The Great Car Insurance Crash

By Harry Glasbeek
1991

When, in early September [1991], Ontario’s Premier Bob Rae announced the death of the public auto insurance scheme – a major facet of his pre-election platform – the news got a lot of attention form the mainstream media.

On further examination, the NDP government had decided that public auto insurance was not a good idea for Ontario after all. The existing scheme, slightly modified, would remain in place. The decision seemed to please the media, its owners and their allies.

For corporate Ontario it was the clearest statement yet of what it had been longing to hear: the NDP government is exactly like any other government it had owned in the past. Its interest is in remaining a government and not in exercising power. Nor does it seem eager to empower the working classes and popular sectors whose aspirations it so proudly claims to reflect and represent.

After the decision, the Toronto Star patted Rae on the back for what it called a “judicious retreat.” Eva Ollino, an insurance spokesperson, said that private insurers were “looking forward to working with him.” Geoffrey Scotton of The Financial Post welcomed the latest sign of a retreat to a more moderate economic policy. Scotton noted that the business community was cautiously hopeful. “I wouldn’t bring out the champagne yet,” said a senior official with a powerful business group. According to Law Times, a lawyers’ trade magazine, the law community was also upbeat about the NDP’s changed position.

The Ontario NDP had retreated, in part because it was confused, but mainly because its devotion to what it likes to call practical politics trumped what it contemptuously refers to as theoretical purity.

The idea of individual responsibility dovetails nicely with the tenets of primitive capitalism

The long-running automobile accident compensation soap opera has two distinct themes. First, there is the issue of the right of accident victims to sue for compensation for their injuries and financial losses. This is the fault/no-fault component of the debate. Second, there is the issue of how the large amounts of money necessary to ensure the compensation of accident victims is to be accumulated. This is the public/private insurance component. Because the two issues overlap, it is easy to collapse them into one problem, as the NDP has done, but it is theoretically and practically dangerous to do so.

A fault-based system requires a person seeking compensation to convince a court that another person involved in the accident caused the harm done by behaving irresponsibly. The idea is that assigning fault for a given accident also makes possible an assessment of the personal losses of a particular accident victim; losses that can include damage to property and physical and emotional harm. Making a particular wrong-doer pay these damages is the flip-side of this emphasis on the individual. Assignment of fault is, in theory, supposed to teach the wrong-doer that certain behaviour is unacceptable and also teach all of us that we’ll be held responsible as individuals should we be found to be culpably careless by the courts.

The scheme cannot work. There is no necessary connection between the amount of damage done to a person and the extent to which another is at fault. A collision that occurs after rolling slowly through a stop sign can do more harm than one caused by driving drunk, at high speed, backwards, the wrong way up a one-way street; killing a child can give rise to a lesser award than injuring that same child badly. And, as legal cause must be established, lawyers are necessarily involved.

As we know, lawyers cost. They take one-third of all damages awarded by a fault system. Lawyers always win. Injured persons rarely do. The studies are unanimous: when a fault system is used to determine the compensation of accident victims, over half (56 per cent according to one study) of all injured persons get nothing from it.

Not surprisingly, because automobile accidents are so common, the fault system was modified some time ago with respect to this aspect of personal injury law. Injured persons were guaranteed compensation up to a low maximum, making it unprofitable for persons with minor injuries to seek restitution through the court system. Still, the concept of fault, however impractical, prevailed as the guiding principle.

Lawyers supported this minor modification of personal injury law, for obvious reasons. But it was also supported by many ordinary people who believed that people who are injured in a car accident should be well-compensated. This popular support stemmed largely from the fact that every so often a victim was still awarded a very large amount of money in court. Insurance companies and lawyers always publicize these cases; it’s good for business. But support for the concept of fault reifies individualism and free will, and in our society that kind of attitude can be extremely dangerous.

The “individual should be responsible” approach dovetails with the tenets of primitive capitalism. The requirement that accident victims prove they are blameless before they can be looked after is a notion that pervades all our social systems. To this day, a major hurdle for injured workers is proving to workers compensation boards that their workers compensation boards that their work-related injuries did not result from serious wrongful conduct on their part. This is the kind of thinking that underlies those odious “You’ve got it, use it” advertising campaigns by workers’ compensation boards; it’s a classic blame-the-victim strategy.

Similar problems are encountered by people seeking social welfare benefits. The process by which people must show themselves to be innocent victims who can in no way be blamed for their plight is a completely inappropriate way of dealing with people in genuine need. This lamentable approach is made possible by the existence of a fault system administered by the judiciary, an elite with enormous prestige in our society. Even when tempered by provisions for automatic compensation for lesser injuries, retaining the fault component should, ideologically, be anathema to a party like the NDP, which supports a social welfare system without regard to fault. The right to sue in respect of accident losses should have been public enemy number one for the NDP government. It was not.

Any understanding of how the fault system works should have told the NDP that it was impractical to retain it even vestigially in any new auto insurance scheme. A fault system is not workable without an insurance scheme backing it up. Imagine any of us having to pay another person for a two-year loss of income, plus out-of-pocket expenses for injuries caused in an auto accident in which we were involved. These are the kinds of sums we are talking about in cases where a relatively minor injury has been sustained, somewhere in the neighborhood of $100,000. No ordinary Canadian has that kind of money handy, and so we must insure ourselves against having to pay it. It can surprise no one that to protect everyone from the costs of accidents under a fault system, private insurance has been made compulsory by law. And so the idea that individuals are made personally responsible for their wrong, thereby preventing future irresponsible conduct, is a complete ruse, totally undermined by the practical necessities of the fault system.

The NDP had an obvious way out at all times: ditch the fault system. But, rather than take the logical position that mandatory insurance made the fault system redundant, the NDP argued that it was the insurance component that had to be changed in order to make the fault system work. A new public insurance scheme was to be designed as a means of funding an existing legal system that had become unworkable. It was as if the NDP set out to give social democratic programmes a bad name!

The most notorious case used to prove the need for high premiums didn’t cost the company a penny

The NDP government was right in one respect: public insurance is more efficient than private insurance. Unlike public insurance, to continue to exist private insurance must make a profit. Any public insurance scheme that gives comprehensive coverage would necessarily have a larger premium-paying population than private companies competing (if only a little) with other private insurance firms. Because they must compete for business, private insurance companies must get the information out – through advertising, brokers, commissioned sales people – all of which produce costs that are passed on to the person paying the premium. Inevitably, at any given level of benefits, public insurance will be less costly than private. There are, then, objective grounds on which to base a political attack on private insurance: the fault system that it underwrites yields bad results, and the companies themselves are motivated by the need to make profits and not by a desire to protect the public. Sometimes they get too greedy.

In theory, insurance companies are supposed to calculate risks and price their policies accordingly. What they often do, and did during the inflationary seventies, is to sell more insurance coverage to people than they really need in order to obtain additional investment capital. To offset the risks of high settlements, companies re-insure their coverage. Of course there is always the danger that the whole structure will come down like a house of cards. If some of these excessively covered risks do materialize and people seek to make claims on the enriched insurance policies they were able to buy cheaply and, if insurance companies get less return on their investment than they expected, they may find that they have written policies without having the assets to cover the claims.

This is what happened in the eighties. There were some expensive environmental disasters and asbestos producers were finally held responsible for the victims they had claimed among North American workers. Insurance companies in North America did two things. First, they refused to meet their obligations under the contracts they had written for the asbestos industry, thus forcing profitable companies into bankruptcy and leaving the victims of the asbestos disaster vulnerable. Second, they jacked up premiums in captive markets they controlled, like the compulsory auto insurance market in Ontario. Of course, insurers were reluctant to tell the public that they were milking auto insurance in an effort to recoup losses in other sectors. Instead, they used the excuse that the fault system was awarding accident victims too much compensation in the courts, offering in support of their position those rare, sensational cases in which a victim was awarded millions in damages.

In Ontario, the case most often cited was that of a boy injured on Brampton municipal land. Originally, the court’s decision went against the municipality and awarded the boy $6 million in damages, the kind of award insurance companies insisted was breaking their backs. Insurance companies were creating an atmosphere of crisis, and they were lying to do so. In the Brampton case, for instance, the insurance company appealed the trial result immediately. Twelve years after the accident, the Ontario court of Appeal reversed the decision. The most notorious case used to dramatize the need for higher premiums did not cost the insurance company a penny; except, of course, in lawyers’ fees.

While insurance companies were contending that they needed a better return on their money, municipalities and boards of education threatened to self-insure. Study after study was commissioned by successive Ontario governments. Before the last election, the then-opposition NDP cast the insurance companies as the arch-villains in the drama – a popular stance, as people naturally hated the idea of paying more for their car insurance. By the time the Liberal government had to do something about the problem, Peter Kormos, a lawyer, was given the role of spokesperson for the New Democrats on the insurance issue. Kormos argued that the real problem was not the fault system, but greedy insurance companies who were systematically wrecking it. The NDP ran very effective campaigns against escalating insurance costs, promising to return the right to sue to its former glory. The NDP basked in the popularity of Kormos’s campaign against the insurance companies, and the Liberals were forced into instituting reforms.

The Liberals settled on something they called a no-fault system which, in reality, was far from it. A larger no-fault component was provided than had previously been the case, making it possible for victims to recover up to a certain amount for personal injuries, regardless of whether fault could be proven. For serious injuries, the right to sue for higher amounts was retained, but claims for what lawyers call pain and suffering and loss of the amenities of life – that is, claims for emotional losses – were disallowed. The Liberal scheme displeased lawyers, but was embraced by insurance companies, who could write policies for both the fault and no-fault components of the plan while their own risks were reduced substantially. This was the kind of decision they had in mind when they created the atmosphere of crisis, and they won big.

In the meantime, Kormos and his allies took aim at the insurance industry for its gains under the new system, but did so in part by lamenting the loss of the individual citizen’s right to sue for damages. Kormos’s agenda, clearly, was to bring in public insurance that retained the idea of fault. The strategy played well with a largely uninformed public, supported as it was by prestigious lawyers and a craven Consumer Protection Association. Short-term expediency triumphed over principle.

But when the Ontario NDP government took office, it was faced with a real problem. If it was to follow through on its promise to reintroduce the fault system full blast, it not only had to take over the business of private insurers (a one-time cost) but find operational funds to cover claims the private insurers had not had to deal with. The Insurance Bureau of Canada (IBC) saw the exposed jugular and went for it.

The IBC invented frightening figures for the takeover cost, and pointed out that many of the people employed would no longer be needed if there were only one insurer in the field. The IBC rightly guessed that a confused NDP would miss the chance to treat this as an admission that public insurance was more efficient than the private industry. They felt that the government’s embarrassment at being associated with job losses, especially if premiums could not quickly be reduced, would force the government to back off. To make sure of it, the insurance industry threw in a free trade argument. Under free trade, any direct or indirect expropriation of a business demands compensation, and price tag of $3.6 billion was tossed out as appropriate compensation for expropriating the private industry’s right to sell automobile accident insurance.

Having trapped itself into promising a return to the fault system, the NDP came out of hiding to claim that the IBC, its favorite bad guy, was now telling it like it was: a conversion to public insurance was prohibitively expensive. Gerald Caplan, the unofficial media voice of the NDP, hailed this hapless retreat as an indication that the government had come of age as a political party. What it actually had done was to declare itself bankrupt of ideas and ideals. This costs.

The NDP has said that it is committed to implement a universal disability compensation scheme, as advocated by the Thompson Social Assistance Board Review Report. After the auto insurance flip-flop, it will now be extremely hard politically to go to the electorate and argue that a publicly run compensation scheme is better than the fragmentary one now provided by private insurers selling sickness, accident and life insurance policies. On the free trade front, the Supreme Court of Canada has suggested that there is no inherent right for private actors to sell liability insurance. The insurance companies have a weak case. Their bluff should have been called. Had it implemented now and paid later in the unlikely event that it lost, the NDP could have shown that it really meant what it said about tossing out the free trade agreement; shown that free trade threatens the constitutional right of elected provincial government to act in areas over which they have had jurisdiction since 1867; argued that Americans have too much control over our financial decisions; and shown that lawyers are tying to rip us off. A marvelous political opportunity was missed.

As this is being written there is gossip coming from Queen’s Park that the fault component of the new system is likely to be much smaller than originally promised. But it’s too late; the damage has been done.

The great auto insurance crash demonstrates that so-called pragmatic politics can be very impractical. The NDP have sent corporate Ontario a message. It is not here to upset capital’s nicely loaded applecart. It might add a few apples, a few of which may fall into the hands of the proletariat; it might sit up there on the cart now and again and pretend it is in the driver’s seat. But it does not actually want to drive. Business can do business with that kind of government.

Harry Glasbeek teaches law at Osgoode Hall in Toronto.

Published in This Magazine, Vol.25 No.176 , December 1991-February 1992

Related Topics: Automobile Insurance – Insurance – Insurance Industry – Insurance Reform – New Democratic Party – No-Fault Insurance – Ontario Government