted as part of of a scheme of legislation which included protocols for diagnosing and treating minor injuries, increases in section B medical benefits, and caps on automobile insurance premiums.

Rowbotham concluded by focusing solely on the MIR it resulted in a flawed assessment of the Law’s contextual factors. “Although the trial judge did not err in finding that the MIR makes a distinction between minor injury claimants and those suffering other injuries from motor vehicle accidents, and that this distinction was on an enumerated ground (disability), I conclude that he erred in finding this distinction was discriminatory.”

She went on to note he erred by concluding the insurance reforms as a whole perpetuate the stereotype. In her view he failed to analyse the insurance reforms as a whole, including the Diagnostic and Treatment Protocols Regulation (DTPR), which recognizes that the injuries suffered by MIR claims are real.

When analyzing whether the claimants needs and circumstances are met by the legislation, the trial judge failed to assess the medical benefits provided to minor injury claimants in exchange for their reduced damages for pain and suffering, she determined.

“I conclude that in applying the four contextual factors from Law, a reasonable person in the position of the minor injury claimants would not conclude that the distinction drawn by the cap on non-pecuniary damages is discriminatory,” she wrote. She ruled that when the MIR is considered within the entire scheme of the insurance reforms, it does not infringe on section 7 or 15 of the Charter and the legislation, as a whole, responds to the needs and circumstances of the injured.

Supreme Court of Canada

Currently, the plaintiffs, the appellants, claimants, insurance companies, and the industry as a whole are waiting to learn whether the Supreme Court of Canada will agree to hear the appeal. Fred Kozak, partner with Reynolds Mirth Richards & Farmer LLP, and lawyer for the plaintiffs, suspects whether leave is granted will be known late this year.

“I hope the SCC will agree to hear the appeal and if they do that they will strike down the legislation on the basis that it treats people unequally, that it contravenes section 15 of the charter,” Kozak says. “Section 15 guarantees equality and so (the legislation) breaches section 15. It’s essentially an assertion that the legislation discriminates on the basis of a disability.”

Effectively, the plaintiffs are looking for fair compensation for an injury versus a cap of $4000 no matter the minor injury. Kozak says that, “we think that every innocent injured victim should have the right to have a court determine an appropriate amount of general damages.”

The Insurance Bureau of Canada, however, opposes the application based on the fact the proposed appeal does not meet the test of “public importance” that governs applications for leave to appeal to the Supreme Court of Canada. “The Court of Appeal was correct in its approach and its conclusion regarding the s. 15(1) challenge,” the IBC wrote in its response to the SCC. “The applicants have not raised any
equality issues that requires resolution by this Court.”

The applicants noted in their request for appeal that, “the Alberta Court of Appeal’s judgment in Morrow v. Zhang reflects a widespread and fundamental confusion in applying this Honourable Court’s jurisprudence on the right to equality guaranteed by section 15(1) of the Canadian Charter of Rights and Freedoms.” The request for leave to appeal goes on to note the judgment “first, allows a government to pass legislation which perpetuates prejudice against a group of victims by expanding the scope of the inquiry to an ill-defined legislative “scheme”; second, interprets this Court’s recent equality jurisprudence as directing an almost-exclusive focus on formal equality in the section 15(1) analysis; and third, finds that there is virtually no role for section 1 analysis in an equality case in light of the jurisprudence from this Honourable Court.”

In its response, the IBC noted that, the scope of the legislative scheme to be considered when dealing with a s. 15 challenge is a fact-specific matter that varies with the particular regulatory scheme in issue and its legislative history. “Identifying the relevant portions of surrounding or related legislation for purposes of a contextual analysis is not particularly complex or novel exercise. Under the modern approach to statutory interpretation, any statutory provision must be interpreted in context,” the IBC wrote.

The IBC goes on to note that looking at the cap alone would be misleading. The MIR itself recognizes that soft tissue injuries may cause serious impairment and non-pecuniary damages awards for serious soft injuries are not capped. In addition, the DTPR establishes medical protocols to alleviate the pain and suffering caused by all soft tissue injuries.

“A reasonable claimant would thus conclude that Alberta was trying to advance recognition and treatment of soft tissue injuries as real injuries, not to demean them,” the IBC wrote.

The IBC further notes, “The applicants’ suggestion that the second contextual factor from Law is not relevant, is not consistent with this Court’s jurisprudence. Indeed, as the Court of Appeal noted, in reviewing this Court’s s. 15 decisions, Professor Hogg found that ‘the correspondence factor seems to have become key.’ In Kapp, this Court recently reiterated the importance of all four of the Law contextual factors.”

Furthermore, “given that the Court of Appeal found that the impugned legislation does not infringe s. 15(1), this issue is irrelevant in the context of the case.”

Within the insurance world

While the issue remains in the hands of the court system, insurance companies continue to try and keep up with the changing direction of the cap — on, off, on — and work to ensure that they have adequately reserved no matter the outcome.

“If the cap is ultimately determined to be unconstitutional, assuming a couple of things: the Supreme Court of Canada hears the case and finds that it is not constitutional, then insurers will have had their premiums approved at a level that assumes the cost savings of the cap are in place,” Randy Bundus, vice president, general counsel and corporate secretary of IBC, says. “If those cost savings of the cap are no longer in place because the cap is not valid, then the premiums will have been inadequate for the costs of the product. Consequently, there is the likelihood of unfounded liability as insurers would not have collected sufficient premium to cover the ultimate cost that the system will bear to them — and there are various estimates as to what that amount is.”

The biggest issue is around pricing and what the cost of the product is, Karin Ots, senior vice president of injury and casualty claims at Aviva Canada, says. “These policies were sold many many years ago at a price that’s already been realized and, I think as a corporation (and likely the industry as well), that’s the bigger struggle that we are having. What’s the ultimate cost of all of this going to be on those claims and those policies that were sold and then how do we, at some point, make up a deficiency?”

Alberta primary insurers are looking at a cumulative, annual capital cost of $330 million each year going forward without a final court authority on the matter, Barbara Sulzenko-Laurie, vice president of policy at IBC, said during the 2009 Swiss Re Breakfast. The figure assumes no premium adjustments have been made to adjust for the uncertainty of the issue.

The annual capital loss going forward is in addition to the estimated $425 million in unrecoverable costs from claims open at the time of the February 2008 Alberta court decision to strike down the minor injury cap. Looking at auto insurance liability in Alberta, the impact of the cap challenge has resulted in a loss ratio 25 per cent higher in 2008 than in 2007, Sulzenko-Laurie noted. The loss ratio went from just over 50 per cent in 2007 to slightly more than 76 per cent in 2008.

Cap on cap off

Between Wittmann’s ruling that the cap was unconstitutional and the Court of Appeal’s overturning of that decision, the way in which insurance companies handled minor injury claims varied by company — some continued with business as usual as though the cap was still in place, others reverted back to where things were before the implementation of the claim, while others fell somewhere in between.

“When we get into a position of negotiating a settlement of a claim, most of our clients have tailored their final releases to include language around the fact that there is a potential further appeal of the Alberta Court of Appeal decision,” Walter Waugh, vice president of operations for Western Canada with Crawford & Company (Canada) Inc., says. “And if the Supreme Court of Canada ultimately does make a decision and if it’s one contrary to the Alberta Court of Appeal, this settlement is still valid and further claims are not going to be considered.”

Peace Hills Insurance went as far as to implement a two-tiered system where clients received notification of what the claim is worth under the cap and what the claim would be worth if there wasn’t a cap — a claim might only be worth $3,500 cap or no cap, or it could be worth $5,500 without a cap. The way the system worked was that claimants would receive what the claim was worth under the cap immediately and then if and when the Supreme Court of Canada makes its ultimate ruling, if it is determined that the cap is unconstitutional, then claimants would receive the remainder of the value of their claim, plus interest, when that decision was made.

Determining exposure

This way, a claim is effectively closed and the claimant has been paid what Peace Hills determined was accurate under the cap. Furthermore, the company knows its exposure — ie. an additional $1,500 — if the cap is determined to be unconstitutional. If the cap was ruled to be constitutional, the claimant receives notice the file has been paid in full, and the file is closed.

“We have continued to reserve our files as if there was no cap,” Diane Brickner, president and CEO of Peace Hills Insurance, says, noting that the company implemented the two-tiered system after Wittmann’s decision. “We haven’t changed our reserving practices since the Appeal Court. As far as we are concerned, when we look at our claims, we feel that we are more than adequately reserved for.”

At Co-operators General Insurance Company, after the cap decision was released at the trial level, the company increased its minimum case reserve for Alberta injury claims. “This reserve was still not adequate to represent the true exposure of these claims,” Brian Kirkconnell, national claims director for Co-operators General Insurance Company, says. “However, we also included a provision in our Incurred But Not Reported (IBNR) for an amount that represented the risk that the Court of Appeal would uphold the decision.” The key is to not make decisions in isolation, Lennie says. Alberta is not the f
irst province to have “rules and regulations hoisted upon us,” so there is experience within companies on how to assess where future reserving settlements on claims should be. “Sometimes you’re right and sometimes you’re wrong,” he says. “The problem is the continual fluctuation and do you jump with both feet going one direction and then have it shift like we did here with the Appeal? A lot of companies have had to change their reserving which has been good or bad depending on how you look at it.”

Most companies have set something aside in their IBNR to cover the contin- gency of losing, Ots says. “But again, until this ultimately plays out, who knows what the cost is going to be,” she says.

Stagnant Claims

Because there is a significant inventory of outstanding claims that are sitting in limbo, when the final ruling comes down, they are going to hit the settlement track all at once, Bob Doiron, vice president of claims at Peace Hills Insurance, says. “It’s really going to be akin to like a property catastrophe loss. This volume of stuff is going to hit the pipe and it’s going to be a mad scramble to try and get these things settled,” he says. For Peace Hills, having a two-tiered system in place will help to alleviate some of this “big rush” after the final ruling comes down.

Marja Welton, Alberta regional manager for Kernaghan Adjusters, says she’s noticed there are a number of lawyers sitting on files waiting for the Supreme Court decision. “It is our understanding that there is a stockpile of claims,” she says. “The insurers have told us that they are under the impression that some lawyers have many files sitting in a drawer waiting for the final decision. Some claimants are simply ignoring settlement attempts hoping that the cap will be abolished before their limitation period.”

Martin Moran, assistant vice president of desktop solutions at Cunningham Lindsey Canada, notes there were also delays when the case was in the lower court. “We had files in our office that were not proceeding,” Moran, who was recently the district manager of the Edmonton office, says. “Things were not moving forward and it was fairly clear that they were claims that would have fallen under the minor injury regulation and just they were not settling until such time that the decisions came down.”

Shauna Dobson, senior adjuster in Edmonton with McLarens Canada agreed that some claimants would hold on, not wanting to settle until the court decision came down. There were some claimants who were willing to accept that the cap was the cap and settle for $4,000, while others were well aware the cap was being appealed and were wanting to wait for a court decision. She would follow up every once in a while with the claimants who would say they were going to keep waiting because they’d heard a decision would come through soon.

The volume of claims that an adjuster needs to carry has increased because they used to be able to turn files over a lot quicker, Doiron says. There is a steadily increasing volume of claims that are, for all intents and purposes, sitting dormant.

There are certainly more open claims, Ots says, that are effectively in a holding pattern. “They are open on the desk, but you do worry about once there is a final resolution, you’ve got a fairly big body of claims that will start moving along and whether or not you are adequately staffed for that,” she says.

Facing uncertainty

The uncertainty of it all is the biggest factor for most companies. Wittmann’s decision sent Peace Hills into a “tailspin,” because the company was about to close its year-end when the auditors came back and said the year-end needed to be restated to include what it will cost in claims. “We had to reopen our year-end results and we had to change them,” Brickner says. “We had to put in an increased IBNR, etc. That was disturbing; that was upsetting.”

Doiron adds the company had to go back and reevaluate all outstanding claims that appeared to be affected by the cap, which involved “some objective evaluation on our part.” The claims department might feel that the claim falls under the cap, but the plaintiff’s counsel might think otherwise, he says. Then all the cap files needed to be re-reserved as though the cap did not exist, which affected the company’s reserves, he says.

“For our business, the insurance industry, consistency and certainty are so important,” Brickner says.

Ots points out that, “the crazy thing of all of this, all of these challenges and all of this legal rigmarole — it doesn’t get people better. None of this actually helps return somebody to their pre-accident status.”