After a lengthy period of reform that dates back more than ten years, auto insurance systems in Atlantic Canada, Ontario and Alberta are showing some wear and tear, particularly in bodily injury claims.
Measures such as minor injury caps or guidelines are under constant pressure from creative litigators and regulators anxious to respond to accident victim disgruntlement. In some cases, provincial governments have tripled cap levels and indexed these amounts to inflation, creating higher per-claim costs. In others, lawyers have found ways “around the cap” by focusing on injuries like chronic pain and post-traumatic stress syndrome, while pursuing additional heads of damages. Other cost pressures include systemic fraud, lengthy dispute resolution procedures, adherence to reasonable treatment guidelines and vehicle property damage claims.
The question today is whether the reforms, designed to create sustainable car insurance programs that balance affordability with fairness, are still working. With legislation either introduced or pending in many provinces, there is a perceived need for measuring, tweaking and, in some cases, overhauling existing systems.
It all adds up to a pivotal time for auto insurance, and a test of whether these changes can keep a healthy tension between reasonable claims payout and stable rates. Here is a cross-country check up on privately delivered auto insurance in key provinces, with commentary from independent adjusters.
Nova Scotia has had the longest experience of a raised minor injury cap in the Atlantic Canada provinces. Effective April 28, 2010, the province increased the limit on pain and suffering awards for minor injuries suffered in a car accident to $7,500 (from $2,500), indexed yearly for inflation. The Nova Scotia government also narrowed the definition of what is actually considered a minor injury to include only sprains, strains and certain whiplash associated disorders.
A second phase of the so-called “Fair Auto Insurance Reforms” came into effect April 1, 2013, bringing new diagnostic and treatment protocols for minor injuries. Borrowing heavily from Alberta’s model, the new treatment plans mean drivers injured in accidents have direct access to physiotherapy and chiropractic services without waiting for approval from an insurer or a physicians. Other reforms included direct compensation for property damage (allowing drivers to be compensated by their own insurer for property damages) and limited liability and new priority of pay rules for car rental companies.
However, it is the changes to the cap that have had the greatest effect on Nova Scotia’s auto insurance system. In May 2010, an actuarial report by Oliver Wyman done for the Nova Scotia Superintendent of Insurance estimated that the revised minor injury cap “will increase the bodily injury coverage claims costs by 17% … Approximately $69 million (estimate) in additional claim costs would be paid by insurers if all claims (open or closed) that had been subject to the current minor injury cap and definition were to be retroactively paid under the proposed minor injury cap and definition.”
Carol Messervey, an adjuster with Plant Hope Adjusters Ltd., says plaintiff lawyers have accepted the reality of the cap, but are constantly looking at ways to circumvent it. “I think the lawyers said, ‘we are stuck with the cap, we have to live with it, let’s try to find other ways around it. Let’s take a look at other tactics,'” she notes. “It was just a matter of what that was going to be.”
One tactic some litigators have tried is to pursue additional heads of damage, such as loss of future earnings capacity, loss of housekeeping capacity and future cost of care, according to Messervey.
“A $60,000 claim is still the $60,000 claim it was way back when,” she notes. “The difference is that plaintiff counsel is making the foot fit the shoe with these heads of damages. So when the insurers are faced with some of these demands, they are starting to take a look at the grass roots adjusting, such as making sure you have a more detailed statement from the claimant to determine the exact nature of the injury and the impact on educational background, occupation.”
Another trend Messervey has observed is increased diagnosis of concussions. “This is diagnosed three, six or nine months after the accident, as opposed to right after,” she says. “I am not sure if the medical field has missed it or if there is some litigiously creative plaintiff counsel out there who realize that, not only does it take it outside the protocols of section B (accident benefits), but also outside the definition of soft tissue injury in the cap.”
For Messervey, these trends necessitate a “back to basics” approach to loss adjusting. “I sensed at the beginning and still maintain that because of the interpretation of what qualifies and what doesn’t under the new cap, now insurers have realized that a good grass roots investigation can help at the onset of a claim,” she says.
New Brunswick’s auto insurance system followed Nova Scotia’s lead in raising the cap for minor injuries to $7,500 (from $2,500) effective July 1, 2013 (indexing for inflation is set to start Jan. 1, 2015). The province also updated the definition of minor injury to a more restrictive set of six listed injuries – contusion, abrasion, minor laceration, sprain, strain and whiplash associated disorder. The regulations also note that minor personal injuries falling within these categories “do not result in serious impairment and permanent serious disfigurement.”
A higher cap, coupled with a narrower definition of minor injury, will lead to higher claims costs – the question is, how much? In October 2013, the New Brunswick Insurance Board accepted estimates from two actuarial studies that showed “the range of probable magnitude for the impact (of the new Minor Injury Regulations) on bodily injury loss costs is between 20% and 31.3%.”
An actuarial report prepared by Oliver Wyman in August 2013 at the request of the Office of the Attorney General for New Brunswick estimated that “the more restrictive minor injury definition and higher $7,500 minor injury cap will increase the bodily injury coverage average cost per claim by approximately 30%, and the accident benefits-medical/rehabilitation average cost per claim by 25%.”
“As insurers know, uncertainty tends to breed litigation and increase costs,” according to a 2013 legal update by McInnes Cooper. “New Brunswick is entering a new era of insurance regulation and there are questions to be answered and arguments to be made. This will likely result in more claims moving to litigation, an increased reliance on expert medical evidence, and of course, increases in awards of non-pecuniary general damages actually paid to claimants.”
These trends are already being observed by some independent adjusters. “It seems to me that bodily injury claimants are much more reluctant to settle their claims within the first 12 months post MVA,” notes Kelly Roberts, an adjuster with Plant Hope. “Since the introduction of the new legislation, claimants are pressing more for the $7,500 payment. It has made it necessary to obtain more medical documentation from the treating physician and other health care providers in order for insurers to accept resolving the matter.”
Invariably, lawyers are showing greater interest in higher cap payouts for minor injuries. “It is my experience that lawyers are becoming more involved in bodily injury files,” Roberts observes. “As a result, this has shifted our handling of files towards a more litigation-type approach. Consequently, files are staying open longer and I expect that there will be more challenges to the definition of what is considered a ‘minor injury.'”
“Whether or not our market will be able to sustain the increase in loss severity remains to be seen,” Roberts adds. “However, we have been down that road before and everybody paid the price.” _Prince Edward Island’s government passed
legislation in the spring of 2014 that will see significant changes in auto insurance, similar to reforms enacted in Nova Scotia and New Brunswick. Effective October 1, 2014, the cap on minor injuries will rise to $7,500 (indexed to inflation as of January 2016), while no-fault accident benefits available under the standard auto policy are set to increase significantly, mirroring those in New Brunswick. The amended legislation also narrows the definition of “minor personal injury” to sprains a, strains and whiplash associated disorders that do not result in a serious impairment. Direct compensation for property damage is also expected to be introduced in PEI in 2015.
Newfoundland and Labrador, without a minor injury cap, remains the dark horse of auto insurance jurisdictions in Atlantic Canada. In 2004, the province introduced a $2,500 deductible on pain and suffering awards for minor injuries. However, according to Insurance Bureau of Canada, this “did not effectively reduce the cost of court awards, and will not provide the long-term cost control that has been seen in the other Atlantic Provinces with a cap, instead of just a deductible.” IBC also notes that “problems continue to exist in the province’s auto insurance system that allow large pain and suffering awards for relatively minor injuries. If the experience in other provinces is any guide, additional reforms will be necessary to maintain stability in insurance rates.”
Following its landslide election victory on June 12, 2014, the Wynne Liberal government quickly reintroduced auto insurance legislation Bill 15 (formerly Bills 171 and 189) into the Ontario legislature on July 15. With a majority government, the legislation is expected to pass this fall.
The auto insurance reform package deals with several measures involving anti-fraud, consumer protection and arbitration, including:
• Changing Ontario’s auto insurance dispute resolution by moving injured drivers from the insurance regulator to an existing tribunal run by the Ministry of the Attorney General (License Appeal Tribunal);
• Providing more oversight of the billing practices of health clinics and allowing only licensed service providers to be paid directly by insurers;
• Requiring tow truck operators to register their vehicles, get permission from a driver before charging for towing and storing services, post their prices and provide itemized invoices.
For adjusters like Tammie Norn, founder of ProFormance Group Insurance Solutions, fraud is one of the biggest challenges facing Ontario auto insurance.
“I would have to say the most significant cost pressures in the personal lines auto insurance at this point would be the fraudulent claims,” Norn notes. “In a Canada-wide study conducted by KPMG on behalf of the IBC they found that 33.6% of all AB claims and 25.6% of all BI claims involve premeditated or opportunistic fraud. The study also found that the total cost to private insurers of AB and BI fraud is estimated to be 15% – 22% of all paid losses or as high as $430 million. The numbers and dollar amounts are highest in Ontario.”
Norn says that some progress has been made on AB claims in Ontario, mainly due to the introduction of the Minor Injury Guideline in 2010. “The MIG has held up quite well and we have a couple of solid decisions supporting the application of the guideline. FSCO reported a decrease in the average cost of AB claims from $56,000 in 2010 to $27,000 in 2012. I also believe the regulation of health care providers as will go a long way in further preventing fraud in AB cases.”
On the bodily injury side, “the frequency of these claims is definitely up,” Norn observes. “The definition of threshold continues to be challenged and we continue to see some of the ‘softer’ cases meeting threshold. Plaintiffs continue to try and recover monetary losses that are no longer available under the Statutory Accident Benefits Schedule, such as housekeeping, caregiving and attendant care to a certain extent. I anticipate these frequencies will continue to rise.”
One area that will experience medium to long-term pressure is the dispute resolution system, according to Norn. “Although the mediation backlog was eliminated the later part of last year, an arbitration backlog now exists,” she says. “According to FSCO, approximately 72% of failed mediations proceed to arbitration. We do not currently have the infrastructure to support this increase. The proposed changes… mandate an arbitration-like process, which is only going to further tax the system.”
Norn is also not confident that the new dispute resolution process involving the Ministry of the Attorney General will improve things. “Removing the right to sue in Accident Benefit cases and having to proceed to the License Appeal Tribunal is a mistake,” she notes. “There will be added cost pressures not only for the insureds who have both AB and BI claims, but for the insurers who are on for both sides as well.”
Property damage claims costs may benefit the most from Bill 15, according to Norn. However, this is not the main driver of loss trends in Ontario auto insurance.
“I would suggest the changes related to towing and storage would have the most significant affect on current cost pressures within the scope of this legislation,” Norn concludes. “That being said, this is just a small portion of what is driving the cost pressures. The bulk of the claim dollars are spent on accident benefit and bodily injury claims. I do not foresee any positive effects in either of those two streams.”
Alberta has not experienced significant changes on the claims side of its auto insurance regulations in recent years. The minor injury regulation (MIR), which came into effect in October 2004, has held steady at $4,000 ($4,777 indexed to inflation for 2014). Alberta’s definition of minor injuries and its diagnostic and treatment protocols have been used as models for other provinces. And like its counterparts in New Brunswick and Nova Scotia, Alberta’s MIR has survived legal challenges against its constitutionality.
However, there are troubling signs of adverse loss development in bodily injury claims in the provincial auto insurance market. According to an actuarial analysis of industry experience done by Oliver Wyman for the Alberta Automobile Insurance Rate Board (AIRB) in December 2013: “We reviewed the loss development patterns for each of the top ten insurers operating in Alberta, and while the development patterns differ (rather significantly) among the companies, most of the insurers experienced adverse development in 2013 as well as other recent years.”
In a submission to the AIRB in May 2013, Allstate Canada noted that: “loss costs for mandatory coverage increased 21.5% in the last 12 months, a marked increase from year over year variances seen in the past three years. Bodily injury claim frequency has remained steady, while average severity climbs. The deterioration in BI experience alone drives total loss costs for mandatory coverage up 15% over the past 12 months.”
The main culprit behind rising BI claims costs seems to be, at least in part, two-fold:
• a higher proportion of claims involving chronic pain (particularly), Temporomandibular Joint Disorders or TMJ (as a result of the Sparrowhawk decision, which held that dental and jaw-related injuries are outside the MIR) and psychological injury; and
• plaintiff counsels aggressively disputing the MIR and a higher percentage of claims being litigated.
While the Oliver Wyman report called these trends “largely anecdotal,” it is clear that plaintiff lawyers have increasingly applied legal rulings to circumvent the MIR/cap in Alberta.
According to a 2013 paper called Minor Injury? I Don’t Think So authored by J. Derek Allchurch and Geoffrey D.W. Brisbin of the Calgary law firm Litwiniuk & Company: “Since Sparrowhawk, we have focused on taking any aspect of an injury not specifically covered by the legislation and
using it to take the injury outside the cap. In addition, we have been relying extensively on the ‘serious impairment’ exception, specifically as it applies to activities of daily living. Finally we are trying to maximize other heads of damage, notably housekeeping.”
In their conclusion, the lawyers expand their approach to any auto insurance jurisdiction using the minor injury cap. “Given the growing similarities between the Alberta and Atlantic legislation, these Alberta approaches will be effective in maximizing recovery for Maritime claimants as well. We also look forward to applying the lessons and strategies emerging from Atlantic Canada in Alberta.”
For independent adjusters, such as Kerry Reid of Alberta-based Canadian Claims Services, the impact on bodily injury claims is clear. “There are signs of pressure in the bodily injury area of insurance,” Reid observes. “What we are finding more is (claims) for Post Traumatic Stress Disorder. There will always be pressure and someone will always challenge the MIR.”