Holding the Bag

A fundamental principle in Canadian common law is that if someone is hurt or wronged, then the victim should be compensated for the damages or injuries they have suffered. Also longstanding is the notion of “joint and several liability.” Basically, this means wrongdoers are on the hook to compensate their victims fully, be it collectively (i. e. “jointly”) or individually ( “severally”). A crass way of expressing the law of joint and several liability is this: Any “deep pocket” wrongdoer will have to pay individually on behalf of any other wrongdoer who can’t. While this seems eminently fair to the victim, is the joint and several liability principle fair to the deep pocket defendants?

No, say risk managers buying insurance for municipalities, arguably among the deepest pockets today. Municipalities are regarded as “deep pockets” because of their ability to draw their funds from all of us, the taxpayers.

How deep are those pockets, really? As court awards and settlements start clocking in at tens of millions of dollars, municipal risk managers across the country are sounding the alarm. Joint and several liability rules, they say, are placing a disproportionate share of the burden on Canadian municipalities to pay huge damage awards for which the municipalities themselves are only marginally responsible. These rules are contained in common law jurisdictions across Canada. In Ontario at least, municipal risk managers refer to joint and several liability as “the 1% rule.” That is to say, even if a municipality is found to be only 1% responsible for a victim’s injuries, it may nevertheless be on the hook to pay for 100% of the damages, assuming one or more of the other defendants can’t pay.

How the 1% rule works

A real-world example is shared by lawyer Bernice Bowley, who has done municipal defence work for 17 years. She is at the law firm of Filmore Riley in Manitoba, one of 11 common law jurisdictions in Canada with the “joint and several” language contained in its contributory negligence legislation. In addition to Ontario and Manitoba, other jurisdictions with the joint and several rule in its books include B.C., Alberta, New Brunswick, P.E.I., Nova Scotia, Newfoundland and Labrador, Northwest Territories, Yukon and Nunavut.

“I’ve got a case right now that’s going to trial where there was a fellow who built the [worst] house possible,” Bowley says. “My client, the municipal inspection entity, missed some of the decisions he made, and didn’t make him re-do [what he did], so my client is second in line [of defendants alleged to be liable].

“Another couple buys this house. Problems start to happen, so they cover it up, put drywall everywhere and sell it to this fourth couple. This fourth couple now sues. The cover-up people have no money. The builder who builds it in the first place has gone bankrupt. And so here I am with my municipal client, and we are going to be holding the bag. In Manitoba at least, it’s sort of treated as a fact of life, however unfortunate it is.”

In Bowley’s case, the plaintiffs are looking for $335,000. “My view of things is that if not for our Joint Tortfeasors and Contributory Negligence Act, my client would pay about $50,000. In the end…the plaintiff is not going to be able to satisfy his judgment against the bankrupt builder or the [first homebuyers], who don’t have any money. And so at the end of the line, my client is going to be on the hook for the full $335,000.

“That’s very routine in municipal cases and I do a lot of that kind of work.”

Joint and several liability cuts across any number of municipal exposures. It not only applies to faulty bridge and home construction scenarios, it can also manifest itself in lawsuits related to motor vehicle accident claims, road safety, public transportation safety, building inspections and facility and event safety.

Frank Cowan and Company, a municipal insurance company based in Princeton, Ontario, has started to construct a database allowing it to track the scope of joint and several liability cases. Thus far, the insurer calculates that joint and several liability features in about one in every 15 of its municipal liability cases.

The origins of joint and several liability

Joint and several liability, an import from British case law, was codified in Canada’s common law provinces and territories in the mid-1940s. But litigation counsel David Boghosian of Boghosian + Associates in Toronto argues the principle long preceded this legal codification. Boghosian did extensive legal research for a September 2009 paper on joint and several liability by the Association of Municipalities of Ontario (AMO), entitled The Case for Joint and Several Liability Reform in Ontario. During his research, Boghosian found joint and several liability appearing in case law dating back to the 14th Century.

“We found something pretty shocking, which was that joint and several liability entered the law through the back door, accidentally, because of a confluence of arcane rules of pleading, which prevented the [the ability of a plaintiff to sue more than one defendant for any given action],” Boghosian said. “This concept, which is called the Theory of the Indivisibility of Liability, stayed in the law well into the 1800s.

“The Theory of the Indivisibility of Liability has long since been discarded. It basically means there’s only one cause of action arising from any particular harm to a plaintiff. You have one shot to sue somebody for it, and you can’t sue multiple parties. You’ve got to pick a party. What these various rules of pleadings and tort [‘tort’ is legalese, meaning ‘a wrong’] meant was that a plaintiff basically had to pick the party from which it thought it would be most likely collect, and against which it thought it would get some liability.”

Ultimately the law changed, allowing plaintiffs to sue multiple defendants. But the idea that a single defendant with deep pockets was on the hook to compensate the plaintiff remained in the law, codified in the form of joint and several liability.

“There was never any discussion in the law of the utility or benefits of joint liability,” Boghosian said of his review of the case law. “Basically it just fell into the law accidentally, through the back door, and has never really been reviewed on a first-principles basis — from a policy standpoint– to see if the various criticisms of joint and several liability outweigh the benefits.”

The chief benefit of joint and several liability is that it makes plaintiffs “whole” after a loss, fully compensating innocent victims for their injuries or damages, Boghosian says. “The downside [is] fundamentally the unfairness to a defendant, who is only at fault to a minor degree, but ends up having to pay the whole amount.”

Implications for Municipal Insurers

Joint and several liability may have made more sense during the turn of the 20th Century, when damage awards were comparatively manageable in scope, and governments played a more minimalist role than they do now. But after the 1930s, the era in which John Maynard Keynes advocated for governments to play a stronger role in many spheres of modern-day society, municipalities were exposed to liability like never before. In addition, damage awards have increased exponentially. Most recently, in Ontario, plaintiff Katherine-Paige MacNeil received an $18-million damage award when she was severely injured in a 2002 car accident. Derek Sarluis, vice president of claims at Frank Cowan and Company, compares the 2009 decision in the MacNeil case to a 1999 case, Osborne v. County of Bruce et al., and notes the inflation between the two. “I know that the Osborne case 10 years ago came in at about $10 million [$8.3 million in damages, plus legal costs], so you have an escalation of $8 million over 10 years,” he noted. “This is in an environment when ordinary inflation has been running at either zero, or certa inly less than 1% per year over the last number of years.”

It is difficult to get a statistical handle on the loss experience in municipal insurance, since there isn’t really a financial reporting category specifically related to municipal liability claims. Because of the wide range of municipal exposures, municipal liability claims cut across traditional reporting categories of insurance lines — including home, auto and commercial lines of business. Federally-regulated Canadian insurers reported escalating claims ratios in the general category of ‘liability’ (which includes municipal liability), between 2007 Q3 (53.67%) and 2009 Q3 (61.59%).

Increasing claims payments typically result in higher premium payments. And “in the entire insurance world, more and more municipalities are getting hit with huge [premium] increases,” said Pat Vanini, executive director of AMO. “One that comes to mind is down in Essex County. Their renewal policy for 2010 had almost a 48% increase, which translated into close to $200,000. There’s a bill for you.”

How much of that bill is due to joint and several liability is open to question. One problem facing municipal insurers is that, because of joint and several liability, municipalities can get pulled into a wide variety of lawsuits — and they

can end up paying a disproportionate share of the damages, even though they might be only marginally at fault.

“People always know the city is there with insurance,” says Don Marshall, director of risk management at the City of Edmonton. “So if you are 1% at fault and the other party in the incident has no insurance, then basically you have to pick up the entire judgment. It’s quite an exposure, because the municipality has so many exposures. We have recreational centres, police departments, roadways — the number of exposures is fairly widespread.

The result is that municipal insurance is very difficult to price, says John Nolan, vice president of commercial lines underwriting at Aviva Canada. “It’s an exposure that’s very difficult to assess, because quite often it isn’t the primary responsibility of the municipality where the suit emanates from,” he said. “They get pulled into the suit and have to respond. It’s very hard to assess the exposure when you are underwriting the risk. Therefore, it’s extremely difficult to price-fix the coverage. If an account is large enough, you would experience-rate the account.”

Theoretically at least, the municipalities should be able to collect back what they pay from the other defendants found to be responsible. But that’s a lot easier said than done. “You have the ability, I guess, to pay the judgment and then try to seek contribution from the other party [responsible for the damage or injury],” says Marshall. “But quite often that’s impossible, because: 1) you don’t know who it is, or 2) they have no resources to begin with. A lot of people who do this stuff, they don’t have insurance, because basically they can’t afford insurance. So even though you sue them for contribution, it’s like getting blood from a stone.”

Implications for Risk Managers

As municipal insurance premiums increase, risk managers who buy the insurance for municipalities have been reluctant to subject their organizations to unnecessary exposure. Joint and several liability affects risk managers in two areas, says Sonia Coward, manager of risk management and insurance for the Region of Durham. “The first is in insurance and the placement of insurance,” she says. “When you go out to market, the insurers are keenly aware of joint and several liability. [Insurers are aware that] municipalities are the deep pockets. We’re going to get brought into any sort of action, whether it’s an auto accident, building construction, all of the common types of claims for which municipalities are brought in.” This in turn will affect the insurance coverage and pricing offered to municipalities.

Boghosian observes that many Ontario municipalities self-insure and/or carry high retention limits. “Toronto, for example, has a $5-million retention,” he says. “And therefore any judgment against it under $5 million comes out of the coffers for the taxpayers. Mississauga has a $1-million retention. Brampton has a $500,000 retention. So any claim under those thresholds come out of the general revenue of those municipalities. It is having an effect on the bottom line. If you are spending money paying claims, you’re going to be able to afford fewer services.”

And consequently this will affect the relationship between municipalities and the people they serve, Coward says. “A second area in which [joint and several liability] affects risk management is in a situation in which your parks guys or other facility operators want to have an event or run a street fair. They will come to you and say: ‘Give us an opinion, give us a risk management opinion on that.’

“Well, you have to consider joint and several liability at that point. Because of all of the rules in place, often you’ve become the ‘No’ person, saying you wouldn’t recommend this because of these reasons. Often you have to get your indemnity in place with someone who wants a street party or fair, and they have to get their insurance in place — all of these requirements make it more and more difficult for the services to be offered to residents of your municipality.”

Vanini realizes municipalities are perceived to have deep pockets because they can raise revenues for taxation or divert expenditures from one area to another. But “at the end of the day, tax increases typically should be returning some value to the taxpayer in terms of improvement and service, not just to pay a deferred wage or a deferral on the inability of someone else to pay,” she says. Once again, she references the $200,000 liability premium increase in Essex County: “At a time when we are trying to create jobs, $200,000 in Essex County probably would generate a couple of child care units. At least you can say that money has a direct return value to the property taxpayer.”

Political Action

Risk managers are now starting to go public with their concerns.

“I don’t think any risk manager in Canada believes injured parties should not get compensated,” Coward says. “We all believe that you should be compensated if you’ve been hurt. The difference without joint and several is that you take responsibility for that percentage for which you were negligent. Municipalities are great for putting all of the policies and procedures in place. We’re very good at following these procedures and making sure that they are done properly. Unfortunately, it’s very easy for a judge to find the small weakness. If they find that you are 1% or 10% liable, we’re willing to accept that, because that is where the error is.”

Risk managers and municipal lawyers note that 40 out of 50 states in the United States do not have joint and several liability in their contributory negligence laws. In fact, proportional models of contributory negligence now seen in the United States represent the best alternative for some risk managers.

“I know in some jurisdictions in the United States, they have a proportional liability,” says Marshall. “So, for example, if a municipality is only 5% at fault — irrespective of the presence of other insurance — that’s the most that they would pay, 5%.”

But proportional models may represent the toughest sell to government legislators, Boghosian says. Witness British Columbia’s 2002 Civil Liability Review: at that time, the Office of the Ombudsman in the Province of British Columbia recommended against limiting the application of joint and several liability. The ombudsman acknowledged the B.C. attorney general’s concern that the joint and several rules might create an “unfair burden” on solvent defendants. Nevertheless, “eliminating this ‘burden’ may leave those who suffer injury without much potential for redress in certain cases,” the ombudsman wrote in its 2002 submission to the review. The ombudsman was responding to a minis try of the attorney general consultation paper on the subject. “Certainly the concern of the attorney general is legitimate, but caution should be exercised before going to a system of strict apportionment of liability on the basis of contribution to the damage,” the ombudsman wrote.

Vanini notes AMO recently brought up the issue of joint and several liability with Ontario Minister of Municipal Affairs and Housing Jim Bradley at AMO’s annual general meeting. She said Bradley responded to a question from the audience by describing joint and several liability as “a complicated issue.”

“We know that,” Vanini said in a subsequent interview with Canadian Underwriter. “But you shouldn’t shy away from good public policy because it’s complicated.”

Vanini was pleased Bradley said he would be interested in spending more time discussing the issue with AMO. “It’s not necessarily a commitment to do things, but it’s an opportunity to sit down and discuss and examine matters in greater detail,” she says.

The Law Reform Commission of Ontario is also investigating joint and several liability, although in the limited context of how it relates to the Business Corporations Act. Canada’s federal government undertook a similar review in 1995, when auditors expressed concern about escalating insurance rates in the context of securities lawsuits against them. The federal government review led to a qualified version of proportionate liability being adopted in the Canadian Business Corporations Act. But the changes were adopted only in federal legislation, not necessarily provincial legislation. And they do not apply to the federal Insurance Act.

B.C. has implemented a form of proportional liability, although the language of “joint and several” liability still appears in S. 4(2)(a) of British Columbia’s Negligence Act.

Saskatchewan’s Contributory Negligence Act contains a reference to the “apportionment of uncollectible contributions.” According to this principle: “If the court is satisfied that the contribution of a person found at fault cannot be collected, the court shall, after determining the degree in which each person is at fault, make an order apportioning the contribution that cannot be collected among the other persons found at fault, proportionate to the degrees in which they have respectively found to have been at fault.”

In other words, if five parties were found to be equally at fault in a $100,000 judgment and one defendant can’t pay, the uncollected $20,000 portion would be distributed equally distributed among the remaining four parties. In one respect, that would prevent a “deep pocket” defendant from having to eat the entire $20,000 in unpaid costs.

But in another way, Saskatchewan’s re-apportionment rule is “not much different in some ways to the way it is now,” Bowley says. “If you’ve got two defendants, and one you can’t collect from, that means the other one is fully on the hook for the rest of it.” There are other, non-proportional models, AMO’s paper notes. For example, some models dictate that a party must be responsible for a certain threshold amount before joint and several liability applies. “I think there are some jurisdictions in the United States in which you have to be over 50% at fault before you have to pay,” Marshall notes. Some models have a 30% threshold before joint and several liability applies, Boghosian adds. Ultimately, Vanini says, reflecting the views of many of Canada’s risk managers, it’s not the model that’s important, so much as the change from the status quo. “We’re not necessarily married to one particular option,” she says. “I think what we are married to is that this [1% rule] isn’t working. We need a much more reasoned approach and something that gives a bit more clarity. If we’re at fault, we’re at fault. But if we’re not at fault, the idea of holding a property taxpayer tax rate up to the challenge just doesn’t seem right.”

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Even if a municipality is found to be only 1% responsible for a victim’s injuries, it may nevertheless be on the hook to pay for 100% of the damages, assuming one or more of the other defendants can’t pay.

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There was never any discussion in the law of the utility or benefits of joint liability. Basically it just fell into the law accidentally, through the back door, and has never really been reviewed on a first-principles basis.

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Essex County’s renewal policy for 2010 had almost a 48% increase, which translated into close to $200,000. There’s a bill for you.

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A lot of people who do this stuff don’t have insurance, because basically they can’t afford insurance. So even though the municipality sues them for contribution, it’s like getting blood from a stone.