Litigation Litmus Test

Insurance contract wordings exist on paper, but policies really only come alive in the world of specific claims circumstances and language interpretations by the courts. Several recent decisions by courts of various levels throughout the country have given the industry pause to consider the wordings, terms and pricing of insurance contracts relative to potentially expanded coverage.

DECISIONS PAST

If we look at the Supreme Court of Canada’s recent decisions, a generally well-reasoned, “common-sense” approach to decisions has affirmed intended policy language and circumscribed generous lower court interpretations. The high court’s approach has restored certainty around the interpretation of the policy. For example, the May 2006 ruling of the Supreme Court in Childs v. Desormeaux held that social hosts do not owe a duty of care to those who suffer physical injury as a result of the impaired driving of one of their guests. The Supreme Court made important distinctions between commercial and social hosts, and found the risk of impaired driving by a guest is not reasonably foreseeable. The decision was a welcome outcome for insurers and homeowners, whose liability exposure was thus reduced.

Another significant Supreme Court decision was Lee v. Dawson. This British Columbia case attracted attention because of its implications for damage awards for bodily injury claims. In March 1997, the plaintiff was severely injured in a car accident and sued for damages. The claim was tried by a jury, which awarded Cdn$2 million in general damages for pain and suffering and loss of amenities. However, the Supreme Court in 1978 established an upper limit on general damages for bodily injury claims in a series of three cases, commonly referred to as the “trilogy.” The upper limit at that time was set at Cdn$100,000. [This figure has increased each year to account for inflation; it now stands at approximately Cdn$315,000.]

In keeping with the precedent established in the trilogy, the trial judge reduced the jury award to the lower amount. The plaintiff appealed to restore the original jury award of $2 million, arguing that the upper limit was contrary to the principles outlined in the Charter of Rights and Freedoms. In March 2006, the B.C. Court of Appeal released its judgment, dismissing the appeal and noting only the Supreme Court of Canada could set aside the trilogy. The Supreme Court denied leave to appeal. Its decision affirms the trilogy approach to upper limits and provides insurance companies with a sense of stability and predictability concerning general damages for bodily injury claims.

DECISIONS FUTURE

The insurance industry is eager to hear the Supreme Court of Canada decision on two important cases from the Ontario Court of Appeal in 2005 – Herbison v. Lumbermens Mutual Casualty Co. and Vytlingam v. The Citadel General Assurance Company. Both test how far courts will go in interpreting section 239 (1)(a) of the Ontario Insurance Act, which states that the auto insurance policy will provide coverage for loss, injury or damage “arising directly or indirectly from the use or operation of an automobile.” Although the circumstances were different in each case (one a hunting accident and the other a serious injury resulting from a boulder dropped from a highway overpass), the appeal court held by a two-to-one majority that incidents not directly involving vehicles do still trigger coverage under an auto insurance policy.

Given the ubiquity of automobiles in our society, these court rulings vastly extend liability for indirect claims. In effect, they make the auto insurance policy comparable to a commercial general liability (CGL) policy. The Supreme Court judgment on the two cases, expected in the first half of 2007, will have a significant impact on legislated wordings, insurance underwriting and pricing of the auto insurance product. Insurers hope a common-sense application of the policy language will prevail.

ON THE HORIZON: PROVINCIAL DECISIONS

Beyond Canada’s highest court, other legal cases in various provinces are of potential concern to insurers. One of the most notable is the challenge in three provinces – Alberta, New Brunswick and Nova Scotia – to auto insurance reforms that set out definitions for “minor injury.”

Amendments to Alberta’s auto insurance legislation in 2004 included a definition of minor injuries, a cap of $4,000 on general damages and a treatment protocol for these injuries. A number of plaintiffs are currently seeking a declaration that the minor injury definition and treatment protocols violate the equality guarantees set out in section 15 of the Charter of Rights and Freedoms. In Nova Scotia, Press Mason law firm is currently lead counsel for three parties challenging provincial legislation on the grounds that it is discriminatory and unconstitutional. An ultra vires motion was filed in 2006 and is expected to be heard in the near future. Nova Scotia’s Bill 1, enacted in 2003, placed a $2,500 cap on general damages for minor injuries. A similar legal challenge is underway in New Brunswick, which also has a cap on minor injuries.

If the legal challenges to auto insurance reforms are successful, they could set back many of the positive gains provincial governments have made in controlling costs and ensuring affordability for consumers. The results would not only undermine past amendments but could send a “chill” to future legislative efforts to reform auto insurance.

In Ontario, a recent case on territorial limits has raised some eyebrows in the insurance industry. In the case of Sutherland v. Pilot, an Ontario resident was rendered a quadriplegic from a car accident in Jamaica. The accident was outside the territorial limits of the Ontario auto insurance policy, but a Superior Court judge ruled the optional family protection endorsement, OPCF 44R, did trigger coverage. The language limiting coverage within North America exists within the auto policy, but not in the endorsement.

Ontario Superior Court Justice Margaret Eberhard ruled “the absence of clear and express language as to the extent and scope of the limitation as it impacts upon a claim in circumstances of underinsurance addressed by OPCF 44R has left the question in a state of ambiguity. As such, the issue is to be resolved in favour of the insured.” Pilot has appealed to the Ontario Court of Appeal, which is expected to hear the case in March 2007. There is confidence in the legal argument that the endorsement is intended to be read within the context of the insurance policy.

Another Ontario auto insurance case involving punitive damages has caught the attention of the insurance industry. The Ontario Court of Appeal ruled in November 2006 that Andrew Grigg, an ex-receiver with the Hamilton Tiger-Cats, should pay $20,000 in punitive damages for the role he played in a 1996 car accident that left a university student with serious injuries.

At the appeal court level, the issue was whether punitive damages can be awarded in an impaired driving case. In a 2-1 majority decision, the court ruled ‘yes.’ But, in a dissenting opinion, Ontario Court of Appeal Justice Robert Blair argued it was not the right way to deter and punish drinking and driving. “If punitive damages can be awarded on the facts of this case, they can be awarded in a great number of others where alcohol-induced motor vehicle accidents lead to death or injury – and, they will be,” Blair wrote.

At the time of the decision, it was not clear who would be paying the award in the Grigg case. Justice Blair expressed his opinion that insurers may be on the hook for future punitive damage claims involving drinking and driving. This is a potential Pandora’s box of liability for auto insurers.

PREDICTABILITY AND CLAIMS

Insurance companies deal with risk through sound underwriting that ensures rates are commensurate with claims. Using the best actuarial data possible, insurers set policy terms (where they can)
and collect premiums to pay for losses based on known liabilities The uncertainty in this equation involves policy wording interpretation by the courts. In the case of auto insurance, regulators interpret the wording, not insurers. If the known becomes the unknown, this delicate underwriting balance can be upset. This kind of unpredictability ultimately results in increased costs to the consumer.

A common-sense interpretation of policy language is the best chance for an affordable, stable insurance system.