Janice Mucalov
January 1/2002
The Information Service of the Canadian Bar Association

Is no-fault insurance a legislated crime against innocent victims who receive inadequate compensation, or is it a necessary social tool to curb rising auto insurance costs? Are lawyers justifiably outraged that their clients are being shortchanged by a flawed system and a powerful insurance company lobby, or are they clinging to an outmoded tort system that rewards no one but themselves? How you answer those questions probably depends on which side of the increasingly fractious line you stand between accident victims and insurers. There’s very little middle ground when it comes to no-fault — either you like it or you don’t, and many lawyers don’t. Ignited in 1974 when New Zealand became the first common-law jurisdiction to adopt a pure no- fault insurance scheme, the no-fault debate rages on in Canada and adds new combatants all the time. Newfoundland and Labrador has just announced that come spring, it intends to wipe out countless personal injury claims by passing new legislation introducing a modified no-fault scheme. The provincial bar is fighting those proposals that impair claimants’ rights. In Saskatchewan, which has had a no-fault compensation scheme since 1995, local lawyers backed by a powerful anti-no-fault coalition of accident victims are waging a campaign to reinstate the right to sue, and the opposition Saskatchewan Party has promised to scrap no-fault if elected. Quebec has had a no-fault system for decades, B.C. almost instituted one in 1997, Manitoba has one in place, and Ontario keeps shuffling back and forth on the no-fault see-saw. For its part, the Canadian Bar Association has made its position clear. At its annual meeting last August, CBA Council resolved to beef up a no-fault task force, emphasizing that its mandate is to establish the complete failure of no-fault compensation, present ways to combat its expansion, and develop a plan for dismantling no-fault schemes in provinces where they’re already in place. The battle lines, drawn for years, are hardening. As the rhetoric flies and anger swells on both sides, it’s hard to know whether no-fault really has failed, what its pros and cons are, and whether there’s any place for it in provincial automobile injury compensation schemes. What’s the real story behind no-fault insurance?

The rationale

No-fault schemes are desirable because they’re cheaper, governments say. They believe that no-fault is in society’s best interests to combat soaring insurance costs and rising premiums, which result from a growing number of claims and a poor return on insurers’ investments in a soft economic climate. Newfoundland is the latest province to argue the point. In October, the government released 51 proposals for automobile insurance reform, which include eliminating the right to sue for pain and suffering unless the injury is permanent and serious, and grafting a $15,000 deductible onto all pain-and-suffering claims. “If the restricted tort option were to be adopted, the government could mandate an immediate reduction in third-party liability rates estimated at 35%,” says Newfoundland Lands & Services Minister Walter Noel. “The insurance industry is warning that in the absence of such change, rates will rise dramatically.” But Jamie Martin, Past President of the CBA’s Newfoundland Branch and Chair of a joint CBA/Law Society of Newfoundland task force on automobile insurance, questions whether insurers really are in trouble. “Insurance companies are claiming financial problems down the road,” he notes. “But recent decisions from the Public Utilities Board [which determines insurance rates and increases in Newfoundland] show that rates aren’t increasing in any substantial way.” The joint task force is calling for a full-scale public hearing by the Board to determine if insurance costs and rates really are at risk, with the Board’s consumer advocate intervening on behalf of insurance buyers. The answers are important, because introducing no-fault could exacerbate rather than alleviate financial problems. In Saskatchewan, no-fault has led to a dramatic increase in premiums, says Hugh Harradence of Harradence Logue Holash in Prince Albert. A former President of the provincial CBA, he sits on Saskatchewan’s Joint No-Fault Committee with members from the province’s law society, CBA and Trial Lawyers Association. Harradence points to statistics showing that premiums effectively exploded by 40% in the first four years after no-fault was adopted by the province. And according to a committee report, administrative costs for Saskatchewan Government Insurance (SGI), the province’s monopoly government auto insurer, mushroomed by 25% — from $34.5 million before the introduction of no-fault in 1995 to $43.1 million in 1998. “It simply hasn’t worked,” says Harradence of the province’s no-fault plan. Over in B.C. in 1996, the former NDP government unsuccessfully tried to push through no-fault on the grounds that premiums and costs would otherwise spiral out of control. “The province paid $1.3 million to KPMG, who predicted that, without no-fault, there’d be a $2.4 billion deficit by 2001,” says Don Renaud of Campbell, Renaud in Burnaby, B.C., president of the Trial Lawyers Association of B.C. “But the reality is that they preserved fault and froze premiums for five years.” Near the other end of the spectrum is Manitoba, which when faced with potential premium increases, introduced its form of pure no-fault, the Personal Injury Protection Plan, in 1994, promising consumers annual savings of $50 million. But no-fault critics point out that the rates rose anyway, the promised savings didn’t materialize, and insurance increases in 1995 and 1996 were substantially the same as they would have been had no-fault not been adopted. And in Ontario, which has a threshold no-fault plan, “abnormal abuses” by insurers are putting pressure on increasing premiums, says Philippa Samworth of Dutton, Brock, MacIntyre & Collier in Toronto, president-elect of The Advocates Society. Claimants and insurers who disagree over the entitlement to Ontario’s accident benefits can obtain neutral third-party assessments through Designated Assessment Centres (DACs). “But the DAC process has become very costly, as high as $15,000 to $20,000 per patient,” says Samworth. “Insurers are spending far too much money on sending patients to doctors to be checked out for medical and rehabilitation cost claims.” Against this tidal wave of sentiment, however, stands one no-fault province that boasts an enviable financial record: Québec. A full 90% of Québec drivers pay just $142 a year in premiums for personal injury protection, covering accidents anywhere in the world — by far the lowest premium in Canada, less than half the equivalent portion paid in second-place Manitoba. That $142 premium has remained steady for the past 17 years. And B.C.’s new Liberal government has announced that its predecessor mismanaged the province’s government-run auto insurer, the Insurance Corporation of British Columbia (ICBC), resulting in a $150 million deficit for 2001 instead of the expected surplus. The new government warns that auto insurance rates will now rise 6.6% — which might have no-fault supporters clucking that B.C. should have gone no-fault when it had the chance.

Fairness

Still, even if costs are an issue, no-fault insurance shouldn’t be used to solve the problem, says Renaud. “If affordability is the problem, there are other solutions, like focusing on road safety.” Road safety initiatives and anti-fraud and anti-theft programs are known to help combat rising auto insurance costs. Where no-fault supporters say the system is cheaper and therefore benefits society, opponents say that a tort-based system is fairer and benefits individuals. For one thing, unlike no-fault, tort principles aim to fully compensate the injured for all their losses. In Ontario, for example, Samworth says the $15,000 deductible is a source of complaint among the plaintiffs’ bar. “It eliminates a lot of smaller claims,” she notes. “Even if you meet the verbal threshold [see sidebar], you won’t sue for, say, a $25,000 claim for general damages if you have to automatically reduce that by the $15,000 deductible.” In Saskatchewan, a claimant seriously injured while in graduate school, but who doesn’t have a record of regular employment, is likely to be treated as if she’d earned an “average” salary. Compensation doesn’t reflect the individual’s actual earning potential. Worse, with many no-fault provinces — like Saskatchewan and Manitoba — there’s no compensation and no right to sue for pain and suffering, a fundamental claim in a tort-based system. There’s no financial solace if you can’t pump iron at the gym anymore, or run your usual five kilometres a day, or swing those golf clubs like you used to. These are legitimate claims denied by no-fault, argues Renaud. “This is money for people’s health.” Québec is the only no-fault province where the amount of compensation comes close to tort awards for all levels of injury. Laval University law professor Daniel Gardner has compared the benefits for traffic accident victims under Québec’s no-fault plan with tort-based compensation — awards for the same injuries occurring in non-automobile contexts (such as ski accidents). “Dollar for dollar, no-fault is as good as sometimes even better than — the common-law tort scheme,” he concludes. He points out that if you take the current maximum non-pecuniary loss amount of about $270,000 in Canadian tort law — derived from a 1978 Supreme Court of Canada trilogy of cases — and deduct 25% to 30% for legal fees, you arrive at about $179,375, the ceiling for non-pecuniary loss under Quebec’s no-fault plan. Gardner refers to the “hidden costs” inherent in the tort system. “In theory, you’re fully compensated under a tort system, but in reality, that’s not the case,” he maintains. A capital lump sum must be invested to make up for the discount rate applied at the time of judgment, and the claimant then has to pay tax on her investment. But fairness isn’t just about money, counters Renaud. “It’s a very important access to justice issue,” he says. “The debate often entered into is between rights and rates. But justice isn’t a commodity. Tort rights aren’t a commodity. A fault system ensures fair compensation because you have access to the courts, where you have the right to be heard and to have your loss assessed based on common-law principles.” Harradence agrees. “No-fault is fundamentally unfair to innocent victims. It’s taken away people’s rights and replaced adjudication by an independent judge with an adjuster, who works for the insurance company that pays the benefits. There’s a huge conflict of interest there.”

The arguments

Unfair or not, an acknowledged advantage to no-fault is that victims usually receive compensation more quickly than under a tort system, because liability isn’t an issue. In Québec, according to the Société de l’assurance automobile du Québec (SAAQ), which administers the province’s no-fault program, the first income benefit cheque is issued on average 22 days after a claim has been made. “Compare that to a tort system, where the victim may not receive settlement for three, four or even five years after the accident,” says Gardner. But Renaud suggests that delays inherent in tort schemes can be addressed. “There’s nothing stopping the insurance companies from making advance payments to people,” he says. And insurers would be more inclined to cough up sooner if sufficient pre-judgment interest was awarded, he adds. “In B.C., since pre-judgment interest was abolished a few years ago, insurance companies have been much slower to settle.” Driver responsibility is yet another point of contention in the fault versus no-fault debate. In the same way that restaurants insured against fire burn down more often than uninsured restaurants, say the critics, no-fault insurance may actually foster bad driving. In Canada, the finger is often pointed at Québec. At least three major studies reported that the number of accidents with injuries jumped by anywhere from 26% to 29% in Québec in the first year after no-fault was introduced. Gardner, however, doesn’t believe that making drivers responsible for their actions leads to fewer accidents and fatalities (the “moral hazard” theory). “The possibility of being sued doesn’t stop people from drinking and driving,” he scoffs. “They’re concerned instead about not getting stopped for drunk driving.” Long-term statistics tell the whole story, he says. According to SAAQ, when no-fault insurance was first adopted by Québec in 1977, there were 1,317 road fatalities out of a pool of 3.1 million drivers. In 2000, the number of fatalities had dropped to 765, while the total number of drivers had increased to 4.5 million. “I’m not saying that road fatalities decreased because of no-fault,” explains Gardner. “The decrease can probably be attributed to other things, like the use of seat belts and better road safety programs. But you can’t say that no-fault leads to an increase in deaths and accidents.” In fact, says Gardner, there’s a causative link between no-fault systems and government encouragement of safe driving. The jurisdictions that spend the most money on road safety are no-fault, such as Québec, Sweden and the state of Victoria in Australia. “They have a greater interest in preventing road accidents, as they have to pay for everyone who is hurt.” A related issue is whether no-fault insurance penalizes good drivers while rewarding the bad. No-fault claims to be better for society than a tort system because all victims are rehabilitated. “But no-fault can compensate more people because it compensates bad drivers,” says Renaud. In Québec, drunk drivers receive the same compensation as innocent victims, unlike in B.C., where a driver at fault won’t succeed in a tort action. While members of a Québec bar task force are campaigning for changes in the province’s law to reduce the compensation for drunk drivers, Gardner disagrees. “I think all civil systems should put the focus on the victim and let the criminal system punish offenders,” he asserts. “The purpose of the civil system is to compensate the victim.” Then there’s the sticky issue of recovery. A recent study of more than 7,000 whiplash victims in Saskatchewan, published in the prestigious New England Journal of Medicine, found that people recover twice as fast in a no-fault insurance system than they do if they’re allowed to sue. The research compared claims before no-fault was introduced with claims afterward, when pain and suffering was dropped. One reason postulated for the findings is that under no-fault, some victims might feel that it’s not worth fussing about pain if there’s no financial return. But Harradence responds that the study has been widely criticized as being flawed. Recovery was equated with the date a claim was closed — this could simply mean that the person was no longer pursuing the claim, not that they were actually better. Also, SGI, which funded the study to the tune of $1.5 million, has been accused of interfering in the research. Renaud says that if insurance companies just followed the protocol recommended by doctors, people would recover faster. “But insurance companies like ICBC want to impose their own one- size-fits-all treatment protocol.” He recalls ICBC intervening with an aggressive treatment plan for one client by sending her off to the gym. It was later discovered that she had a disc protrusion in her lower back. “The gym was absolutely the wrong thing for her. If ICBC had just let her follow the protocol of her own doctor and have an MRI, the problem would have been detected much earlier and she’d have had a faster recovery.”

Shallow pockets

Another problem with the tort system is that it presupposes there are assets behind the defendant to back the claim. “It’s no good to nail someone for $3.5 million if he only has $1 million of insurance and a $500,000 mortgage on his house,” says Frank McKellar of McKellar Structured Settlements in Toronto. “Not everybody gets hit by Coca-Cola.” In his experience with auto accidents, which dates back to 1963, McKellar has found that no-fault, at least in Ontario, has doubled the number of victims who have access to financial benefits. Moreover, seriously injured victims receive more money on the whole than they would under a pure tort scheme. “We’ve been structuring more settlements for more money, so I’d think that has got to be better for victims.” McKellar notes that like tort compensation, Ontario’s no-fault benefits can be cashed out in a lump sum, and these payouts are often turned into structured settlements. “In my view, Ontario has rattled out a fairly good system over the last decade ‹ a combination of tort and a pretty rich no-fault scheme, which can be piled together in one pot and then cashed out and structured.” Bob Baxter of Baxter Structures in Toronto says he’s doing far more business now than before the introduction of no-fault insurance in Ontario in 1990. That’s partly because the concept of structured settlements is more understood and acceptable now, he says. But he also credits lingering claims covered by Bill 164, the “rich” 1994-96 predecessor to Ontario’s current scaled-back no-fault scheme. Under Bill 164 — sometimes called the “Rolls Royce of benefits” — claimants could recover up to $10,000 a month for life in attendant care if they were totally disabled with a brain injury (indexed to the CPI), along with medical/rehab costs of up to $1 million, and many other benefits. Baxter notes that claim values for catastrophic injuries aren’t very different post-Bill 164. “The numbers for the plaintiff are very similar,” he says, countering the argument that no-fault puts less money in injured victims’ pockets. If anything, Baxter says, what hurts plaintiffs’ final damage awards is legal fees. “There’s not much provision for lawyers’ fees when dealing with no-fault benefits,” he notes. Fees are only supposed to be considered with the tort aspect of a claim. In practice, if a claimant cashes out her combined no-fault/tort claim, she’ll typically receive a cash component and an annuity component, and the lawyer takes his fees from the cash component. “It would be good if the no-fault system could build in legal fees for the lawyers,” suggests Baxter, “rather than forcing lawyers to take them out of plaintiffs’ pockets.”

A compromise solution?

Admittedly, many members of the legal profession have a financial stake in keeping tort systems alive. “But lawyers are very resilient,” notes Harradence. After no-fault came to Saskatchewan, he simply switched his focus from automobile personal injury work to general litigation, like the 5,000 or so lawyers whom Gardner estimates also survived Québec’s change to no-fault. And it’s not just lawyers who oppose blanket no-fault schemes. While SAAQ says 82% of Québécois are satisfied or very satisfied with their no-fault system, numerous accident victims and victims’ groups elsewhere across the country complain bitterly about no-fault insurance. Still, most lawyers agree that no-fault has its place. Samworth, who’s been consulted on government legislation since 1985, sees advantages to both tort law and no-fault insurance. “You cannot have a really good auto insurance scheme without some sort of no-fault,” she concludes. “It allows accident victims to recover early accident benefits. “The most sophisticated schemes are hybrid,” she adds. “It’s the fairest combination of access to some benefits for no-fault, mixed with the opportunity to sue for innocent victims.” To help contain costs, a small deductible could be set — perhaps $5,000, as proposed by Saskatchewan’s Joint No-Fault Committee. “This would help keep insurance costs down, as it eliminates smaller claims, and the majority of claims are smaller claims,” says Harradence. Finally, Renaud points out that efforts should be directed at preventing traffic accidents and injuries — the root cause of insurance costs and claims — rather than blaming tort-based insurance schemes, and the lawyers who represent victims. Janice Mucalov is a lawyer and freelance writer based in Vancouver.
Understanding no-fault

Automobile insurance law, and the resulting compensation for accident victims, has developed under common-law tort principles — allowing an injured person the right to sue the driver or party who caused the accident. In contrast, no-fault insurance schemes compensate all victims, regardless of fault. “No-fault is based on community responsibility, tort law on individual responsibility,” explains the 1996 Report of the No-Fault Insurance Committee of the Law Society of B.C. But “no-fault” itself is a generic term that encompasses many different types of no-fault schemes. And in Canada, no two provinces have the same plan. In a pure no-fault scheme, there’s no right to sue at all. Every person hurt in a traffic accident is compensated according to a schedule of benefits, regardless of who is to blame. Québec is a good example. Saskatchewan’s plan is a type of pure no-fault, but is less generous than Québec’s — unlike Québec, Saskatchewan offers no compensation for pain and suffering. Threshold no-fault schemes provide basic compensation to all accident victims, but allow seriously injured victims who meet a defined threshold to sue. That can be a “monetary threshold,” defined by the costs of the injury (e.g., the amount of the medical expenses), or a “verbal threshold,” defined by the seriousness of the injury (e.g, permanent serious physical disability). Ontario has a verbal threshold scheme. Claimants can sue for pain and suffering if they suffer a “permanent serious” disfigurement and/or impairment of important physical, mental or psychological function. Newfoundland is also considering a similar verbal threshold scheme. Then there are hybrid no- faults, where the basic scheme is tort-based, but mandatory insurance provides some basic no-fault benefits. Alberta and B.C. are examples.