Caught in a Crunch – Auto Insurers Face Litigation Nightmare

As if the auto insurance market was not in rough enough shape. With the Ontario market in a downward slump and near disaster in Atlantic Canada, perhaps the last thing insurers were prepared to deal with was a large-scale class action lawsuit with the potential to result in millions of dollars in claim payouts. But, with the recent decision by the Supreme Court of Canada (SCC) not to hear an appeal in the case of McNaughton Automotive Ltd. v. The Co-operators General Insurance Co., this is exactly what auto insurers face. What had begun as a relatively low-value claim, where the claimant took offense at the insurer charging a deductible and also taking his written-off vehicle and selling it for salvage, now is becoming the industry’s biggest headache.

A large part of the headache may come from the fact that, despite the SCC decision, there is still no widespread agreement on the handling either of past or future claims resulting from the McNaughton verdict, nor a sense of what the industry’s total price tag may end up being. On a worst-case scenario basis, it could be hundreds of millions of dollars, admits Randy Bundus, vice president and general counsel for the Insurance Bureau of Canada. With about 99,000 vehicles written off each year in Canada, and the potential for the case to reach back several years, this worst case scenario may not be unrealistic.

With a judge assigned to case manage the Ontario decision, and a June court date set for the class action certification, insurers just now seem to be gearing up for the fight. In Ontario alone, there are now at least 38 class action suits in play, against 35 insurers, confirms Michael McGowan, plaintiff’s counsel in the McNaughton case and partner at McGowan Elliott and Kim. Another B.C.-based suit targets 81 insurers in seven provinces. Altogether, suits are aimed at private insurers across the country and include all common law provinces. One public insurer, Saskatchewan Government Insurance (SGI) has even been named. “Frankly, it was an idea that came to us out of the blue…but we’re talking about it now,” admits lawyer Brian Vail, of Field Atkinson Perraton.

Wording woes

The case is relatively simple: the policyholder filed claim for a collision resulting in the total write-off of a vehicle under a commercial fleet policy with Co-operators. The insurer paid $8,235 minus a $1,000 deductible for the vehicle and then sold the vehicle as salvage, netting about $1,400. McNaughton signed a proof of loss as to these terms, which are commonplace — insurers generally charge the deductible in at-fault cases, although many will waive it in cases where the policyholder is not at-fault. It is also common for insurers to take possession of the wrecked vehicle and sell it as salvage.

Nonetheless, McNaughton was not satisfied with the settlement and filed a class action lawsuit, to include Co-operators clients in several provinces, arguing that the insurer did not have the right to charge the deductible in the case of a write-off according to the statutory conditions of the policy.

Statutory conditions, applied through legislation, have been considered “sacred”, explains Bill Blakeney, partner with Blakeney Hennebery Baksh and Murphy. “You can’t offer someone less than the indemnity set out by the statutory conditions.” While a lower court judge found in favor of the insurer, upon appeal to the Ontario Court of Appeal, that decision was overturned. The Court of Appeal found that the wording of the statutory condition, which says “if the insurer exercises the option to replace the automobile or pays the actual cash value of the automobile, the salvage, if any, shall vest in the insurer”, means that insurers must pay the “actual cash value”, not the “actual cash value” minus the deductible.

The decision refers back to a 1974 Alberta decision, Mueller v. Western Union Insurance Co., based on a similar statutory condition, that found the policyholder should not pay the deductible in a write-off situation. McGowan also refers to two insurance texts, Insurance Case Law Digest by John Newcombe, and Insurance Law in Canada by Craig Brown and Julio Menezes, which also come to the same conclusion. Two issues are potentially at work in these cases, McGowan goes on to say. One is that insurers breached the contract, or policy, and two is that insurers potentially engaged in an intentional wrongdoing, a “tort of conversion” issue. This supposes that the insurer took possession of the damaged vehicle even though they had not paid full value for it. “They did not own the vehicle when they sold it, they did not hold title.” Insurers would have to pay full value, not full value minus the deductible to hold full title, he says.

“Disappointing” decision

Perhaps the most intriguing aspect of the McNaughton v. Co-operators case is the reaction, or in many cases lack thereof, by insurers following the Ontario court’s decision. Although at that time the decision was binding, notes Blakeney, insurers did not start to take action on refunding deductibles. Part of this may be a lack of industry agreement on what the decision really means. When asked what his company was doing in response to the decision, Royal and SunAlliance president and CEO Larry Simmons would only say “we expect to comply with the decision as soon as we can”, but did not give details as to what this compliance would entail.

Although insurers were by and large unable to comment on specific aspects of the McNaughton case as it, and the later cases arising from it, are still before courts, there is clearly widespread disappointment with the SCC decision not to hear the appeal. The courts have taken a “very simple, basic part of the policy” and viewed it through a “technical” interpretation that is “inequitable” and “unreasonable”, says Igal Mayer, president and CEO of CGU Group Canada.

On behalf of Co-operators, vice president of claims Sharon Bros added the company’s disappointment with the SCC decision. “This creates a big inequity between policyholders”, she says, by having those with written-off vehicles not subject to the same deductible being paid by those whose cars are damaged but still repairable.

“This is one of the worst decisions we’ve ever seen,” laments Bill Star, president of Kingsway General, who, although his company is relatively unscathed by the decision, says the precedent being set is unfair. “These conditions have been traditional throughout the industry, even internationally. It was always understood that a deductible would apply,” he says. “It [the court’s decision] doesn’t make sense.” Like the rest of the industry, he argues that it is unfair not to apply the deductible just because a vehicle is a total loss. “This was never intended in the wording of the policy.” Star observes that the SCC decision not to hear the appeal does not mean that the high court agrees with the decision, only that it did not find a fault in the Court of Appeal trial to justify hearing the insurer’s appeal.

Other policyholders may be the ones most impacted by the decision, says Bros. “The public is going to have to bear the costs of this. I don’t know who’s winning here, but I don’t think it’s the driving public.” Not only could drivers face higher premiums as a result of the decision, as insurers deal with potentially large payouts, but there is also the question of premium discounts for taking on larger deductibles. “People use the deductible tool to help keep premiums lower,” she says. There is no incentive to offer a discount to drivers for accepting a greater portion of the loss if they will not have to pay this portion in the event of a total loss.

“It will put the costs up for everybody,” says Bros. “It just doesn’t make sense.”

In dealing with past claims perhaps the best solution for insurers at this stage is the voluntary payback to the date of the Ontario Court of Appeal decision, in June of last year, as a gesture of good faith, suggests Blakeney. It may be less expensive than waiting for a broader class to be certified.

But, there is still the question of how deductibles are to be handled in the future. “There is not a consistent, uniform approach to how the industry is dealing with the problem,” says Glenn Gibson, CEO of Crawford Adjusters Canada, a situation that is hard on large adjusters dealing with several different companies who face “consistently inconsistent instructions” on handling total loss claims. “I’m not sure where, as an industry, we’re going to be if we don’t come up with a consistent approach…on a go-forward basis.”

The IBC is suggesting that insurers waive the deductible if charging it would result in paying less than the actual cash value of the vehicle, as there is an interest in getting wrecked vehicles off the road. Bros agrees, saying the decision by Co-operators to waive deductibles was in part influenced by the desire to deal with unsafe vehicles. “It’s not in the best interests of anybody to have unsafe vehicles on the road…this [decision] is pushing insurers to leave salvage in the hands of the motoring public.” The only recourse in Ontario at this stage is to work with government to change the wording to reflect the industry’s intention, a process currently under way, Bundus says.

Classic example

On a more over-arching note, the case may represent a change in the air in Canada’s courts. “There’s an anti-insurance bias on the bench to some degree,” suggests Vail. Cases are tending to be viewed as “the poor little guy versus the big, bad insurer”.

And this case is perhaps a “classic example” of the potential for class action in Canada, notes Gibson. Class actions are “changing the landscape of our industry in so many ways”, he says, referring to such as examples as the after-market auto parts debate. “In one sense we’re an industry under attack on a lot of fronts.”

With the McNaughton case, which takes its lead from the 1974 small claims court case, a case that was never appealed, here is an instance of one small decision providing the foundation for a potential landslide of claims. “Who would think 30 years later it [Mueller v. Western] was going to jump back and be the precedent for turning the industry around.”

Gibson hopes the current decision does not forebode a change to a more U.S. style of litigation, where class actions are a common occurrence, but can cost companies big. For example a recent case against Johnson & Johnson over contact lenses is seeing people receive $7 per box of contact lenses purchased. “People are getting back [perhaps] $80, but there are 100 million people getting back $80.”

This growth industry is fuelled by plaintiff’s lawyers undaunted by small individual awards, who take a cut of all the cases settled. “I don’t think the momentum for a class action is going to come from the insureds,” says Vail, it will come from plaintiff’s lawyers looking to sign as many clients as possible. Such is the case here, where deductibles range from $100 to $10,000, but will mostly fall at the low end of this range. “At $250-$500 a pop, they’re going to have to sign up a lot of people.” But if lawyers can solicit enough clients, potentially “it’s a gold mine”.

To do this, plaintiff’s lawyers will cast a wide net and in this case are pursuing rather large classes, notes Blakeney. In the McNaughton case specifically, “they’re shooting for a very big class. Essentially they’re trying to include everyone in the history of the world in common law jurisdictions.”

Three factors will contribute to the overall size of the class(es) and the payouts insurers face: how far back a class is expanded in time; to which jurisdictions the class is expanded; and whether or not punitive damages are awarded. The McNaughton suit is intended to include Co-operators policyholders in Ontario, Alberta, New Brunswick, Nova Scotia, PEI and Newfoundland, and to run back to the 1974 Alberta decision potentially. But plaintiffs’ lawyers may be over-shooting their mark, Blakeney says, as the test for class action certification in Ontario is stringent. “I don’t honestly think they’re going to make it because they’ve spread the net so wide.” However, this does not preclude smaller, more manageable classes being sought, he notes. “Even if this particular class is denied, someone else can take a crack at it.”

Punitive damages

The eventual amount insurers will be on the hook for in any McNaughton-based case could be greatly influenced, as McGowan notes, by the potential for punitive damages. “It’s debatable how you determine how much in damages each person gets.” At least three routes could be taken, including refunding the deductible, refunding the value of the wrecked vehicle when it was sold by the insurer, and/or awarding punitive damages.

Blakeney notes that insurers should not be waiting to find out the results of the class action suit before making provisions to pay out claims, as they may be found liable for not having acted on the Court of Appeals decision. But some insurers seem curiously to be waiting, perhaps for the class action to become certified or for a suit aimed directly at them. “The Supreme Court of Canada has made a decision on it and they’re ignoring it,” Blakeney says with puzzlement.

McGowan notes that following the June 18, 2001 Court of Appeal decision, many insurers did not stop charging the deductible, and kept “ripping off customers”. This is a decision that would only have been justifiable if the Court of Appeal decision had been stayed pending the SCC appeal, but this was not the case. The Court of Appeal ruling was in force. He also argues that insurers may even be subject to punitive damages for not adhering to the 1974 Alberta decision, at which point, given the lack of an appeal by insurers, insurers should have been aware of the court’s stance on the deductible issue. “Insurance companies for many years took advantage of their customers,” he says, which may be justification for the court to award some kind of punitive damage.

The question of punitive damages has become all the more interesting in light of the Whiten v. Pilot case, which upped the threshold for damages to $1 million, and perhaps more importantly gave directions as to when such damages should be awarded. McGowan says that “many of those factors apply to what insurance companies have done [in the deductibles case],” and argues that insurers should have been aware and made policyholders aware of the provisions of the statutory conditions. “They [policyholders] rely on insurance companies to treat them fairly.”

But punitive damages may be a tough sell, says Vail. He says the Whiten case, while increasing the limit for damages, also suggests that such damages only be awarded in rare cases. Trial decisions since Whiten v. Pilot, including in the companion case of Performance Industries v. Sylvan Lake Golf Club, show a tendency by the bench to shy away from punitive damage awards.

Vail also argues that proving insurers acted in “bad faith” is difficult, as there was industry-wide belief that the deductible did apply, and even the lower court decision in Ontario (in favor of the insurer), suggests that there is no black and white view on the issue. One thing that is clear is that insurers have taken note of the SCC decision and are now preparing for battle. Says Star, “I’m a little disappointed that the companies didn’t fight a little harder” in the Co-operators’ case.

But Mayer says insurers are not prepared to throw in the towel yet. “We’re going to fight it.” The question is, can insurers get the case back to the SCC and get a reversal in some other province? “We think we had a badly tried case here in Ontario”, he says. “Rest assured we will have a better tried case in another jurisdiction.”