Optional Paralysis

Ontario’s 2010 auto insurance reforms may have created a dilemma related to the “portability” of optional benefits in priority of payment situations.

In 1996, Ontario approved the OPCF 47 endorsement, designed to make sure an insured person is able to access optional benefits regardless of how the priority of payment rules set out in subsections 268(2), (4), (5), (5.1) and (5.2) of the province’s Insurance Act are interpreted.

Although the OPCF 47 has been available since 1996, optional benefits did not surface in many claims files before Sept. 1, 2010, when Ontario introduced an auto insurance reform package. The 2010 reforms converted previously mandatory benefits such as caregiver, housekeeping and home maintenance benefits into optional benefits.

If more consumers buy the optional benefits to preserve their pre-Sept. 1, 2010 coverages, there will be more OPCF 47 endorsements in the marketplace. In turn, more insurers will become the priority payor of claims they otherwise would not have had to pay before Sept. 1. It follows that insurers could be faced with paying millions of dollars in claims under a policy with an OPCF 47 that they otherwise would not have had to pay under the priority rules.

Background

The Automobile Insurance Rate Stability Act, 1996 (Bill 59) sought to lower the cost of compulsory automobile insurance in Ontario. Among other changes, the legislature tried to set the mandatory accident benefit coverages at a level that would satisfy consumers’ needs, while allowing insurers to price their products appropriately.

Until Sept. 1, 2010, all auto polices in Ontario included basic caregiver and housekeeping /home maintenance benefits. Accident benefit claimants with non-catastrophic (non-CAT) injuries were entitled to claim medical/rehabilitation benefits up to $100,000 per accident. Non-CAT attendant care benefits were available for up to two years after an accident, to a maximum of $72,000 ($3,000/month).

On Sept. 1, 2010, auto insurance reforms went into effect, significantly changing basic coverages for non-CAT claims. Under the new benefits schedule (Reg. 34/10, “the SABS”), caregiver and housekeeping benefits are no longer available by default. Likewise, the non-CAT limits for medical/rehabilitation benefits have been reduced to $50,000. Attendant care benefits have been limited to no more than $36,000 for non-CAT claims (down from $72,000). Again, the plan was to adjust basic coverages to meet consumers’ needs, giving consumers more choices for non-CAT claims while allowing insurers to adjust their premiums.

In the spirit of “more choice,” consumers wishing to preserve their pre-September 2010 benefits could purchase them as optional benefits under s. 28 of the SABS. Once purchased, optional benefits become available in the event of a claim to the named insured (actual or deemed), their spouse, their dependent(s) or a listed driver. Optional benefits are not available to anyone else claiming under the enhanced policy. For example, an uninsured pedestrian struck by a vehicle insured under a policy with optional benefits would not be entitled to those optional benefits when claiming under that policy.

Although the changes to the basic coverages offer more choices and premium levels, they pose some new challenges for underwriters and claims adjusters. Insurers should consider the impact optional benefits might have on future claims, specifically within the ambit of the priority rules under section 268(2) of the Insurance Act and the exceptions to the priority rules set out under the OPCF 47 endorsement (Agreement not to Rely on SABS Priority of Payment Rules).

Impact of the Reforms

We are only six months into the updated policy. As more insureds renew their post-Sept. 1 policies, they are faced with less coverages unless they purchase the optional benefits. Conceivably, the number of optional benefits purchased could skyrocket. From an underwriting perspective, the optional benefits provide an opportunity to sell additional coverages that consumers are used to having anyway. Meanwhile, brokers might be inclined to promote these optional benefits to avoid possible E&O claims against them arising from a failure to inform their customers about the significant changes to the basic auto policy.

However, from a claims perspective, the increasing prevalence of optional benefits amplifies the frequency of incidents in which the OPCF 47 might be triggered. This could significantly increase the insurer’s exposure to paying sizable amounts of benefits it otherwise would not have had to pay.

Here’s why. In a nutshell, the priority rules under s. 268(2) of the Insurance Act determine which insurer is ultimately responsible for paying a claimant accident benefits. A claimant’s first recourse is against his or her own insurer (as named insured, listed driver, spouse or dependent). If that recourse isn’t available, the claimant next has recourse against the insurer of the vehicle they were in or, if the claimant is a pedestrian, the insurer of the vehicle that struck them. If there is still no insurance available, the claimant next has recourse against the insurer of any other vehicle involved in the accident. Finally, if there is still no insurance available, the claimant has recourse against the Motor Vehicle Accident Claims Fund.

Often claimants will have recourse against more than one insurer on the same priority level. For example, a named insured also has recourse against their spouse’s insurer. Likewise, an uninsured passenger in an uninsured vehicle would have recourse against the insurers of any other vehicles involved in the accident. In these cases, section 268(4) of the Insurance Act allows a claimant to choose one of the equally ranked insurers, settling the priority dispute. Sections 268(5) to (5.2) prescribe additional priority rules to break the deadlock when the claimant is a named insured (actual or deemed), their spouse or their dependent(s). These prescribed rules under sections 268(5) to (5.2) may cause significant issues if optional benefits are otherwise available.

Consider the following example. John is insured with ABC Co. He has purchased optional caregiver, housekeeping, attendant care and med/rehab benefits to restore his coverages to the pre-Sept. 1, 2010 policy. He is driving his wife Ann’s car, insured with 123 Co. Their three young children are also in the car. Ann’s policy does not have the post-Sept. 1, 2010 optional benefits. John gets into an accident and all of the occupants in Ann’s car are injured.

Section 268(5.2) of the Act requires 123 Co. to pay John’s claims, since he is Ann’s (the named insured’s) spouse and he was in her vehicle at the time of the accident. Further, 123 would also have priority over the children’s claims, since they are Ann’s dependents and were in her vehicle at the time of the accident. Consequently, the priority rules would deprive John and his children of the optional benefits John purchased for his policy, for an additional premium, to protect his family.

Enter the OPCF 47 endorsement. Insurers are required to issue the OPCF 47 in all instances in which an insured purchases optional accident benefits. The purpose of the endorsement is to make sure an insured is able to access optional benefits under their own policy regardless of how the priority rules are interpreted.

With the OPCF 47, John and his three children could claim benefits from ABC under John’s policy. ABC would then have to accede priority over 123 despite section 268(5.2). Since John’s policy includes the optional (pre-Sept. 1, 2010) benefits, whereas Ann’s policy does not, it is very likely the four claimants would choose to apply to ABC over 123. Depending on the nature and seriousness of the various claims, John’s OPCF 47 could cost ABC considerably.

Therefore, under th e current SABS, it is important for underwriters/brokers to consider the implications of selling optional benefits to insureds who might also have coverage under other, equal policies. Given the likely increased prevalence of optional benefits after Sept. 1, 2010, the OPCF 47 endorsement and its application may have some unintended consequences to the bottom line for which insurers have not accounted.