The crisis struck municipalities, companies and clubs across the nation last week. In Ottawa the Canadian Ski Association declared that it might pull its national teams off the World Cup circuit because it could not obtain liability insurance—at any price. Two days later a spokesman for the Ottawa-based St. John Ambulance service said that its 14,200 first-aid volunteers were working without liability insurance coverage because the organization could not afford to pay the $205,000 premium—up from last year’s $16,000. In Saint John, N.B., the nonprofit Cherry Brook Zoo ended a 17-day shutdown when the directors finally found an insurance company willing to provide liability coverage. To pay the $8,900 premium—up 1,483 per cent from last year’s $600—mayor Elsie Wayne organized a raffle. Zoo chairman Joseph Coughlan told Maclean's: “We were shocked to death. We did not realize the situation was this bad.” As dozens of groups scrambled to find liability insurance—and more money for less coverage—the political outcry mounted.
The difficulty in obtaining affordable insurance was felt across the country. In Ottawa 10 Liberal MPs, including House Leader Herbert Gray, demanded an inquiry under the Combines Investigation Act into what they called a “conspiracy” among companies selling liability insurance. As well, Toronto Conservative MP Donald Blenkarn, the chairman of the Commons finance committee, requested immediate action. “Our very way of life is threatened,” he declared. Faced with those demands, Minister of State for Finance Barbara McDougall said that Ottawa will work with the provinces to solve the problem.
Still, property and casualty insurers who provide liability insurance say that they are as hard-pressed as their clients. Indeed, the industry appears to be in chaos as it struggles to cope with a series of critical changes. Industry experts say that the companies are losing money on liability insurance because the number of claims—and the size of court-ordered awards—has increased dramatically. Even income earned from the investment of premiums has not covered mounting claim losses, they say. Insurance companies are now raising rates to cover those losses—and possible future losses—because of the size of U.S. court awards and a small number of costly Canadian awards.
At the same time, international insurance companies such as Lloyd’s of London, which reinsure the policies of Canadian insurers, have imposed large increases. Under the reinsurance arrangement, international companies pick up a portion of the liability on large policies—such as the final $15 million in a $20 million policy—in return for a percentage of the premiums.
To determine the price of reinsurance, Lloyd’s and others usually examine the record of claims in each insurance area for all North America. That means that the liability record of the United States—with its numerous claims and expensive settlements—is driving up reinsurance rates paid by Canadian companies. As well, many reinsurance firms are staggering from the financial impact of catastrophe claims like some of those made after last year’s major air disasters. As a result, they are either withdrawing from the North American market altogether or offering less reinsurance for more money to primary insurance companies.
Faced with reluctant reinsurers and reinsurance price increases of up to 1,000 per cent, many Canadian insurance firms have stopped offering liability insurance—or have raised their prices for reduced coverage. Said Philip Kane, senior vice-president of national marketing for Toronto-based insurance brokers Johnson & Higgins Willis Faber Ltd.: “There are now only a handful of companies in Canada even willing to touch liability insurance.”
That aversion is the result of a discouraging financial record. In 1982 the Canadian liability insurance industry took in $421 million in premiums and paid out $364 million in claims. But the companies paid out $1.11 in claims and operating expenses for every dollar earned from premiums and from premium investment income. By 1984 premiums brought in $487 million but claims were $526 million. That year companies paid out $1.16 for every dollar earned.
Still, Canadian insurance companies added to their own losses when they became locked in a vicious price war between 1979 and late 1984. When companies such as Strathcona General Insurance Co. of Ottawa, which went bankrupt in 1981, began cutting liability premiums by up to 80 per cent in order to attract money for investment purposes, the entire industry followed suit. “Policies were sold on price and the degree of risk was ignored,” said Edward Belton, president of the Toronto-based Insurance Advisory Organization. Added insurance broker Kane: “There was mismanagement on the part of the insurance companies.”
When competition finally lessened during 1985 and insurance firms raised this year’s rates to reflect costs, as they did in the late 1970s, the impact on their clients was staggering. If a policy price fell by 50 per cent, it had to double to return to its previous level. As well, some insurance companies are now trying to make premiums—instead of the traditional combination of premiums and premium income-pay for claims and expenses.
The sudden high rate increases also reflect insurers’ concern that Canadian courts will match high American awards. As a mark of that fear, some insurance executives now refer to Ontario as “California North.” And they cite a landmark judgment to support their claim: last year the city of Brampton, Ont., was ordered to pay $6.3 million to a youth who became a quadriplegic at 14 when he rode his dirt bike at full speed around a blind curve in an abandoned quarry owned by the city and crashed into another bike. The court found the city guilty of negligence because it had not posted trespassing signs. That award is now under appeal.
The Brampton judgment also worried industry experts because it underlined the changed attitude toward risk. In the past individuals had to prove negligence to win damages. Now, said Hélène Gagné, senior counsel for the Toronto-based Insurance Bureau of Canada, that traditional theory of risk has eroded and “the individual is being protected in spite of his own stupidity.”
A recent decision by the Ontario Court of Appeal also set an unusual precedent. The case involved a 1981 auto accident in southern Ontario between Edward Borland and Harry Muttersbach. The court ruled that the Royal Insurance Co. of Canada must pay the full amount of the “underinsured motorist endorsement” to the injured passengers in Borland’s vehicle. That endorsement ensures that a policy-holder is covered by his own insurance company—up to a listed amount—when the offending driver does not have sufficient insurance. The Royal policy stated that the company was responsible for the difference between the endorsement amount—$1 million—and the amount provided by the offending driver—in Muttersbach’s case, $300,000. But the appeal court ruled that the firm must pay the full amount of $1 million, not $700,000. Declared Belton: “The courts may decide that companies are not insuring what they thought they were.”
The price increases that have resulted from those decisions have shocked many insurance clients, some of whom have passed on increased premiums in the form of higher prices. Henry Nolting, the president of Cooper Canada Ltd. of Toronto, saw the sporting goods company’s liability insurance soar to $2 million in 1985 from $200,000 in 1984—largely because it exports its products to the United States, where lawsuits and high settlements are common. Cooper raised the price of its hockey helmets by $5 each to help cover the cost.
Many insurance experts say that the crisis will ease next year—and prices will move downward. They point to figures for the first nine months of last year which showed a slight improvement over 1984. During that period insurers paid out $1.03 for every dollar they earned. For its part, the federal government is considering amendments to the Federal Insurance Act that would force insurance companies to increase their reserves to cover claims losses and to charge premium prices that are more in line with risks. Those measures might help to deter predatory pricing and violent price fluctuations.
But the insurance crisis may also force many Canadians to re-examine the whole concept of responsibility. Faced with costly court awards, many institutions have tried to improve their service—and reduce damages. Ann Macintosh, for one, the risk management director at Halifax’s Victoria General Hospital, has instituted procedure checks to “prevent patient harm from happening in the first place.” The hardest adjustment, say many insurance executives, may involve changing social attitudes toward insurance. “It is the psychology of entitlement—if someone is injured, sue everyone in sight, even if it is your own damn fault,” said Belton. “But society is waking up to the fact that this aberration in the civil justice field is costing us a lot of money.”
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