A COMMENTARY ON THE AUTO INSURANCE SYSTEM IN B.C.

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1 A COMMENTARY ON THE AUTO INSURANCE SYSTEM IN B.C. (The head of Clark Wilson LLP s Insurance Practice Group, Nigel Kent, was asked to be the keynote speaker at the Ontario Auto Insurance Conference hosted by Insight Information Co. in Toronto on December 11, This is a copy of his address.) Introduction In British Columbia, auto insurance is provided by a monopoly, the Insurance Corporation of B.C. (ICBC), a crown corporation first established thirty years ago. It is the largest auto insurer in Canada, with annual premiums of $2.5 million. ICBC has a network of some 900 Autoplan brokers located throughout the province, who deliver completely automated, one-stop shopping for licensing and insuring motor vehicles in the province. It has 5,000 to 6,000 employees, including approximately 75 in-house lawyers, with claims centres in ICBC-owned buildings all over the province. It is a major player, not just in the insurance field, but in the B.C. business environment generally. ICBC provides universal, mandatory minimum auto insurance coverages including: third party liability coverage up to $200,000; no-fault medical and disability benefits (very generous by the standards of some provinces such as Alberta); and underinsured motorist cover (UMP) for $1 million. Over and above the mandatory minimum coverage which must be purchased by ICBC, consumers can purchase so-called optional coverages in respect of which private insurers can compete with ICBC in the marketplace and which include: third party liability coverage in excess of $200,000; and comprehensive/collision coverage ( own damage ) for the insured vehicle. Although private insurers are allowed to compete, ICBC nevertheless occupies 85-90% of this optional market.

2 p. 2 Monopoly Issues: Things monopolies can do Monopolies Actively Discourage Competition Even though it occupies the dominant position in the marketplace for optional coverages, ICBC nevertheless discourages competition. While very few autoplan brokers will bring to the attention of their clients the existence of alternatives from private insurers, ICBC is not averse to anti-competitive conduct. And, of course, monopolies by their very nature wield a lot of power. Assume one of ICBC s competitors makes agreements with repair shops to refer its collision work in exchange for free courtesy cars for their insureds. How might a monopoly address that? Well, perhaps it could go to those same shops and suggest that if they want to continue any relationship with ICBC, they had better sign a modified authorized repair centre agreement. And perhaps that modification might include a no preference clause respecting ICBC s competition, effectively requiring the repair shop to charge the competition for courtesy cars. Not very fair, you might think, but that s what monopolies can do (see Canadian Direct Insurance v. ICBC, 1998, B.C. Supreme Court). Or perhaps you could go to your brokers and advise them that, if they sell private optional insurance, their ICBC agency agreements might be cancelled, commission rates might be reduced, or technology support might be withheld. (See ICBC Abusers Accused of Driving up Premiums: Federal Regulators say Corporation has Misused its Monopoly, Vancouver Sun, Friday, November 2, 2001). All of which might result in the Federal Competition Bureau rapping ICBC s knuckles (for the second time in five years). Not appropriate, you say? Well, that s what monopolies can do. Monopolies Can Ignore Economics in the Name of Principle The bane of every private insurer s claims department is the small personal injury claim where the cost of defence far exceeds the value of the claim. Invariably, private insurers will hold their nose and make a nuisance value settlement just to get rid of the matter. And cynical plaintiffs lawyers know that, even if the claim completely lacks merit, they can probably extract a few dollars to settle the matter simply on the basis of these economics. Monopolies can ignore these economics. For several years now, ICBC has adopted a No Crash, No Cash policy whereby it flatly refuses to pay any money whatever (whether for no-fault benefits or on tort claims) to claimants involved in accidents where damage to the motor vehicles is either non-existent or extremely minor. If the claimant has the audacity to sue, then ICBC will take the matter all the way to trial before a jury in the hopes that an unsympathetic panel of jurors will award the plaintiff next to nothing. Sure, once in a while that jury will be sympathetic to the plaintiff and might surprise you with a big award. Sure, the cost of the exercise far exceeds the actual value of the claim. But, if you re a monopoly, you have to figure you ll reap benefits through all those small claims which don t get made or don t get paid. After all, that s what monopolies can do.

3 p. 3 Fraud is another area which costs insurers millions and millions of dollars every year. Most insurers try to be as diligent as possible in detecting fraudulent claims. When they do, they quite rightly refuse to pay but rarely will they bring any sort of civil lawsuit against those involved in the fraud. Once again, it s mostly a matter of economics; the cost of the exercise will far exceed any realistic recovery. But monopolies can again ignore these economic imperatives. Hence the Vancouver Sun Newspaper on December 6, 2003 had a first page article Record Court Award Sends Signal to Car Thieves: Jury Gives ICBC $4.5 million in Suit Against Chop Shop. ICBC has adopted a policy of instituting civil lawsuits against persons involved in fraud, actual or attempted. The chances of actual recovery are basically zero (most of the defendants are in jail or are deadbeats of one sort or another) but it makes for great public relations as witnessed by the proclamation in the newspaper article: ICBC will not stand by and simply pass the costs onto our customers. We will aggressively pursue fraudulent activity..[and]..we will sue. It s completely uneconomic, but that s what monopolies can do. Monopolies Ignore Conflicts of Interest If some hapless plaintiff was involved in four motor vehicle accidents and elected to sue all four groups of owner-driver defendants in the same lawsuit, one would expect each set of defendants would have conflicting interests and would be represented by different counsel. Liability would be in issue. Another issue would be apportioning the injuries to each accident. Most private insurers would immediately conclude the conflicting interests required their insureds to be represented by separate counsel. But not ICBC! It s the same insurer, after all, and the policy gives it exclusive control over the litigation, so why not brush all that theoretical conflict of interest stuff under the carpet and save costs by having the same lawyer represent all the defendants? After all, ICBC is a monopoly and that s what monopolies can do. (See Mara v. Blake, 1996, B.C. Court of Appeal). Assume another hapless plaintiff is injured in a car accident and collects no-fault benefits from his own insurer but also sues the other (negligent) owner-driver for personal injury damages. Would the plaintiff s insurer simply volunteer their Section B (no-fault benefits) file to the defendants insurer? Of course not! But if it s the same insurer (because, after all, it s a monopoly), you just have to make a few strokes on the keyboard and up comes all the information you want! For that matter, why not just have the same adjuster handle both the tort and the no-fault claims? Would a private insurer do this? No way, but if you re a monopoly, that s what monopolies can do.

4 p. 4 It s Not Just a Monopoly, it s a Government-Owned Monopoly! Being a government-owned monopoly means there is opportunity to consolidate insurance and government regulatory functions so as to save cost and collect money. For example, one can (and B.C. has) consolidated the entire process of licensing and insuring a vehicle at the same time and at the same place (through the autoplan broker). Indeed, the government can use the process to ensure collection of outstanding fines. Some might be concerned about the big brother aspect of such arrangements, but it does collect $500,000,000 annually for the provincial coffers. Close relations between government and the insurance monopoly also facilitates the promotion of road safety programs respecting seatbelts, motorcycle helmets, drinking-driving roadblocks, photo radar, graduated drivers licensing, and so on. The benefits of such an initiatives are hard to dispute. A government-owned insurance monopoly can also wield very significant influence in the promotion of so-called tort reform (i.e. measures to reduce payouts to personal injury claimants). In B.C., such ICBC-supported initiatives include: keeping the drunk driving exclusion in the liability coverage; providing an automatic release of tort defendants for amounts received or receivable as no-fault benefits; eliminating pre-judgment interest on non-pecuniary damages; limiting recovery of loss of income claims to a net and not a gross basis; mandating structured judgments for pecuniary damage awards over $100,000 or for any claim involving a tax gross-up; and imposing mandatory mediation for all motor vehicle accident personal injury lawsuits. Recent Changes in B.C. The election of the Liberal Party as the B.C. government (in B.C., the Liberals are actually small c conservatives) had private insurers salivating at the prospect of privatizing the entire auto insurance regime in the province. The opening, in one fell swoop, of a $2.5 billion marketplace to private insurers would be an unprecedented development in Canadian insurance history. Upon its election, the Liberal government undertook a core review of government operations to determine which areas the government might exit e.g. ferries, railways, and so on. ICBC was included in that review.

5 p. 5 For the present, the B.C. government has decided to keep the Crown Corporation and the compulsory, mandatory minimum structure that is in place through ICBC but they have made some structural changes in the past three months which are designed to facilitate competition in the marketplace. In particular, initiatives include: harmonizing and consolidating the auto provisions of the two Acts that had formerly governed both private insurers (the Insurance Act) and ICBC (the Insurance (Motor Vehicle) Act); appointing the B.C. Utilities Commission to replace Cabinet to regulate ICBC s premiums; prohibiting the cross-subsidization of ICBC s optional insurance business from the compulsory basic business; and vesting the B.C. Utilities Commission with authority to regulate ICBC s competitive practices. As always, the devil is in the details and those details will mostly be forthcoming by way of regulation in the next six months to a year. Private insurers are keenly awaiting these developments. Public or Private: What does the public think? This is an unscientific debate without obvious conclusions. It is a war of manipulated statistics and public relations campaigns between diametrically-opposed vested interests. A survey prepared for the Insurance Bureau of Canada in 2000 reported that 81% of British Columbians want to retain ICBC but also want full competition between ICBC and private insurers at all levels of coverage. (IBC, Public Attitudes Toward the Provision of Car Insurance in B.C.: Survey Highlights, 2000 ). In October 2001 the other side responded with a report Down the Road: The Implications of Full Competition for Public Auto Insurance in B.C. which concluded that such competition, will almost certainly result in a number of negative outcomes, including: discriminatory rate setting; higher insurance premiums for hundreds of thousands of British Columbians; job loss, diminished investment in road safety; and higher costs for the public treasury For sure, there are many public policy issues involved in the debate (although it is doubtful the average Joe gives them much thought). ICBC does not differentiate on age or gender, so it is generally cheaper to insure younger drivers. ICBC is a huge employer in British Columbia and the elimination of the Corporation would indeed involve significant job loss. ICBC collects licensing fees and outstanding fines for the government and this consolidation has resulted in the lowest level of uninsured drivers in Canada (3%). ICBC funds drunk driving roadblocks, drivers

6 p. 6 education programs, and even some road improvements. It seems likely private insurers would not undertake such activities at the same level. More likely that not, the average Joe only cares about rates. Would a private insurance regime offer the same coverage at cheaper rates? Or are private insurers, as ICBC alleges, just creaming the good business and refusing coverage to the higher-risk insureds? Who knows? As indicated, statistics can be manipulated to mean anything and almost all public relations campaigns involve inaccurate hyperbole. In September 2003 the Consumers Association of Canada released a review of auto insurance rates in 40 Canadian cities which purported to answer the following question: How much would the same driver pay for auto insurance if they had the same vehicle, same driving record and same claims history, and lived in each of the forty cities surveyed in the study? The conclusion was that public auto insurance systems provide the lowest rates for consumers. The same month, the Fraser Institute (a conservative think-tank) issued a report entitled Public Auto Insurance: A Mortality Warning for Motorists which concluded that provinces where public auto insurance have higher auto collision, death, injury and property damage rates that those with market-based insurance. And in November 2003, the same institute issued another report Two Hundred Bucks More: The Premium Cost of Public Auto Insurance which, as the name suggests, concluded the four public auto insurance provinces collectively have the highest average premiums in Canada. It claimed B.C. in 2004 will be the most expensive auto insurance province, at 27% higher than the national average. The conclusions were based upon appropriate measurement and assessment of hidden subsidies and inadequate financial reserves within the public auto systems. So the debate, and the rhetoric, continues to flourish. It seems likely little will change in B.C. in the near future and perhaps not at all. Nigel Kent December 2003 CWA