Ontario insurance regulator outlines insurers' rights and responsibilities in curbing "questionable or abusive claims"

Ontario's insurance regulator, the Financial Services Commission of Ontario (FSCO), has issued a bulletin outlining an insurer's "rights and responsibilities to challenge questionable or abusive claims."
The bulletin comes in the wake of the province's auto insurance reforms, implemented on Sept. 1, 2010.
"FSCO is monitoring on an ongoing basis the interpretation and application of the SABS and associated guidelines by its stakeholders, with a view to identifying and responding to actions that are inconsistent with the recent auto reforms," the regulator says in its bulletin.
"FSCO recognizes that an overwhelming majority of stakeholders are fair and responsible participants in the auto insurance system. However, FSCO is also aware that a small group of service providers and representatives continue to abuse the system."
FSCO outlines several areas of concern, including:
1) It notes the new SABS introduced an interim Minor Injury Guideline (MIG), which defines "minor injuries" as one or more of a sprain, strain, whiplash associated disorder, contusion, abrasion, laceration or subluxation and includes any clinically associated sequelae to such an injury.
All persons with minor injuries fall under the MIG, with limited exceptions, including if compelling evidence demonstrates that a pre-existing condition will prevent that person from achieving maximal recovery if he or she is limited to MIG treatment.
"It appears that some providers are requesting approval for treatment of minor injuries on a Treatment and Assessment Plan (OCF-18) rather than providing pre-approved treatment under the MIG by submitting a Treatment Confirmation Form (OCF-23)," FSCO notes.
"The auto reforms are still fairly new and not all providers are familiar with the minor injury definition and the MIG.
"In particular, not all providers are aware that the existence of other injuries and conditions will not necessarily bring a claimant outside the MIG if the predominant impairment falls under the minor injury definition."
Insurers have a role to educate health care providers on the new MIG, FSCO noted, adding most already perform this role.
2) FSCO notes a few health care providers are flooding insurers with treatment plans.
"It appears that a small number of providers engage in the practice of flooding insurers with multiple versions of similar or identical treatment and assessment plans (OCF-18s) in an apparent attempt to overwhelm adjusters," the FSCO bulletin says. "In many cases it appears that the objective is to cause adjusters to miss the approval timelines set out in the SABS.
"This type of behaviour is clearly inappropriate."
FSCO notes an insurer is not obligated to undertake an assessment for each treatment or assessment request.

'Funds withheld' arrangements for unlicensed insurance: a possible alternative to reinsurance security agreements?

In an article outlining Canada's new requirement for reinsurance security agreements when using unlicensed reinsurance, McMillan LLP has raised the alternative possibility of administering an unlicensed reinsurance agreement on a "funds withheld" basis instead.
Canada's solvency regulator, the Office of the Superintendent of Financial Institutions (OSFI), has changed the mechanism by which Canadian insurers are allowed capital or asset credit for reinsurance placed with non-Canadian licensed insurers.
Previously, collateral arrangements for unlicensed reinsurance took the form of a reinsurance trust agreement between a cedant insurer and an unlicensed reinsurer, as prescribed by OSFI.
Now, however, the regulator is calling for trust arrangements to be replaced by reinsurance security agreements. These security agreements are to be vouchsafed by a legal opinion.
In an article for the International Law Office, McMillan LLP suggested the possibility of collapsing the trust arrangement and administering the reinsurance on a "funds withheld" basis instead.
"OSFI's related new guidance on reinsurance generally contemplates these arrangements, but cautions that the reinsurance agreement must clearly state that in the event of an insolvency of the ceding insurer or the reinsurer, the funds withheld (minus the amount properly due to the reinsurer) form the property under the cedant under applicable Canadian insurance law," McMillan LLP writes. "This appears to be a matter of legal drafting and as yet OSFI has not stated that a legal opinion confirming the legal effect of the wording will be required.
"However, it is uncertain whether this type of legal arrangement could have a regulatory impact on the reinsurer."
McMillan LLP suggests getting in touch with OSFI before attempting such an alternative arrangement.

Court of Appeal upholds agreement blocking brokerage from suing third party insurer in claim regarding underinsurance

Ontario's Court of Appeal has upheld an agreement blocking an independent insurance broker from claiming indemnification against a third party insurance company in a case in which the insured accused the brokerage firm of leaving it underinsured.
The Court of Appeal lifted a stay on an action between the company, Shoeless Joe's, and its brokerage firm, Insurance Portfolio Inc., meaning a court is now open to assess Shoeless Joe's allegations that Insurance Portfolio caused the company to be uninsured. The allegations have not been proven in court.
Insurance Portfolio arranged for loss insurance for Shoeless Joe's. When Shoeless Joe's called on that insurance, it as told there was insufficient coverage.
Without the broker's assistance, Shoeless Joe's settled with the third party insurer, the Dominion of Canada General Insurance Company, for less than the value of its loss. At that time, Shoeless Joe's signed a release in favour of Dominion, agreeing not to make a claim against anyone who might claim contribution or indemnity from Dominion.
Shoeless Joe's then sued Insurance Portfolio, which then sought indemnification against Dominion.
Dominion moved to stop (or "stay") Shoeless Joe's action and Insurance Portfolio's claim for indemnification, based on the release it signed with Shoeless Joe's.
The court lifted the stay on the main action, meaning Shoeless could proceed with its claim against the broker.
But the broker's indemnification action against Dominion couldn't succeed, the court ruled, not only because of the waiver, but because the broker was arguing Shoeless Joe's was actually properly insured, and that Dominion was negligent in paying less than what it should have.
"In our view, it is plain and obvious that [Insurance Portfolio's] third party claim [against Dominion] for indemnification arising from [Shoeless Joe's] underinsured claim cannot succeed," the court ruled.
If Shoeless Joe's was successful in proving it was underinsured, then the basis of Insurance Portfolio's third party indemnity claim against Dominion - i.e. that Shoeless Joe's was properly insured - fell away, the court noted.
Conversely, if Shoeless Joe's was unsuccessful in proving it was underinsured, it suffered no loss. Thus, the brokerage couldn't claim contribution or indemnity from Dominion.

Court voids claims waiver based on power imbalance between adjuster and plaintiff

The Ontario Superior Court of Justice has voided a release waiving all claims against a defendant and his insurer in an auto accident claim, based on the fact that the insurance adjuster had used his unequal bargaining power to lowball a settlement agreement with the plaintiff.
Specifically, the court noted the adjuster did not share information with the plaintiff about the true extent of the plaintiff's serious injuries. Also, the adjuster had incorrectly applied Fault Determination Rules, significantly reducing the settlement offer.
In Jones v. Jenkins, the plaintiff, Brandon Patrick Jones, was injured in a motor vehicle accident when his motorcycle collided with a vehicle driven by Jack Jenkins.
Jenkins wanted the court to enforce a release in which the plaintiff agreed to receive a payment of $19,411 in return for a waiver of any future claims against Jenkins and his insurer, ING Insurance Company of Canada.
The agreement was reached after discussions between the ING insurance adjuster and Jones. The adjuster asked Jones to make a settlement offer based on heads of damages such as disfigurement, pain suffered, future pain and future loss of employment. Jones proposed $241,000.
The adjuster made a counter-offer. A deductible of $30,000 was applied to the general damages. Also, based on the adjuster's assertion that Jones was 75% responsible for the accident, the general damages ($35,000 net of the deductible) and future economic loss ($22,500) were reduced by 75%. The total counter-proposal was $19,411.
The court described the plaintiff, who trusted the adjuster, as "unsophisticated" and "not good with words."
Jones feared losing his job after the accident, and so he stated to a person filling out a medical report that he felt he had recovered and could return to work.
But the adjuster had access to Jones' accident benefit file, which indicated Jones had suffered a much more serious injury - severe and acute radial nerve damage - than disclosed in the medical report. The adjuster should have shared this information in the file with the plaintiff, the court noted.
Also, the court found: "More troubling is the fact that the adjuster reduced the general damages and future economic loss claim by 75% purportedly on the basis of the plaintiff being 75% responsible for the accident. There is no evidence that this was the case.
There was no reason to apply Fault Determination Rules as they were guidelines which were only applicable as between insurers and not as between a plaintiff and a defendant."
As a result, the court found the adjuster had "used his position of power to achieve an advantage and that the agreement reached was sufficiently divergent from community standards of commercial morality as to be unconscionable and it should be set aside."

Common law spouse of husband who dies of injuries sustained in home fire cannot receive full home insurance payout until estranged children of spouse are contacted: judge

The widow of a common-law husband, who died without a Will as a result of injuries from a fire that engulfed their insured home, cannot receive the balance of the home insurance payment until her husband's estranged children can be contacted, the New Brunswick Court of the Queen's Bench has ruled.
In the same ruling, Stanley Mutual Insurance Company received permission to pay the unresolved balance of the home insurance policy proceeds ($45,447.26) into court. The court thus discharged the insurer of all liability for the monies while the issue of whether the widow is entitled to the money is resolved.
"This matter is indeed complicated by the intestacy of [the deceased husband] Vernon Pell and the fact that he and [June Yvonne] Shepherd, although they lived as common law spouses for many years, never married," Court of Queen's Bench of New Brunswick Justice Thomas Riordon wrote.
Pell and Shepherd lived as a common-law couple for approximately 28 to 30 years. Pell, who was divorced prior to his relationship with Shepherd, had children from his previous marriage, but had not had any contact with them for many years. The whereabouts of the children were unknown.
In 2001, the couple moved to New Brunswick from Ontario and purchased the house. They bought a home insurance policy from Stanley Morgan.
The house was damaged in a fire on Sept. 18, 2009. Pell died the next day as a result of a heart attack connected to serious burns to his body in the fire.
Pell died without a Will at the age of 75.
Stanley Mutual paid proceeds owing to Shepherd, and made an application to the court to pay to Shepherd the remainder of proceeds owed to Pell ($45,447.26). The court ordered that some effort be made to find Pell's surviving children first, prior to determining Shepherd's entitlement to the remainder of the insurance policy payment.
"I can understand and appreciate the arguments advanced on behalf of the respondent, Ms. Shepherd," the judge wrote. "However, considering that Mr. Pell died intestate, that he and Ms. Shepherd were not married and that he had children and the provisions of the Devolution of Estates Act [in which the widow of "marital property" is entitled to an intestate's proceeds], I am not prepared at this time to approve payment of the remaining proceeds to Ms. Shepherd."
The judge allowed the insurer to pay the balance of the proceeds into court, pending a search to find Pell's children and/or heirs.

Ontario Court of Appeal holds up marijuana exclusion clause

The Ontario Court of Appeal has upheld a marijuana exclusion clause when landlords tried to make a claim for damages arising from an explosion on their property caused by a tenant running a marijuana grow-up.
In Pietrangelo v. Gore Mutual Insurance Company, Valentino Pietrangelo and Antoinette Pietrangelo owned a rental property. The tenants of the property caused an explosion resulting in total destruction of the house.
As a consequence of the explosion, the tenant pleaded guilty to intentionally or recklessly causing damage to a dwelling house and unlawfully producing cannabis resin.
Following the explosion, the Pietrangelos filed a proof of loss claim under their home insurance. The insurer, Gore Mutual Insurance Company, denied the loss based on an exclusion clause in the policy that excluded coverage to properties directly or indirectly damaged while used in the processing or manufacture of marijuana.
The Pietrangelo's appealed the use of the exclusion clause, arguing that:
• the word "use" in the clause is ambiguous, and that it was an error to hold that the exclusion clause was intended to apply regardless of any knowledge or involvement of the insured;
• the exclusion clause was unjust and unreasonable and s. 151 of the Insurance Act should apply because an insured should not be expected to pay for wreckage caused by the criminal acts of a third party;
• by accepting evidence of the draftsperson as to his intent, the trial judge ignored the clear language of the insurer's Notice that the clause was in relation to ‘marijuana grow houses.'
The Court of Appeal upheld the lower court's rejection of each of the submissions.
The reasonings are as follows:
• the trial judge was correct to interpret the word ‘use' in accordance with its ordinary, commonly understood and literal meaning;
• the trial judge correctly observed that the issue is not whether the exclusion clause creates unfairness to the insured, but whether there is a rational basis for its existence. Since the trial judge determined it was valid and legitimate, s. 151 of the Insurance Act has no application; and
• the draftperson's evidence did not go to the interpretation of the clause, rather, it was in relation to the reason for the existence of such a clause.
"We agree with the trial judge, the exclusion clause in the circumstances of this case is neither "unjust nor unreasonableness," the panel of Court of Appeal Judges wrote. "There are certain risks, which insurers are entitled not to cover for legitimate business reasons relating to the ability to assess risk and set premiums."

Insurer not obliged to pay for independent counsel retained by insured to defend against damages beyond coverage limits: Ontario court

An insurance company does not have to pay for counsel retained by an insured to defend the insured's interests in the event that damages exceed prescribed policy coverage limits, the Ontario Superior Court has ruled.
In 137328 Canada Inc. (Alliance Security Systems) v. Economical Mutual Insurance Company, Alliance installed a security system at a warehouse occupied by Richelieu Hosiery in 2003. During the five-year contract period, the warehouse roof collapsed as a result of excessive snow, causing a water main to burst and damage to the premises and inventory alleged to be in excess of $7 million.
Richelieu commenced an action against Alliance, alleging the security company failed to notify it when the roof collapsed, contributing to the extent of the loss. Alliance purchased liability insurance of $2 million from The Economical.
The Economical advised Alliance that it would defend the action and provide coverage up to the coverage limit. It then retained a lawyer of its choosing.
Alliance, however, retained independent counsel of its own, saying there was a conflict of interest between Alliance and Economical.
Alliance argued The Economical didn't rule out a "remote possibility" that a coverage issue might arise during litigation, which would put the insurer at odds with the insured. [The Economical gave evidence that it was not aware of any coverage issues going into the trial, and seemed to be simply cautioning the insured.]
Also, Alliance said it needed to retain independent counsel in the event that the damages exceeded the policy limits.
But none of these concerns suggested a divergence of interests between the insured and the insurer that warranted taking the defence out of the hands of the insurance company, the court ruled.
"The insurance policy does not contain any term requiring Economical to pay for counsel for Alliance to protect itself with respect to claims in excess of the policy limits," the court ruled. "At this point in time the issue of protecting any interest it may have in any dispute with the insurer is non-existent, because the insurer acknowledges and has agreed that it will provide coverage for the claim up to its limits."
The court ruled the insurer had a right to choose its own defence counsel and to direct the defence. Alliance had a right to retain independent counsel to defend its interests if damages went beyond the coverage limits, but the insurer was not required to pay for the independent counsel.