In the current legal environment, why would anyone want to write insurance? This is the question attendees of the recent CIP Business Summit may have been asking themselves at the end of the day. Speakers at the conference, held in Waterloo, ON, brought forward a litany of perils currently facing the property & casualty insurance industry. In particular, a litigation environment spilled over from the U.S. is causing Canadian insurers and their global parents to rethink what it means to write liability coverage.
“The world has become a more dangerous place, and that’s primarily due to a changing legal environment,” observes Glenn McGillivray, assistant vice president of corporate communications for Swiss Reinsurance Co. Canada. Most prominent amongst the current “liability monsters” is asbestos. Although asbestos has been less of an issue in Canadian courts due to the public provision of workers’ compensation coverage, the U.S. asbestos litigation explosion has made its mark on insurers writing cross-border business. This is especially true in light of the fact that asbestos is still being produced and exported in vast quantities in Canada. Asbestos imports to the U.S. rose 30% in the last decade.
While the first wave of asbestos litigation in the U.S. caused widespread bankruptcies and job losses, a second wave of litigation has arisen, aimed at “peripheral defendants” – often arising from plaintiffs not even yet sick, McGillivray adds. Currently there are about 350,000 asbestos cases filed in the U.S., with another 275,000 cases pending, and 400,000 more projected. Estimates suggest insurers are under-reserved for asbestos by between US$9-$29 billion. In Canada, “the fear is that a Canadian company will get dragged into U.S. court”, particularly in a “plaintiff friendly” state like Mississippi, McGillivray notes.
LEGAL MINEFIELDS
Asbestos, however, is just the tip of the iceberg, with insurers facing an almost daily barrage of new bases for litigation. Following on the heels of asbestos are silicosis lawsuits, based on workers being exposed to quartz dust which causes a lung disease known as silcosis. Plaintiffs are in many cases attacking the same companies as in asbestos suits, McGillivray points out.
In Canada, the next big “litigation minefield” could be water contamination, following on the Walkerton, ON and North Battleford, SK tainted water scandals in 2000 and 2001, respectively. In both of those cases, settlements were reached with most residents by the local and provincial governments, avoiding large-scale class action lawsuits. But, insurers may not be so lucky in the future: newspaper accounts reveal tainted water incidents, in some cases involving the carcinogen trichloroethylene (TCE), being uncovered in many areas across the country. “It’s very clear that there is no shortage of more potential Walkertons in the future,” says McGillivray. “It’s going to happen again.”
Also on the horizon are cases for improperly sterilized hospital equipment, tainted gasoline, credit card interest rates, and the introduction in Ontario and Quebec of a suit against Blockbuster for late return penalties.
CASH WINDFALLS
Insurers themselves have become no stranger to sitting in the defendant’s seat, with the prominence of two recent bad faith suits proving costly. Pilot Insurance paid out $1 million, and Hamilton Township Farmers Mutual paid $2 million, in punitive damages for bad faith judgements (this comes on top of compensatory damages).
Punitive damage awards are meant to punish “really outrageously bad behavior”, points out Bill Blakeney, partner at Blakeney Henneberry Murphy. Such a judgement is a “windfall in response to something the defendant has done that is so bad the court wants to make an example of them”. The Canadian courts have indicated that they are not going to set an award that is an amplification of the claim, that punitive damages are not a reward to the plaintiff, but a punishment of the defendant and can therefore be unrelated to the actual amount of the claim, he explains. The impact of these decisions is to push insurers on the defensive when it comes to claims handling. However, Blakeney points out that such damages are a rarity, coming only as a result of denying a claim on subjective grounds or ignoring evidence which supports a claim. “Insurers are entitled and obliged to handle claims in regards to your own interests…if you’re wrong on a coverage issue, this is not grounds for punitive damages.”
In some respects, Blakeney acknowledges, insurers are fighting “an urban legend” in that juries have been exposed to the perception that insurers are out to deny claims. Insurers, for their part, have a responsibility when it comes to using claims as a marketing tool, in that they will have to live up to that marketing material in the eyes of jurors. “That [marketing] material turns into propaganda in the hand of a plaintiff’s lawyer.”
MEDIA GLARE
Certainly the public perception of insurers is at an all-time low. Consumers are irate over rate increases, and part of this may stem from a lack of widespread understanding of how rates are set, and overuse of the excuse that rate increases were somehow related to the 9/11 terrorist attacks, speculates Glenn Gibson, president of Crawford Adjusters Canada, and chairman of the Insurance Institute of Canada (IIC).
The mainstream media has become focused on rates, specifically on auto insurance issues, and has turned a blind eye to the “good news” stories of the industry, Gibson observes. The good claims work which followed the B.C. forest fires and Hurricane Juan went unreported, he laments. “That chapter doesn’t get written.”
The situation has also crossed into the commercial insurance environment, where industry issues, such as the impact of class action lawsuits, are not being translated to customers to explain rate increases. “We’re paying the expenses for class action litigation. It’s part of the explanation for why commercial insurance rates are going the way they are going.” Gibson points to the litigation stories of Plastimet, Walkerton, tainted gas, sexual abuse, SARS, and more, noting that the intense media coverage of these suits failed to address the impact on insurance.
REGULATING AUTO
Nowhere has the public perception of insurers been more of a factor than in recent debate over auto insurance reform. “Part of the tension [surrounding auto insurance] is that the grass looks greener”, says Shelley Miller, partner at Fraser Milner Casgrain LLP. She notes that each province in Canada has at least one neighbor with a different system – public or private, tort or no-fault, threshold no-fault or optional tort.
In her experience as chief negotiator in New Zealand’s auto reform process and more recently working for the “Atlantic Harmonization Task Force”, Miller says one obvious hurdle has become evident. Insurers need to understand that they, along with vendors, service providers, government and others are not true stakeholders. The only true stakeholders are insureds and accident victims. Viewed through this lens, the ultimate goal of insurance reform is clear – effective and early rehabilitation.
Some of the problems being experienced by insurers in jurisdictions such as Ontario and Atlantic Canada can be linked to systems that “cause people to be sicker longer, or to think they need to be sicker longer. Monetary compensation doesn’t help heal people… What is full compensation? It’s getting healthy,” Miller notes.
The Ontario system, for example, gives a ton of treatment but is not effective at getting people healthy. Pain and suffering awards are treated as a “business opportunity” with little encouragement for claimants to get better. The solution, Miller says, is a system the public can understand and support, based on fast and effective treatment of injuries. Another issue continuing to rear its head in the auto insurance system is persistent fraud. A new scenario has developed where drivers have an accident in the U.S. with a carload of people and claim accident benefi ts in Ontario, explains Steve Smith, president of Farm Mutual Reinsurance Plan (FMRP). In his work with mutual insurers, Smith has seen how focused the fraud issue is in the Toronto area, and notes that mutual companies, which are more often in rural and small-town areas, are posting 25% better results on auto in part due to their reduced exposure to fraud.
In his former role with Kingsway General Insurance, Smith worked actively to reduce fraud, and encourages all insurers to take a firm stand against fraudulent tow truck drivers, paralegals and clinics. He advocates simply refusing to deal with these groups, paying directly to the claimant, and fully investigating every injury claim. This includes hiring investigators to go to clinics and confirm that the claimant received the treatment, and questioning paralegals on whether or not they possess the required errors and omissions (E&O) coverage. “This is what you have to do to set the tone,” he says, to show paralegals and service providers that fraud will not be tolerated. The same vigilance needs to be taken in caregiver and housekeeping claims. Insurers need to start requiring more thorough information from these providers, Smith warns. “This area is costing the industry millions of dollars.”