Dangerous Dose

An Alberta judge’s striking down of the province’s Minor Injury Regulation puts short-term pressure on adjusters facing a stockpile of claims. While insurer strategies for handling “cap” files may vary, there is concern in the industry about the cost of settling claims and the impact on rate stability.

With both the Alberta government and Insurance Bureau of Canada appealing the decision, this concern extends to other provinces with minor injury caps — and other limits on pain and suffering.

Like a dormant volcano showing signs of eruption, Alberta’s Minor Injury Regulation (MIR) faced mounting pressure from legal challenges since it came into effect in October 2004. The “cap,” which limited non-economic damage awards for “sprains, strains and whiplash-related disorders” to $4,399, was singled out by the plaintiff’s bar as discriminatory and potentially unconstitutional. Thousands of cases were purposely backlogged by lawyers pending the outcome of a legal challenge on the constitutionality of the MIR.

On Feb. 8, 2008, the volcano erupted with a definitive ruling from Alberta Court of Queen’s Bench Associate Chief Justice Neil Wittmann. In Morrow

v. Zhang, the judge ruled the MIR “sacrifices the dignity of minor injury victims at the altar of reducing insurance premiums.” He held that the cap breached s. 15 of the Canadian Charter of Rights and Freedoms because is discriminated against a group of car accident victims with minor injuries. Wittmann’s remedy was to thus eliminate the MIR.

The two plaintiffs, Peari Morrow and Brea Pederson, suffered soft tissue injuries from two separate auto accidents. With the cap gone, Wittmann awarded $21,000 in non-pecuniary damages to Morrow and $15,000 to Pederson.

“The evidence before me suggests strongly that ‘minor injury’ victims, particularly those suffering from a whiplash-associated disorder, are subjected to stereotyping and prejudice,” Wittmann noted in his ruling. “In sum, they are often viewed as malingerers who exaggerate their injuries or their effects in an effort to gain financially.”

Alberta’s provincial government, under Premier Ed Stelmach, was quick to appeal for a stay of the decision, which was heard by Wittmann on Feb.

25. He rejected the stay application and did not accept the government’s contention that there would be irreparable harm to the public interest. Both the Alberta government and Insurance Bureau of Canada (IBC) have appealed the decision to the provincial Court of Appeal, which will hear both cases jointly in a hearing scheduled for Sept. 12.

A new milieu

The immediate result is that the cap on pain and suffering damages for minor injury claims is no longer in place in Alberta. Insurers and adjusters are now coping with a new environment in which consumers must be informed of the cap’s elimination and claims must be settled accordingly. The buildup of old claims will be a big issue in the months ahead.

Just how many claims have been “stockpiled” is difficult to pin down, but Don McGarvey, a partner with Edmonton law firm McLennan Ross, estimates these cases in “the tens of thousands. There are a whole bunch of cases that have backlogged since Oct. 1, 2004.”

Where does that leave claims adjusters in the short-term? Depending on the insurance company client, claims professionals will face either a move to settle outstanding files or a “wait and see” approach to the appeal process. An air of uncertainty surrounds the situation in the wake of the original Queen of Courts Bench decision and in advance of the upcoming appeal.

“Right now, we are in a bit of limbo and a holding pattern,” Martin Moran, director of marketing and sales, Western Canada for Cunningham Lindsey, says. “Most of these claims are represented by plaintiff’s counsel and we are waiting to see what (they) want to do with the claims.” He adds that “we are not seeing the dramatic increases on settlement demands that we thought we would if the cap were struck down.”

Irene Bianchi, vice president of claims and corporate services for Royal & SunAlliance Canada, agrees there are few signs of a flood of settlement requests from plaintiffs’ lawyers. “It has been extremely quiet and surprisingly so,” she says. “We had been bracing ourselves for an onslaught . . . but we have not seen a wild influx of new claims or older claims that have been kept on ice and brought forward. It has been business as usual so far.”

Claims handling

Independent adjusters will be looking to insurer clients for direction on how they are to handle any outstanding claims.

“Some insurer clients will provide instructions to settle the book as best they can as it’s an old book of business,” Mike Tolan, senior manager of operations for Crawford & Company (Canada), notes. “Other insurers may prefer to wait for the appeal. Because they have a large inventory of files that are impacted, raising reserves by $10,000 to $15,000 each will cause a significant hit to their prior year adverse development. Therefore they may not be prepared to just roll over and give up versus fight the good fight regarding the appeal.”

It will be up to the executive branch of the corporation to best decide how to handle these claims, Tolan says. For those that decide to get rid of the claims, it will be a busy time. He suggests the large quantity of claims will likely lead to settlement conferences. “Adjusters are going to be very busy to try and clear those out,” he notes.

When it comes to settlements, there could be some grey areas, according to Fred Plant, president of Plant Hope Adjusters. “What happens to the claimant who has a claim that is worth more than the cap, but signs a release and settles for the cap amount or less

— and then the cap is scrapped?” he asks. “I have been asked that question numerous times. If it is done right, I believe the release will be valid and the claim will be dead. If it is not done right, the claim will live and the claim purse will have to be reopened.”

IBC has developed draft wording of a final settlement that provides immediate payment for amounts that would have been agreed to under the cap and also creates a fund in trust for excess cap claims pending exhaustion of all rights of appeal, which could go as far as the Supreme Court of Canada.

In fact, insurers are considering three main strategies, according to McGarvey, who regularly consults with claims professionals of insurance companies. “First, as a matter of corporate policy, they will wait to see how the appeal turns out; therefore claims will continue to be stockpiled, but now by them,” he says. “Secondly, some claims managers will settle them for the value of the claim under a pure tort system. Thirdly, others will seek to hedge or negotiate with the other side and meet in the middle between what this case is worth under a pure tort system and the cap, (which) is under appeal.”

McGarvey says the revised damage awards in the Wittmann decision were generous given that the two plaintiffs “had truly minor injuries. The awards were seen to be far beyond what they were really worth under a pure tort system. That fact is not lost on plaintiffs’ counsel in Alberta. . . . This has created a real impetus for the plaintiff’s bar to ask for even more.”

Facing additional costs

Insurance companies will have to prepare for those additional costs, according to Plant. “Insurers cut their costs while the cap cut the payments, so it was a double win. Now, they have to decide: keep it as it is and hope the appeals succeed or prepare for the worst,” he says. “With the possibility of claims with general damage potential as much as $25,000 not being capped, it will be necessary to take a closer look at these cases to better determine fault and the veracity of injury claims.”

In the long run, Plant says, there will likely be further changes in the way claims are handled and investigated, regardless of what is sure to be a lengthy appeal proces s in Alberta.

“The vast majority of injury claims today are being handled by telephone, often from other jurisdictions, so there is not the adjuster/claimant contact that once was common,” Plant, who is also president of the Canadian Independent Adjusters Association (CIAA), says. “If insurers see the huge potential for an outpouring of money down the road, it should mean an increased number of assignments and more in-depth investigations, both for staff and independent adjusters.”

Other provinces down the line

The Alberta decision is not the only legal challenge on minor injury regulations in Canada. While legislation is different in all provinces, plaintiff lawyers are hoping the recent ruling will add legal weight to their arguments on the constitutionality of caps in New Brunswick, Nova Scotia and P. E. I. — and potentially Ontario’s verbal threshold.

In New Brunswick, there are roughly 175 cases that are challenging the constitutionality of that province’s minor injury cap, according to Charles Foster, a principal with the Fredericton law firm Foster & Company. None of the cases has gone to trial to date.

“A motion has been brought by the Attorney General, which addresses 147 of the 175 cases and is scheduled to be heard on Apr. 11,” Foster notes. “It is an attempt by the province of New Brunswick to have a case management judge appointed by the Court to manage the common issues raised in these cases.” New Brunswick has had a $2,500 minor injury cap in place since 2003.

Bianchi says her company recently received a letter from a New Brunswick law firm inviting major insurance companies to talk with representatives in advance of a legal challenge to the province’s cap.

“I think we are already seeing signs of a Domino effect (on the minor injury cap),” Bianchi observes. “That is something that all of the regulators in Canada are very aware of. This Domino effect is alive and well in the insurance industry and the only people who will end up losing on this are consumers.”

One “test case,” Hartling et al v. Nova Scotia, is set to be heard by the Supreme Court of Nova Scotia in October. The plaintiffs include three parties — two women injured in separate auto accidents and a public interest group known as the Nova Scotia Coalition Against No-Fault Insurance Society — represented by Barry Mason of the law firm Presse & Mason. (The IBC verified that a similar legal challenge in P. E. I has been filed, but there were no details available at press time). Nova Scotia and P. E. I have also had minor injury regulations in effect since 2003.

Ontario’s auto insurance system is markedly different from other private sector auto insurance systems, but legal groups in the province are threatening a similar challenge to the constitutionality of certain provisions. Section 267.5(5) of the Ontario Insurance Act states that individuals must suffer a permanent, serious impairment to an important bodily function before they can get compensation for any pain and suffering — the “verbal threshold” clause. Any damage awards for pain and suffering are also reduced by a deductible of $30,000, if damages are not assessed over $100,000.

Legal groups such as the Ontario Trial Lawyers Association and Ontario Bar Association are considering court challenges to the verbal threshold and deductible provisions of auto insurance legislation under s. 15 and s. 7 of the Charter of Rights.

“We feel that the present system in Ontario is in fact more discriminatory than what they had in Alberta,” Patrick Brown, president-elect of the OTLA told Claims Canada. “Our point is that (Alberta) had a $4,000 cap on minor injuries, but our $30,000 deductible eliminates many minor claims for pain and suffering and goes above and beyond because there are a large number of claims that are significant that are still within that range.”

The OTLA also argues that the injury threshold differentiates between people in and outside the workforce, thus discriminating against groups like seniors, people with disabilities, children and stay-at-home parents.

The effect on rates

All these legal challenges have the very real potential to upset the delicate balance between rate stability and limits

to damage awards that was the goal of auto insurance reforms in Alberta and other provinces.

“If you look across the country, the reason for all the tort reforms across Canada over the last five or six years was to reduce the claims costs and reduce the premium that consumers pay,” Bianchi notes.

And many sources say cap removals could lead to price fluctuations and instability in key markets. In Alberta, the combination of a pricing grid and the minor injury regulation has yielded average premium reductions of 18 per cent since 2004, according to the IBC.

“By combining the increased accident benefits with the grid and the cap, they had found price stability in Alberta,” Tolan says. “But this decision in Alberta throws a monkey wrench in the works. You have policies priced that include a cap that is no longer in place.”

The cap did a lot of good for rate stability in Alberta, and that was what a lot of insurance company partners were saying, according to Moran.

“The cap was an inherent part of being able to deliver more affordable rates through the grid. I think the two are intrinsically tied; if one is gone, the other is going to go,” he adds.

If something like the cap is removed — which was really the bedrock for lower premiums — it is inevitable we will see a premium increase, Bianchi points out. “The pricing was based on an understanding of the claims experience companies could expect,” she adds.

The bottom line is that if society wants automobile accident victims to be compensated huge sums of money for minor injuries, then society is going to have to pay for that in the form of insurance premiums, Plant notes. “If the cap is scrapped and we return to the foolishness we had before, there will be public outcry once again and the politicians will step back into the ring. That won’t be good for anyone and pure no-fault may well be the end result,” he adds.

What does the future hold?

In Alberta, the MIR’s future still hinges on the Court of Appeal’s decision regarding constitutional validity. “It is premature for us to talk about the appeal arguments specifically at this point, but suffice it to say we will argue that the MIR does not violate the Charter of Rights,” Randy Bundus, vice president, general counsel for IBC, says. “We will be arguing that Associate Chief Justice Wittmann erred in finding that s. 15 was violated.”

Bundus notes the likelihood of this case being appealed to the Supreme Court of Canada is quite strong.

McGarvey says a distinct argument could be made — given the prevalence of minor injury caps in other provinces — that Morrow v. Zhang is of “national significance.” However, he suggests, there are not many legal holes in Associate Chief Justice Wittmann’s original trial decision.

“I think this is a strongly written, strongly worded, well reasoned decision,” McGarvey opines. “I think the defendants have a real serious uphill battle in regards to the standard of review and the way in which he ( Wittmann) has written this judgment.”

A University of Calgary law faculty submission by Jennifer Koshan argues that “Justice Wittmann’s judgment on the constitutionality of the MIR provides the Court of Appeal with an excellent starting point — it is a well organized, thorough and compelling decision, and it will serve as important benchmark in future equality rights cases both inside and outside the insurance context.”

Another recourse for the government, instead of appealing all the way to the country’s highest court, is to revamp auto insurance regulations. “There is a school of thought that suggests instead of going through a lengthy appeal process, which the government could lose, then it may in fact just look at changing the auto i nsurance legislation,” Moran says. “That may be quicker, but what they could end up changing it to is up in the air.”

There will be cost implications for the insurance product if the governments lose the appeal process and don’t change the legislation. “You have to remember this is the government’s legislation; we are intervening to support the government’s case, but the onus really lies with the government,” Bundus says.

Either way the MIR appeal process plays out in Alberta, adjusters are dealing with the reality of a “cap-less” environment, and taking their cues from insurance company partners on how to move forward. That could mean a spate of settlement conferences, administering individual settlement agreements or a long waiting process. Adjusters in other provinces are similarly bracing for changes to cap regulations.

“Anytime a decision like this comes out there is a certain amount of sabrerattling from the various camps,” Tolan concludes. “It makes for uncertain and interesting times.”

One thing, however, does seem certain: It will be a long time before the volcanic issue of the constitutionality of minor injury caps becomes dormant.