Damages on Tap

The phrase, “what happens in Vegas, stays in Vegas,” may elicit collective and knowing head nods. But with joint and several rules, “what happens in” an Ontario municipality, a Saskatchewan city or a British Columbia town is inspiring an unwelcome mix of head nodding and head shaking from municipalities.

Municipalities face plenty of challenges – from managing a multitude of risks to providing services, balancing the books and dealing with the unexpected. Although not a specific ticket on the insurance list, real and potential effects of existing joint and several regimes are, nonetheless, a consideration across the country. Many would argue that ever-present concern clearly illustrates the need for reform to restore the health of the system.

At its heart, the tort principle of joint and several liability means any defendant, including municipalities, are exposed to as much as 100% of any damage award in a liability case involving multiple defendants when the other defendants cannot pay. This applies even if the defendant in question is found to be only 1% liable.

That is the principle; the reality is that municipalities are more likely having to dig into “deep pockets” and foot a bigger portion of the ultimate bill. Someone has to pay, and courts are unlikely to want victims to leave empty-handed.

BROKEN SYSTEM

Municipalities “have no specific mechanisms available to help protect them from the application of joint and several liability, which results in the deepest pocket funding claim settlements and judgments,” notes the 2013 bulletin, Municipal Legislative Reform – Tort Exposures, from Frank Cowan Company. “This means that every road, facility, sidewalk, etc. must be kept in a state of perfect condition, not only for reasonable use, but for every circumstance, which is an expansive duty of care,” it adds.

“There has been a long-term trend of judicial recognition of a wider scope of liability on the part of municipalities and police,” says Neil Robertson, an associate with Robb & Dowling in Regina, who has a focus on local government law, adding that “a reasonable balance has to be struck.”

Doug Brown, risk manager at the City of Regina, sees a “fairly desperate need” to reform joint and several liability requirements to reduce the impact on municipalities. “I do not think that the issues are really worsening, but I think municipalities are seeing claimants becoming more litigious than in the past.”

Roman Parzei, director of revenue and risk management for the City of Brampton, which borders Toronto to the west, agrees things are not worsening. That said, “we’re certainly finding ourselves being dragged into more and more claims,” Parzei reports.

Tom Barnes, chief executive officer and general counsel for the Municipal Insurance Association of B.C. (MIABC), agrees reform is necessary. “Other jurisdictions have already implemented some reforms and B.C. local governments deserve the same consideration,” Barnes reports.

Concerns around joint and several persist despite having different systems in place. For example, Ontario’s Negligence Act stipulates that where damages have been caused or contributed to by the fault or neglect of two or more persons and where two or more persons are found at fault or negligent, they are jointly and severally liable to the person suffering the loss or damage. Saskatchewan’s Contributory Negligence Act provides that if a defendant cannot fund its proportion of liability, as found by the court, the uncollectible amount will be apportioned between all parties, including the plaintiff where the plaintiff is found contributorily negligent. British Columbia’s Negligence Act still contains language of joint and several liability, although the province has implemented a form of proportional liability.

The issue in Ontario – seemingly on the provincial government’s front burner since the release of an Association of Municipalities of Ontario (AMO) paper in 2010 – has been unceremoniously shunted to the back burner.

“Joint and several liability encourages plaintiffs to target so-called ‘deep pocket’ defendants who are generally insured,” the paper notes. “The obvious result of this is an exponential rise in insurance claims, a corresponding rise in the cost of insurance and the unavailability of insurance at all in some cases, effectively crippling risk-exposed defendants.”

As of late July, Madeleine Meilleur, Ontario’s attorney general, responded to a question in the provincial legislature that a couple of options to reform continued to be available. One month later, the reforms had been scrapped.

“After considering the feedback we received from all stakeholders, Ontario has decided not to move forward with changes to the rule of joint and several liability at this time,” says Brendan Crawley, senior co-ordinator of media relations for Ontario’s Ministry of the Attorney General. “Significant concerns have been identified, including the potential burden that making changes to joint and several liability would place on injured plaintiffs in lawsuits,” Crawley reports.

“The current situation is unacceptable – and morally wrong. Lawyers are abusing legal conventions to take advantage of municipal property taxpayers. Most taxpayers don’t even know it, and it’s costing them millions. It won’t stop until the Ontario government creates rational limits,” charges AMO’s incoming president, Gary McNamara.

“With the news that matters will stay status quo, Ontario municipalities will continue to incur increased claims costs regardless of the municipalities’ percentage of contributory negligence,” says Nahla Hanna, president and attorney in fact for OMEX, the Ontario Municipal Insurance Exchange, a not-for-profit reciprocal.

“OMEX believes fair settlements should be made to parties who suffer injuries and losses,” Hanna says. “However, we do not agree with the inequity of settlements assessed against municipalities, simply because of deep-pocket perception and the application of joint and several liability or the 1% rule,” she emphasizes.

Brown echoes the sentiment. “If society wishes to ensure that all victims are fully compensated for loss,” he says, “then there should be a different way of funding that compensation.”

Says Crawley, “We appreciate the concerns that municipalities have expressed about increasing insurance costs. However, we have not seen enough evidence that making changes to joint and several liability would have an impact on those costs.”

RATES UP IN ONTARIO

In 2011, AMO reported in its first-ever comprehensive survey – results were weighted from a sample size of 97 to 122 municipalities representing approximately 50% of the Ontario population – of municipal insurance costs that liability premiums have increased by 22.2% since 2007.

Canadian Underwriter reported at the time that the survey showed municipal insurance costs in 2011 were $155.2 million, with liability premiums accounting for $85.5 million of the total. “The per capita insurance costs for communities with populations under 10,000 are $37.56. By comparison, per capita costs in large communities with populations over 75,000 are $7.71.”

Noting the figures do not include legal fees, self-insurance costs, settlements, risk management expenses or court-mandated awards, AMO reported that based on current trends, insurance costs would rise to $214 million annually by 2020.

Increases have been significant for some municipalities. Canadian Underwriter previously reported that Essex County saw its municipal insurance premium increase by 47.5% when it renewed its policy in 2010, and by 41.7% more when it renewed in 2011; the Town of Amherstburg had a 22% increase for 2010; the Township of Wellington North saw a 6% hike and was advised to increase its liability coverage from $25 million to $50 million; and Perth County saw a 54% increase in its 2011 renewal.

“The J&S issue has resulted in an automatic increase of 20% (fr om 2012 to 2014) for most of our clients,” notes Christopher Sinardo, vice president and associate, public sector national practice leader for BFL Canada Risk and Insurance Services Inc. “We estimate the total annual liability premium for all Ontario municipalities at $100 million – the total needed to grow to cover off the large losses recently paid to injured third parties.”

In 2013, Frank Cowan Company reported that over the previous two years, the company had paid out approximately $94 million for settlements or judgments for large claims against municipalities. Approximately one-quarter of payments were the result of the application of joint and several liability.

With awards increasing, especially in Ontario, insurance companies will likely respond in two ways, suggests Julie Boyd, national director, public sector for Zurich Canada. “First, companies may want to increase deductibles, to ensure municipal clients have more ‘skin in the game,’ so to speak. Second, companies may increase rates to get the correct price for the exposures based on the settlements we’re seeing now.”

Hanna says OMEX, an insurer that exclusively handles municipalities, has witnessed an increase in claims cost, and a rise in the number of claims exceeding $1 million directly related to the 1% rule. “Along with higher claims costs, municipalities now are opting for higher deductibles, or significantly increasing their self-insurance retentions, and yet still face the increase in premium cost.”

Sinardo notes BFL Canada’s minimum for deductibles has moved from $2,500 to $5,000. “In the past, our recommendation for our clients (a benchmark) for their deductible should be $1 per capita,” but medium to larger municipalities “are now looking at $2 to $5 per capita,” he reports.

In a 2005 paper, Legislation and Liability of Saskatchewan Municipalities – Restoring Balance, Robb & Dowling’s Neil Robertson notes “the City of Regina has been fortunate to maintain coverage with its existing insurers, due in part to its good loss history, but its premiums doubled from 2001 to 2004. At the same time, the city’s deductibles also doubled, such that most claims now fall within the deductible limit, resulting in a situation of self-insurance for most civic tort litigation.”

A Canadian Underwriter article from 2010 cites David Boghosian, then of Boghosian + Associates, who noted the retention for Toronto was $5 million, $1 million for Mississauga and $500,000 for Brampton. “So, any claims under those thresholds come out of the general revenue of those municipalities. It is having an effect on the bottom line.”

Brampton moved from a $100,000 deductible to $500,000 about three years ago, Parzei says. Although the city’s claims experience has shown that about 85% of claims fall within the $100,000 range, “by increasing to $500,000, we had a huge reduction in our premiums,” he reports.

COST DRIVERS

Just what events lead to municipalities being named in lawsuits depends on numerous factors. In general, though, Robertson says “the big areas for claims would be automobile collisions/roadways, slip and fall on sidewalks and in public buildings, claims in nuisance and negligence for water and sewer breaks and back-up, building failures attributable to negligent building approval and inspection, negligent misrepresentation in zoning or building approvals, and police liability for assault and wrongful arrest.”

In British Columbia, “claims arising out of defective construction and motor vehicle accidents are the biggest risk to B.C. local governments,” says MIABC’s Tom Barnes. “The former have arisen out of chronic quality control problems in the construction industry, combined with uneven liability insurance coverage. In B.C., the motor vehicle claims seem to be the result of low mandatory (Insurance Corporation of B.C.) limits forcing parties (and ICBC) to look for deeper pockets,” Barnes says.

Charles Painter, a partner with the Toronto office of Paterson MacDougall, LLP, suggests the most significant unfairness of the 1% rule imposes on Ontario municipalities is in the context of highway maintenance claims. “The worst sort of example in terms of the most unfair scenario is where you have a passenger in a motor vehicle who is catastrophically injured, and the allegation is that this is partly due to the negligence of the driver of the vehicle they’re a passenger in, and partly due to something wrong with the road,” he explains.

The typical motor vehicle owner has only $1 million of third-party liability insurance, Painter says. If, for example, a younger passenger, through no fault of his own, is catastrophically injured and requires 24-hour attendant care, there could easily be a $20 million to $30 million claim for damages, he explains.

The AMO paper notes that the minimum compulsory insurance coverage for auto accidents in Ontario is $200,000, “just a fraction of the funds necessary to cover catastrophic injury claims, and a situation which often compels plaintiffs to seek out those with deep pockets to provide for long-term care.”

Parzei advocates increasing the minimum requirement for liability coverage in Ontario so that other defendants actually have some financial resources. “I would say the province should seriously look at raising the minimum auto policy liability to at least $1 million, better still $2 million.”

Hanna points to an Ontario case in the AMO paper in which a driver – impaired, speeding and not wearing a seat belt – was driving on a township road under construction. As the driver was overtaking another vehicle where the pavement turned to gravel, the driver lost control and was killed; the passenger, also not wearing a seat belt, suffered a catastrophic brain injury.

The claim settled for $9.39 million, with the driver’s insurer contributing $2.67 million and the township’s insurer paying the remaining $6.72 million as a result of the application of joint and several liability.

“The existence of the 1% rule leads to the settlement of a number of these claims, not on the merits of the defence that the municipality may have, but on the sheer massive exposure for damages that they face,” argues Painter.

“That’s the big harm, that municipalities that I deal with are most concerned with and I believe rightly so, because it’s transferring the burden of the health care and future medical care for these tort victims onto the municipal taxpayer.”

Doug Brown from the City of Regina says that since few cases are appealed to the Supreme Court of Canada, for whatever reason, “municipalities are stuck with the often-vexing decisions of lower courts who seem to have a penchant for finding the flimsiest of reasons to award damages to plaintiffs.”

CLEAR SOLUTIONS

Proportionate liability – compensation to an injured plaintiff would reflect the extent to which any defendant is found liable – appears to be the clear winner when asked about the remedy for what ails municipalities on the joint and several issue.

An alert issued by the Ontario Good Roads Association (OGRA) this spring (before the provincial government announced things would remain status quo) outlines three options that had earlier been advanced by the Ministry of the Attorney General as part of the review process:

• The Saskatchewan Model: Where there is a shortfall due to one defendant being insolvent and the plaintiff’s own negligence contributed to the harm, the shortfall is divided among the remaining defendants and the plaintiff in proportion to their fault. This model would apply to all types of defendants in all types of negligence claims.

• The Multiplier Model: In road authority cases, where there is a shortfall due to one defendant being insolvent, the municipality would never be liable for more than two times its proportion of damages, even if this means that a plaintiff does not fully recover. The model would be limited to municipalities and the specific subset of road authority cases.

• T he Combined Model: In cases where both models apply (a road authority case involving contributory negligence on the part of the plaintiff) the Saskatchewan model would be applied, followed by the multiplier model if needed to ensure that the municipality would not be liable for more than two times its proportion of damages.

“Our first choice and one that OGRA will continue to press is the abolition of joint and several liability completely. The combined model represents a good first step,” the alert noted.

Parzei agrees. “It’s not to say it’s the best solution for municipalities, but it’s better than what we have now,” he says of the combined model.

Ralph Palumbo, vice president, Ontario for Insurance Bureau of Canada (IBC), says “we continue to believe that a defendant who only contributed marginally to a loss should not be compelled to take on a significantly disproportionate amount of the damages awarded because of a non-contributing defendant.”

One recommendation is to expand reform options to include claims for property damage and bodily injury losses arising from the use and operation of motor vehicles in Ontario, Palumbo says. “This would help minimize the potential shift of liability costs to other defendants and contribute to lowering the cost of auto insurance for consumers.”

Parzei also recommends the Ontario legislature consider legislating that all municipalities be part of a reciprocal, which would provide both economies of scale and the specific coverage municipalities require. “We would have a different kind of scenario where when it comes to joint and several or when it comes to settling other claims, I think financially we’ll be able to handle it.”

FOCUS ON RISK

“Legislative reform is certainly part of the solution, but one cannot lose sight of the prime imperative that municipalities exist to serve the community,” Robertson emphasizes. “When municipalities do inadvertently cause harm to individuals, they should be willing to remedy the harm and take steps to avoid its recurrence. Financial savings should be a collateral benefit, not the prime motivator, of risk management.”

Robertson suggests municipalities can take simple but important steps, such as good recordkeeping, essential to defending claims, to “harden the target.”

Municipalities must “try and ensure that they operate prudently, that reasonable risk management strategies are

employed in their day-to-day operations and that when something goes wrong, they pay when they are liable and defend against claims when they are not liable,” Brown adds.

Parzei says Brampton is doing what it can with regard to risk management and ensuring it meets minimum provincial maintenance standards that apply to roads in Ontario. This will “at least show before the courts that we have done our due diligence, and if there is any fault to be attached to any party, and we’re one of those defendants, that our share is very minimal.”

SERVICE REDUCTION?

Are costs having a negative effect on services that municipalities are able to provide? Robertson says he does not believe so.

“Claims against municipalities are a problem, but not the main cause of current municipal funding issues. The greater problem for municipal government is public and political unwillingness to pay/levy taxes than an inability to pay,” he contends.

But Barnes is not convinced. “The most critical impacts of the joint and several regime are felt at service levels, as local governments frequently choose to limit or eliminate services or facilities because of liability fears,” he argues. “It is unquestionable that the additional risks posed by the threat of joint and several liability adversely impacts services provided by B.C. local government.”

Brown points out that “while increased costs can be challenging in the short term, I believe that municipalities in most Canadian jurisdictions have adequate options available to deal with these short-term challenges in the form of access to the traditional insurance marketplace, reciprocals and captives, and by employing better business practices and risk management strategies.”

Is there potentially a bigger effect on smaller municipalities? Robertson says smaller municipalities “are less able to absorb unexpected losses. They are similarly less able to fund the cost of defending actions, regardless of whether an award is made.”

Parzei suggests that most smaller municipalities “totally rely on their insurance policy to cover whatever financial settlements they have been hit with.” And in most cases, they carry a very low deductible, which means a much higher premium.

“As more and more (joint and several) cases get settled and (smaller municipalities are) involved, their premiums begin to skyrocket, hitting them even more, which puts a huge pressure on their actual budget,” Parzei says.

Parzei reports that he has heard some insurers are insisting that smaller municipalities increase their deductibles – say, moving from $25,000 to $100,000 or more.

“Insurance is often viewed as a line in the budget which has to be controlled. As they look for ways to control or cut costs, municipalities issue (requests for proposals) in search of a reduced price,” OMEX’s Nahla Hanna says. “Some end up in a vicious cycle of tendering for insurance services, securing lower price, and then as their claims experience develops, they are again faced with increased premiums,” she explains.

“If these significant claims continue and if premiums get to a point where municipalities cannot get insurance, then you would face a significant problem, beyond that which is already in existence,” says Painter. “If we get to a breaking point where they can’t find insurance, there are no insurers willing to write the risk unless you pay an outrageous exorbitant premium, in order to justify the taking on of that risk,” he says, “at that point, things will definitely change one way or the other.”

“We are seeing some companies enter this segment and write business at what we believe are artificially depressed rates based on the nature of the risk,” says Zurich Canada’s Julie Boyd.

“That approach to the market may lead to short-term gain, but inevitably creates long-term pain at some point when the claims start to come in. Municipal clients and their brokers should be wary of such low pricing in a segment that is defined by long-tail claims,” Boyd emphasizes.

The “long-tail nature” of municipal liability claims means an incident may occur in one policy year, but the claims may not be presented until several years later and can take several more to settle, Frank Cowan Company has noted. That makes predicting future costs more difficult.

“Recently, there was hope to reform the joint and several liability issue, and now with the recent decision (Ontario government announcement), some insurers might decide to stop writing municipal insurance. This might lead us to a municipal insurance crisis – yet again,” Hanna says.

MIABC has not seen premiums or deductibles increase, Barnes reports. “We have sufficient capital to buffer our members from a series of shock losses, so we expect costs to remain stable, even in the event of an uptick in claims,” he notes.

And although there are fewer players in the market, “coverage is still readily available,” Barnes suggests.

Boyd recommends that brokers and insureds “look to the stability and experience of the carriers for public sector insurance and avoid choosing based on price alone. The current upward trend in the size of awards means that municipalities can be exposed to severe financial consequences, even if they experience only a few claims.”

The AMO paper points out “Ontario municipalities ought not to be insurers of last resort, targeted deliberately in some instances because of joint and several. If this situation is allowed to continue, the scaling back on public services in order to limit liability exposure and insurance costs will only continue.”

The system p uts great pressure “on municipal budgets, to be that sort of go-to pocket to make people whole with their financial settlements,” Parzei says. And with the announcement that things will remain status quo, “everybody is in shock. Everybody is wondering, ‘What happened?'”

Noting that law commissions in Ontario, other provinces and other countries have examined joint and several liability, Brendan Crawley of Ontario’s Ministry of the Attorney General says they have “determined that the rule of joint and several liability is the fairest way of dealing with a shortfall in damages.”

That is unlikely to sit well with municipalities – again… or still.