Fasken Martineau Alert

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1 Fasken Martineau Alert September 2003 Fasken Martineau DuMoulin LLP Ontario election update: Auto insurance Vancouver Calgary Yellowknife Toronto Montreal Québec City Auto insurance which has already figured prominently in two other provincial elections this year might also play a significant role in the campaign for Ontario s October 2 general election. This special bulletin, issued jointly by our Strategic Counsel Practice Group and our Financial Institutions and Services Practice Group, examines the auto insurance issue and explores each party s policy in this important area. Issue environment Not since 1990, when the victorious New Democrats campaigned on a platform of driver owned auto insurance, has the price of car insurance figured significantly in an Ontario election campaign. Average auto insurance rates fell during each of 11 consecutive quarters after the Automobile Insurance Rate Stability Act in came into force in late By the time of the 1999 provincial election, auto insurance was virtually non-existent as a political issue. ever since. As of June 30, 2003, the average cost of auto insurance in Ontario was per cent higher than one year earlier, and per cent higher than in the third quarter of Ontario rate increases are not nearly as large as in the two provinces where the price of auto insurance influenced recent campaigns. In Nova Scotia and New Brunswick, widely-published Statistics Canada figures showed that year-overyear increases in average rates had been 71 per cent and 66 per cent, respectively. 3 (The Insurance Bureau of Canada explained that average annual increases were only 27.5 and 23.4 per cent, and Statistics Canada said it would review the methodology it uses to measure premium prices. Nonetheless, the higher Statistics Canada numbers had more currency among the media and voters.) If rising premiums are going to influence the outcome of next month s election, then opinion polls have yet to show it. Currently, auto insurance does not register on the list of issues that voters consider most important. (Health care continues to New York Average rates started to increase during the last quarter of 1999, and have risen London 1 S.O. 1996, c. 21. Received Royal Assent June 27, Proclaimed in force November 1, Source: Financial Services Commission of Ontario. All figures in this paragraph apply to annual increases from March 2002 to March 2003.

2 Fasken Martineau DuMoulin LLP Fasken Martineau Alert 2 Ontario Average Auto Insurance Premiums (changes since Third Quarter 1996) Sep-96 Dec-96 Mar-97 Jun-97 Sep-97 Dec-97 Mar-98 Jun-98 Sep-98 Dec-98 Mar-99 Jun-99 % Change Sep-99 Dec-99 Mar-00 Jun-00 Sep-00 Dec-00 Mar-01 Jun-01 Sep-01 Dec-01 Mar-02 Jun-02 Sep-02 Dec-02 Mar-03 Jun-03 Source: Financial Services Commission of Ontario lead the pack.) Just the same, it would be premature to dismiss its impact on the campaign. Certainly all three major parties believe that the premium issue is growing more important the proof lying in their hasty responses. When they originally released their campaign platforms, none of the three major parties found it necessary to include a section on auto insurance policy. In the last two months, however, each party has attempted to get ahead of the emerging issue by unveiling a specific plan to reduce premiums. Accompanying each policy is the party s projection of the impact on consumers: The Liberals would impose an average 10 per cent rate cut within 90 days of taking office, and suggest that some drivers could save an additional 10 per cent. The NDP promises good drivers a rate reduction of at least 20 per cent. The Progressive Conservatives say that their plan will reduce forecast auto insurance premiums by up to 15 per cent for good drivers. Notable are the qualifications embedded in the parties estimates: average good drivers up to forecast. Individual impacts may vary and, as experience has shown, estimated effects are just that: estimates. This bulletin summarizes each party s auto insurance policy. Parties are considered in alphabetical order. Liberals A Liberal government would freeze rates as soon as it is sworn into office, then within 90 days require insurers to cut average premiums by at least 10 per cent. The party says that the savings created by its plan would enable insurers to achieve this reduction. Greater flexibility for consumers means that some drivers could choose plans that cost an additional 10 per cent less. Rate freeze, then reduction The Liberals would immediately direct the Financial Services Commission of Ontario (FSCO) to freeze rates at current levels. Within 90 days they would launch a series of reforms that they estimate would reduce annual costs by $650 million. To pass these

3 Fasken Martineau DuMoulin LLP Fasken Martineau Alert 3 (Liberals, cont d) savings to drivers, each insurance company would be required to file new rates that reduce premiums by an average of at least 10 per cent. Greater choice Under the Liberal plan, drivers who choose reduced coverage or higher deductibles would enjoy an additional premium reduction of at least 10 percent. Greater flexibility would allow consumers to choose plans that offer lower premiums because: the deductible for collision coverage is higher; the level of coverage is reduced (e.g., to suit a consumer who would otherwise be over-insured when the effect of other policies is taken into account); and/or income-replacement coverage is reduced or eliminated (e.g., because the insured is on a fixed income and does not need to be protected against inability to work). Scrap assessment centres The Liberals propose to save insurance companies at least $100 million savings that would flow to consumers through the rate reduction by eliminating the Medical/Rehabilitation Designated Assessment Centres. They argue that the Centres are costly and bureaucratic intermediaries that review health care plans without actually providing any treatment. Instead, a health care plan would be mapped out by the patient s family doctor, based on Pre-Approved Frameworks that incorporate clinical best-practice guidelines. If dissatisfied with the proposed treatment, then either the insurance company or the patient could obtain a second opinion from an independent physician. Any conflicts between the doctors opinions would be resolved through a FSCO-led process of mediation/arbitration. In addition to the $100 million to be saved by scrapping the Assessment Centres, the Liberals estimate $275 million in savings in medical rehabilitation costs. Consumer protection At least half of the Liberals auto insurance plan is devoted to a series of reforms intended to protect consumers. These promises include: Prohibiting premium increases based on accidents where the insured was not at fault. (In fact, insurers are already prohibited from assessing risk based on past not-at-fault claims and from denying, terminating or refusing to renew coverage because of a not-at-fault claim. 4 ) Making a regulation that would protect drivers from being dropped by insurers if their risk factors are unchanged. Requiring insurers to create a new risk class (dubbed the Gold Standard ) with reduced premiums for the best drivers. [R]educing the emphasis on geographic boundaries for risk ratings. How much less reliance would be placed on location is unclear. Currently, risk classifications must be both actuarially sound and just and reasonable ; among other things, a distinction that is a surrogate for an unacceptable rating factor is not permitted (e.g., neighbourhood could not be relied upon as a proxy for income level). 4 Regulation 664, subsections 5(2) and 16(2), as amended.

4 Fasken Martineau DuMoulin LLP Fasken Martineau Alert 4 (Liberals, cont d) The example used in the Liberal plan is of an individual whose premiums increase following a short move within the same municipality possibly suggesting that insurers might still be able to differentiate on a municipality-bymunicipality basis. Preventing companies from hiking rates or denying coverage because the driver inadvertently submits an NSF cheque. (Shortly after the Liberals issued their policy, FSCO clarified that insurers may not decline coverage because of an NSF incident. 5 ) More powers for FSCO and a consumer watchdog The Financial Services Commission would be given the authority to adjudicate individual rate disputes between drivers and insurance companies. The Liberals would also appoint an independent Auto Insurance Watchdog who would entertain and investigate consumer complaints about unfair practices or inappropriate rates. In a proceeding before FSCO, the Watchdog would be able to advocate on behalf of the consumer. The Watchdog would also report annually on rates, costs and the state of the auto insurance industry. Meanwhile FSCO would require that each insurance company seeking approval for a premium change project its rate requests for the next two years. The proposed relationship between the Auto Insurance Watchdog (investigation and advocacy) and FSCO (adjudication) is noteworthy since a similar relationship already exists within FSCO between the Superintendent of Financial Services and the Financial Services Tribunal: the Tribunal adjudicates cases while the Superintendent (or one of his officials) appears before the Tribunal as prosecutor or respondent. While implementation details have yet to be provided, the Liberals proposal might fit neatly within this model: the new adjudicative powers could be conferred on the Financial Services Tribunal, while the new, independent Watchdog could work with the Superintendent as part of the FSCO team. Reducing the cost of litigation Under Ontario s partial no-fault system of auto insurance, section of the Insurance Act limits the ability to sue for damages resulting from an automobile accident. Among other things, damages for non-pecuniary loss (pain and suffering) cannot be recovered unless the injured person has died or has sustained (a) permanent serious disfigurement or (b) permanent serious impairment of an important physical, mental or psychological function. [emphasis added] A Liberal government would use its regulationmaking power under the Insurance Act to define permanent serious impairment, thereby limiting claims for non-pecuniary loss. As another check on actions for non-pecuniary damages, section automatically reduces any award to the plaintiff by $15,000 or such greater amount as is determined by regulation. As a further disincentive to all but serious actions, the Liberal 5 Automobile insurance underwriting rules (July 29, 2003), FSCO Bulletin A-09/03.

5 Fasken Martineau DuMoulin LLP Fasken Martineau Alert 5 (Liberals, cont d) plan proposes to increase this deduction to $25, (However, shortly after the Liberals announced their policy, the deduction was raised to $30,000 by regulation. 7 ) Additional legislation would give Cabinet the power to make regulations that would define injuries, benefits and costs, all in order to reduce the size of settlements and awards. All together, the Liberals estimate that the reduction in court costs and damage awards would save $250 million. Addressing fraud Effective November 1, 2003, a regulation prohibits service providers and paralegals from soliciting kickbacks, taking referral fees and failing to disclose conflicts of interest. The Liberals promise to investigate and crack down on kickbacks, finder s fees and commissions beyond those mandated. They would also prosecute any health care provider, lawyer, paralegal or auto repairer that refers an injured party to a provider in which he or she has a financial interest. The Liberals estimate that the elimination of fraud and conflicts of interest would save $25 million. 6 7 Where a spouse, child or other relative claims under the Family Law Act for loss of guidance, care and companionship, the award is only reduced by $7500 (or half of the current $15,000 deductible). Presumably the Liberals would continue to apply a reduced deductible for guidance, care and companionship claims; for example, $12,500 might be logical as a proportionate increase. O. Reg. 312/03. New Democrats Alone among the three major parties, the NDP is promising to introduce a government-run, non-profit system of auto insurance. Four provinces have public auto insurance already: British Columbia, Manitoba, Quebec and Saskatchewan. Non-profit The New Democrats argue that premiums have increased because private-sector insurance companies have seen their investment income decline, from nine per cent between to just two percent in According to them, a public insurer would hold more stable investments and, ultimately, any risk would be backed by the province. Further, a public agency would not operate to deliver shareholders a profit. Indeed, the elimination of insurance company profits which the NDP pegs at 12 to 15 per cent annually, on average would yield a significant portion of the party s estimated consumer savings. The new public insurer would operate on a nonprofit basis. Surpluses would be reinvested, or returned to consumers. Whether insurance companies do enjoy a profit quota of 12 to 15 per cent, as the New Democrats claim, is a central issue. Before it approves rate changes, FSCO requires insurers to report on their expected return on equity and underwriting profit margins. While in theory FSCO would allow an ROE as high as 12 per cent, the Insurance Bureau of Canada (which represents private general insurers) says that last year ROE averaged just 1.6 per cent and companies incurred underwriting losses, not profits. The NDP uses inter-provincial comparisons to make its case that public auto insurance is cheaper for consumers. For example, it says that a Vancouver

6 Fasken Martineau DuMoulin LLP Fasken Martineau Alert 6 (New Democrats, cont d) family with one young driver, a 1996 Toyota Camry and a perfect driving record would pay $1298, while in Toronto the same family would pay, on average, $2553. The NDP also cites figures showing that, following five years without any rate increases, over the past year the public insurers in B.C., Manitoba and Saskatchewan raised premiums by only 6 to 10 per cent. (In contrast, the average annual increase in Ontario was nearly 20 per cent.) (During recent debates in the Maritimes, the Insurance Bureau of Canada strongly took issue with claims that public auto insurance is cheaper for consumers. Its figures showed that public insurers pay substantially less in claims than private insurers; for example, in 2002 the average claims paid were $2368 in B.C. and $2674 in Manitoba, much lower than averages of $6811 and $6830 in Ontario and New Brunswick, respectively. Meanwhile, premiums are not necessarily lower under a public system. Last year, the IBC says, the average premium was $1010 in British Columbia and $1027 in Ontario.) No distinction based on age, sex, marital status, location The NDP plan also includes the elimination of differential premiums based on age, sex, marital status or location. It promises that rates would be based strictly on a driver s record. Section 22 of the Human Rights Code currently permits an insurer to differentiate based on age, sex, marital status, family status or handicap, provided that it has reasonable and bona fide grounds for doing so. The New Democrats policy would not necessitate a Code amendment; the provincial government could simply direct its own agency not to distinguish among different groups of insureds. On the other hand, the NDP could entrench the nodiscrimination guarantee by removing auto insurers from the Human Rights Code exemption. The pledge to base rates strictly on driving record would raise implementation issues. Presumably claims history, traffic offences and years of experience would be considered part of the record, but it is unclear what additional factors might be included. For example, distance travelled and car model/year arguably have actuarial significance, but are not components of a driving record. It is also unclear whether elimination of age-based differentiation would prevent the new public insurance company from offering a retiree s discount. Currently each insurance company is required to discount the basic accident benefits coverage rate for retirees. Savings Like the other parties, the NDP promises that its plan would create savings that in turn would be passed on to good drivers in the form of lower premiums. Unlike the other parties, the NDP has not quantified the estimated savings. It does, however, identify the sources: Lower administration costs by eliminating multiple companies offering the same basic product. (According to the NDP, in 2001 the average cost of handling a claim was $359 in British Columbia, compared to more than $478 in Ontario.) Lower marketing costs because there is only one provider and the product is compulsory. Lower solvency costs because there is one large risk pool that ultimately is backed by the provincial government.

7 Fasken Martineau DuMoulin LLP Fasken Martineau Alert 7 (New Democrats, cont d) New Democrats say that the net effect of these savings (plus the elimination of shareholder profit and differentiation based on age, sex and other factors) would be an immediate 20 per cent reduction in premiums for good drivers, followed by long-term rate stability. Eliminate corporations tax on insurance premiums Because the insurer would be a government agency or Crown corporation, the NDP would exempt it from the existing 3 per cent tax that auto insurance companies pay on their gross premiums. 8 The approximately $270 million in savings would be passed on to consumers. (The corporations tax that insurance companies pay on premiums is separate from the retail sales tax on premiums paid by consumers. Until March 31, 2004, RST on premiums is charged to consumers at the rate of 1 per cent; as of April 1, 2004, this tax will be eliminated.) Progressive Conservatives The Progressive Conservatives plan consists not of a single document but rather a portfolio of announcements made over the last two months. Because they currently form the government, the Conservatives have had the opportunity to implement some parts of their plan. (The following analysis highlights which reforms are in place and which are proposed.) Rate reduction The PC target is $1.2 to $1.3 billion in savings, which would be passed to consumers through premium reductions of up to 15 per cent. New flexibility for drivers to choose their types of coverage could create additional premium savings of 5 to 20 per cent, the PCs say. The Conservatives have directed the Superintendent of Financial Services to require insurers to re-file their rates, where appropriate, in light of any savings from the plan. Greater choice The Progressive Conservatives would develop a new, flexible insurance policy that would allow drivers to customize their coverage. (As do the Liberals, the PCs cite the example of consumers who currently pay for income protection under their auto policy when they already have disability insurance from another source.) Depending on individual circumstances and choices, they expect some drivers to save an additional 5 to 20 per cent. The new policy would be designed by January Consumer protection The Conservatives say that inadvertent NSF cheques, not-at-fault accidents and insurers arbitrary changes in territorial boundaries are all invalid reasons to re-assess an individual s driving risk. A change in premiums resulting from any of these events is not currently permitted. However, the Conservatives have said that the Superintendent will continue to ensure that consumers are not penalized for not-at-fault accidents [and] take a stronger approach to ensuring that consumers are not unfairly penalized for inadvertent NSF cheques or insurer changes in territorial boundaries. 8 Corporations Tax Act, section 74.

8 Fasken Martineau DuMoulin LLP Fasken Martineau Alert 8 (Progressive Conservatives, cont d) They have also directed the Superintendent to undertake a complete review of how insurance companies determine the risks of insureds, to be concluded by October Assessment reform The PCs have streamlined the assessment and treatment process for whiplash and related minor injuries by creating a Pre-Approved Framework based on clinical best practices that allows doctors to provide certain treatment without further approval. They have also restricted insurers use of medical examinations, a move that they say would end duplication and reduce costs. The Conservatives are also moving to prohibit cash settlements for accident benefits until one year has passed. They point out that this would give the injured a full year of treatment and income replacement, but it might also achieve savings by deferring a settlement until a condition has stabilized. They defend the use of Designated Assessment Centres to assess injuries, claiming that otherwise insureds would be too dependent on determinations made by the insurance companies and that the Centres help resolve disputes without need of litigation. The PCs have asked the Superintendent to expand the number of Centres; that process is underway. At the same time, in response to consumer complaints about how the Centres are run, the Conservatives have directed the Superintendent to review the Designated Assessment Centres system, including governance, neutrality, fees, operational standards and reporting time lines, with the review expected to be complete by October Tort reform To deter court actions for non-pecuniary (pain and suffering) damages, section of the Insurance Act automatically reduces any award to the plaintiff by $15,000 or such greater amount as is determined by regulation. Arguing that the deductible has not kept pace with increases in court awards, the PCs have increased this deductible to $30,000, effective October 1, Section also limits damages for non-pecuniary loss to cases where the injured person has died or sustained (a) permanent serious disfigurement or (b) permanent serious impairment of an important physical, mental or psychological function. The Conservatives would use the government s regulation-making power under the Insurance Act to define permanent serious impairment, thereby limiting claims for non-pecuniary loss. Their July 2003 white paper suggests that the definition would focus on severe physical as opposed to mental or psychological injuries. At the same time, the PCs would expand access to the courts for some accident victims. In 2002 the Legislature passed an amendment that would allow persons who suffer serious disfigurement or permanent serious impairment to sue for health care costs (medical, rehabilitation and attendant care). Currently a victim can sue for health care costs only if he or she has sustained a catastrophic impairment (a much higher test). The amendment is not yet in effect, but would come into force on a date proclaimed by Cabinet; the Conservatives promise to do so. 9 O. Reg. 312/03, amending O. Reg. 461/96. The deductible from guidance, care and companionship awards under clause 61(2)(e) of the Family Law Act is being increased from $7500 to $15,000.

9 Fasken Martineau DuMoulin LLP Fasken Martineau Alert 9 (Progressive Conservatives, cont d) Another amendment, passed but not proclaimed in force, would eliminate the deductible in cases where damages for non-pecuniary loss would exceed $100, While popular with participants in recent consultations, this change would increase premiums. The PCs are reviewing whether to proclaim this amendment in force. Addressing fraud and reducing costs The Progressive Conservatives propose a number of measures to combat fraud, reduce abuses of the system and otherwise lower costs. They would: Require health professionals to report suspected fraud and abuse to the police. The PCs say that this and additional, unspecified anti-fraud initiatives would help the industry meet a $100- million fraud reduction target. Calculate benefits for income replacement based solely on income that has been reported for tax purposes. Estimated savings from this reform (and the proposal to allow flexibility in the amount of income-replacement coverage that consumers purchase) would be up to $120 million. Expand the regulation on Unfair or Deceptive Acts and Practices to prohibit health care providers 11 and paralegals from soliciting or accepting kickbacks or referral fees, from charging unreasonable amounts and from failing to disclose conflicts of interest. This change has already been made, effective November 1, Work with the insurance industry to earmark a minimum of $1 per policy toward a safe driving program. Additional savings The Conservatives also promise that they would require insurers to generate up to an additional $100 million in savings through unspecified reductions in administrative costs and other areas. Reduce corporations tax on insurance premiums The PC Party would reduce from 3 per cent to 2 per cent the existing tax that auto insurance companies pay on their gross premiums. 13 It estimates that this would generate up to $90 million in savings that would then be passed on to consumers. (As mentioned in the analysis of the NDP policy, above, the corporations tax that insurance companies pay on premiums is separate from the 1 per cent retail sales tax on premiums currently paid by consumers. As of April 1, 2004, the RST on premiums will be eliminated.) Conclusion All three parties commitments to lower premiums depend on estimates that their policies will lower the costs of insurance. To a certain extent all three parties are asking the voters to accept, on faith and without much detail, that the projected savings will be realized $50,000 in the case of guidance, care and companionship awards. The regulation is worded broadly and covers any person who provides goods or services to or for the benefit of a person who claims statutory accident benefits O. Reg. 7/00, as amended by O. Reg. 278/03. Corporations Tax Act, section 74.

10 Fasken Martineau DuMoulin LLP Fasken Martineau Alert 10 Clearly, should the projected savings fail to materialize, then premium reductions would be smaller than promised, or premiums might not be reduced at all. if it forms the government following October 2. Regardless of the election outcome, drivers and members of the industry both will know what to expect in the months ahead. Nonetheless, each party has given the electorate a clear sense of its direction for auto insurance reform,

11 Fasken Martineau DuMoulin LLP Fasken Martineau Alert 11 For more information on the subject of this bulletin, please contact a member of either of the groups listed below: Strategic Counsel Practice Group Guy W. Giorno ggiorno@tor.fasken.com W. Thomas Barlow tbarlow@tor.fasken.com C. William Hourigan cwhourigan@tor.fasken.com Sean L. Morley smorley@tor.fasken.com Financial Institutions and Services Practice Group Robert W. McDowell rmcdowell@tor.fasken.com Robert E. Elliott relliott@tor.fasken.com Stephen B. Kerr skerr@tor.fasken.com Karen Hauser khauser@tor.fasken.com Koker Christensen kchristensen@tor.fasken.com Scott Mitchell csmitchell@tor.fasken.com This publication is intended to provide information to clients on recent developments in provincial, national and international law. Articles in this bulletin are not legal opinions and readers should not act on the basis of these articles without first consulting a lawyer who will provide analysis and advice on a specific matter. Fasken Martineau DuMoulin LLP is a limited liability partnership under the laws of Ontario and includes law corporations Fasken Martineau DuMoulin LLP Vancouver info@van.fasken.com Calgary info@cgy.fasken.com Yellowknife info@nwt.fasken.com Toronto info@tor.fasken.com Montreal info@mtl.fasken.com Québec City info@qc.fasken.com New York info@nyc.fasken.com London info@lon.fasken.com