A. Introduction

(1) Basic Insurance Theory

Definition: B.C.I.A., s.1

-"insurance" means the undertaking by one person to indemnify (compensate) another person against loss or liability for loss in respect of a certain risk or peril to which the object of the insurance may be exposed, or to pay a sum of money or other thing of value on the happening of a certain event.

Purpose of insurance: Economic and Social Context for Insurance

  • Financial protection: Insurance is a way for people to protect their financial interests to ensure they don’t go bankrupt when something goes wrong
  • Impersonal/individualistic society: no longer rely on family and friends so formalizing financial protection, a function of capitalistic society

Role of modern corporations & financial institutions

  • Ability to collect and analyze information
  • Accurate prediction of nature and probability of risks. Ex. no one will sell flood insurance to an area that is prone to floods, supposed to be unpredictable and floods are predictable.
  • Effective underwriting decisions about what to insure, when and how much
  • Sophisticated banking and investment systems: Made it possible for insurance industry to be a viable sector.

Government as Insurer

Why should governments be involved in provision of insurance services?

  • Part of social safety net
  • Adequate protection for specific risks, e.g. highway everyone’s protected
  • Eliminating/reducing socio-economic inequalities, e.g. employment insurance
  • Cost spreading re vital services, e.g. health insurance, affordable for all

Public vs. Private Insurers

What risks should be insured by public insurers?

Relevant factors include:

  • Nature of risk – often highly unpredictable
  • Difficulties determining insurer’s ability to pay in event of loss
  • Possibility of higher premiums: If too much uncertainty, then higher premiums charged which may exceed the level of risk. This will be expensive and only affordable by the rich. Unemployment insurance is something that we want the poor to have, so don’t want the cost to be that high.

How is government able to provide effective insurance in these areas?

  • Mandatory insurance: everyone pays into the system, so government more revenue.
  • Single insurer: They can pool the risk together much more effectively
  • Subsidization through general tax revenues

Elements of an Insurance Contract

-(1) Undertaking by one person - insurer (promises indemnity)

-(2) To indemnify another, Promise of indemnity: compensate insured

  • Named and Unnamed insured, eg. Automobile; homeowner
  • Unnamed: basically is a group of people who are protected or can benefit from that contract because they fit certain characteristics. For automobile insurance the unnamed is people who drive your car with your permission. Homeowner: protects the belongings inside the home.
  • Personal Insurance – life, accident, sickness
  • Assured: purchaser
  • Insured: Person’s whose life is insured (assured and insured can be the same person, pay your own life insurance). They would be different if your parents buy your life insurance
  • Beneficiary: Receives insurance money; assured or 3rd party

-(3) Agreed consideration for promise of indemnity- premium

  • Speaks to the price that the assured/insured has to pay for that promise of compensation

-(4) From the loss or liability for insured event or subject matter, subject to policy limit

  • Indemnity v. Non-Indemnity insurance contracts
  • Indemnity: Undertaking to compensate you for your actual losses with the materialization and proof of the insured risk. If no loss, then no coverage. Moral Hazard: we want to discourage the temptation to stage the loss.
  • Non-Indemnity: contracts that provide for the payment of a specified amount in the contract upon the happening of a particular event, without the need to prove a loss. Life insurance: don’t put a dollar value on the life of a human being, so you can claim the stated amount.

-(5) Occurrence of event uncertain

  • If it is certain then cannot be the subject matter of an insurance contract.

Reflection on definition of insurance contract

-Mechanisms to protect against risk

-Insured’s Perspective: Loss shifting in exchange for rateable contribution – premium/consideration

  • Premium determined based on degree and extent of risk:
  • Physical hazard: where is the building located, high crime area or vulnerable to fires. Will determine whether it should be insured
  • Moral hazard: not the object but the person who is purchasing the insurance. What is your character, what is your previous record? How often have you made claims?
  • Look at things like your age, gender, health status for life/personal insurances, tells us the chances in relation to you.

-Societal/Insurer’s Perspective:

  • Loss distribution/spreading
  • Risk prediction
  • No correlation between premiums and recovery: pool our resources to help the unfortunate few, spread pain of society
  • Random losses – majority contribute to pay for losses of few. Should not be able to tell who will suffer the loss.
  • Large number of insured’s: The risks should be independent of one another.

Insurance Law distinguished from General Contract Law

Purpose of insurance contract: transfer of uncertain risk

1. Duty of utmost good faith (both parties)

  • Importance of open and frank communication
  • Maintaining the integrity of the system
  • Insurer not to exploit vulnerability of insured

2. Fortuity: random losses

  • Random losses – uncertainty re which insured will suffer losses or when they will occur
  • Excludes predictable losses, e.g. normal wear & tear

3. Indemnity

  • Recovery limited to insured’s actual losses except in non-indemnity insurance contracts
  • Prevents moral hazard. Not supposed to benefit from an unfortunate event

-Section 7 of the BCIA, the insured claims is governed by the indemnity principle. Sub 2 says except life insurance where the value is based on a pre-determined amount.

4. Consumer Protection

  • Regulation and principles designed to protect consumers and general public

5. Compensation

  • Ensure compensation for victims, especially in third party policies
  • E.g. Automobile Insurance
  • No-fault benefits: everyone is taken care of
  • Protecting victim’s right to compensation even if insured in default
  • BC Insurance (Vehicle) Act, s. 76
  • Victim’s right to enforce judgment directly against insurer – BCIA, s. 24

Ensuring Solvency and Meeting Insured’s Reasonable Expectations for Compensation

•Solvency of insurers essential to loss spreading

•Regulation – e.g. Financial Institutions Act, 1996: Reserves

  • Deals with financial solvency and health of the companies, companies in BC must maintain a certain amount of reserve against the liability

•Reinsurance: Helps spread the risk of loss, insurers transfer some risk to other insurers. If there are claims beyond a certain amount, then the reinsurer will step in to bail out the insurer.

  • Reinsurers typically multinationals who have no relationship with the party.
  • Predominant arrangement for life insurance.
  • Legal consequences of re-insurance:
  • No privity of contract between insured and re-insurer. No relationship
  • Insured has no priority over other creditors. Can’t bring an action against them, only against the private insurer.
  • Re Northern Union Ins. Co:Even though the money was paid out to the insurer on your account, it does not give you right to sue for that money. NU had reinsured the risk and the reinsurer had paid them on account of BC Hydro’s claim. But since NU was in the bankruptcy proceedings, the money was part of NU general assets and so they had to join the line-up to get the money.

•Subscription Policy: When Insured has large risk to be insured it is not realistic for a single insurer. So separate insurance contracts with multiple insurers for same object for specific amounts

  • Typical in property & casualty insurance
  • Privity of contract between insured and each insurer. Direct K with each insurer who is liable for specific amounts.
  • Potential Problem: Multiple claims for loss, have to deal with multiple companies

(2) Distinguishing Insurance from Wagering

Insurance:

  • Anterior risk: need for insurance for cushioning in event of loss which will happen regardless of coverage.
  • Insurable interest in object of insurance. You are interested in object’s continued existence, risks prejudice from loss or destruction.

Wagering:

  • Risk arises from speculation of outcome of event. You are betting on something happening, the outcome would not affect your financial situation. You stand to lose or gain something only if you place the bet. Prior to speculating risk, neutral
  • Purpose: Windfall, to get money into your pocket

Current position on Wagering

  • Wagering and gaming prohibited: B.C.IA., s. 6
  • Wagering contract: Insured has no insurable interest in subject matter of contract, s. 6(2) [this is how we know, you would have otherwise remained neutral]
  • If the contract is determined to be a wager, it is void
  • Rationale for prohibition of wagering and gaming contracts:
  • Public Policy: it is seen as antisocial and useless enterprise.
  • Moral hazard: if you have no interest in the subject matter of the insurance, you are more likely to create the loss. The temptation to fake the loss is higher.

Is Insurance truly distinguishable from Wagering?

  • Does insurance industry support some form of wagering?
  • Insurance companies willingly insure promotional events. Like the “Let it Snow” promotion launched by itravel2000. Funded by weather insurance.
  • Is this abuse of purpose of insurance?Do you agree with public sentiments against promotion?
  • Is there risk of moral hazard in weather-dependent promotions? There is no way to fix the weather, still the element of uncertainty and the company cannot do anything about it actually happening. Since no moral hazard, it is not considered a wager.

3. Regulation of the Insurance Industry

Why regulate the insurance industry?

  • Power imbalance: protect the consumer, from large corporations.
  • Potential exploitation of vulnerable party
  • Solvency of insurers and protecting loss spreading goals of insurance (proper reserves)
  • Ultimate goal: consumer protection and confidence in insurance system

To ensure that the fundamental risk-spreading objective is achieved, Canadian Law regulates insurance in two ways

1. Legislation controls formation and operation of insurance companies to ensure solvency

2. Insurance law regulates the content and enforceability of insurance contracts

How is insurance industry regulated?

  • Formation and operation of insurance companies. They are regulated by laws, rules, etc
  • Contents and enforceability of insurance contracts
  • Terms and conditions
  • Obligations of parties to insurance contract
  • Qualifications and responsibilities of intermediaries
  • Contracts are standard form contracts drawn up by the insurance industry. Courts ensure that the interest of the insured is protected in terms of the form of the contract and the substance.
  • Part 5, Section 126(2) which sets out the statutory conditions in relation to fire insurance. Insurer cannot alter terms to the determent of the insured, or make terms more onerous
  • Purpose of contract
  • Clarify the terms on which it is made
  • The terms and conditions should set out the rights of the parties
  • Regulation also tries to keep a handle on who can sell insurance. Keep tabs on who is selling what, also have ones that keep track of the intermediaries

Sources of Insurance Law

  • Common law (including equity): Lord Mansfelddeveloped based on the law of merchant
  • Legislation: codifying and expanding the common law.
  • Continuing Importance of Common Law

Jurisdiction for Regulating Insurance Industry

Division of powers: Constitution Act

  • Provincial Jurisdiction: property and civil rights: s. 92(13): Insurance contracts and regulation of insurance industry
  • Federal Jurisdiction: exclusive authority to legislate with respect to incorporation of national insurance companies
  • Provincially and federally incorporated insurance Companies operating in province - Canadian Indemnity Co. v. British Columbia (A.G.) (1977 SCC):
  • Facts: federally incorporated insurance companies selling car insurance challenged provincial statute for universal compulsory auto insurance in BC and monopoly for ICBC to provide auto insurance.They sought a declaration that law interfered with their capacity to provide and carry on their business, which they were federally incorporated to do
  • Decision: It is entirely up to the province to regulate what type of business an insurance company can carry on regardless of federal or provincial. While the federal government can regulate the status of the companies, provincial can regulate the companies insurance operations
  • Provincially incorporated companies subject to federal legislation on subject within federal jurisdiction, e.g. bankruptcy and insolvency – Ontario (A.G.) v. Policy Holders of WentworIth Ins CoPriority rules in federal Winding Up Act supersedes priority provisions in Provincial Insurance Act.
  • Within its own areas of legislative jurisdiction the federal government can pass laws which incidentally impact upon the provincial insurance companies insurance operations and the federal takes priority

Regulation of federally incorporated Companies providing insurance

  • Chartered banks federally incorporated
  • Principal business – financial services
  • Insurance services incidental, helps support the main function
  • Provincial regulation inapplicable where insurance incidental business: Bank of Nova Scotia v. Canada (Superintendent of Financial Institutions)
  • Facts: The bank hired telemarketers to sell insurance over the phone, not licensed.Province said telemarketers are exempt from licensing under FIA S. 171(3) if credit insurance is incidental to principle function. Government argued the exemption only applies if you are selling insurance at the time they are signing up for credit not after the fact.
  • Decision: Banks exempt from provincial insurance act licensing requirements because the banks insurance operations were only incidental to ordinary bank operations, not limited in terms of time
  • Chartered Banks offering insurance products not exempt from provincial licensing requirements - Canadian Western Bank v. Alberta
  • SCC: Banks should are bound by provincial licensing requirements. SCC understands the need for bank to obtain collateral for loans, but insurance is only one way of securing loans. It is your choice to be in this business of selling insurance, not the business of your company to sell insurance so not exempt.
  • The SCC did not follow the Bank of Nova Scotia case but distinguished based on the wording of the BC Legislation, Financial Institution Act. In Nova Scotia it was a temporal issue, said it was incidental because being sold at a different time.

Insurance Regulation and Canadian Charter of Rights and Freedoms

  • Risk assessment central to effective underwriting
  • Relevance of personal characteristics, e.g. gender, age, marital status, family status, health status for risk assessment.
  • Potentially discriminatory?They all line up with section 15.
  • To what extent can insurance regulation or provision of insurance be subject to Charter scrutiny?
  • Charter applicable to governmental activities: as a general rule, insurance is a private contract between individuals so the Charter would not be applicable.

Limited applicability of Charter in Insurance Regulation

  • Public insurer: if you are governmental entity, then the Charter does apply
  • Insurance legislation and regulation must be consistent with Charter values - Miron v. Trudel
  • Definition of the spouse for benefit was being married he was common law partner so was excluded. Successfully challenged under Section 15(1) because it discriminated against him in a way that could not be justified under section 1.
  • Constitutionality of Regulations limiting insurance benefits for minor injuries: Morrow v. ZhangNote: Morrow reversed: leave to appeal to SCC refused; see also Hartling v. Nova Scotia, (A.G.) 2009, leave to appeal to SCC refused
  • Facts: There was a minor injury cap and compensation for pain and suffering was limited. The claimants were women and they said discrimination because they suffer more of these types of non-pecuniary losses. If not for cap, would havegotten more so brought actions under S. 7 and 15(1)
  • Decision: There was a legitimate purpose and it has nothing to do with your gender. All accident victims are subject to the same type of regulations and so no discrimination. Is a legitimate way for the province to control costs

Discriminatory Practices by Insurers

  • Insurance companies provide public service; subject to human rights legislation
  • Can insurers rely on personal characteristics to make underwriting decisions?
  • Discriminatory insurance practices and policies exempt from application of human rights legislation if based on reasonable and bona fide distinctions. See BC Human Rights Code, s. 8; Ontario Human Rights Code, s. 22
  • Relevant factors:
  • Type of policy
  • Nature of discriminatory practice
  • Whether distinctions legitimate or unavoidable:
  • Nova Scotia Human Rights Commission v. Canada Life
  • Facts: Complainant refused mortgage insurance due to his physical health condition. Bank provided group insurance through Canada Life but husband was refused coverage because above average risk, had to pay higher premiums. He challenged the provisions as being discrimination based on disability
  • Issue: does this practice constitute discrimination based on the human rights codes
  • Decision: Policy offered to eligible bank customers; not service customarily provided to public within Human Rights Act; exempt from legislation. A life insurer is entitled to assess risk based on applicant’s health and can deny service to unreasonably high risk applicants. It was not an irrelevant distinction. The practice was in good faith, the insurer needed to make this distinction to decide whether to provide this service. Exemption is bona fide

What constitutes reasonable and bona fide distinction?

Zurich Insurance Co. v. Ontario Human Rights Commission (1992 S.C.C.)

  • Basis of complaint: Generally single young men, under 25 were more likely to get into car accidents compared to women in that age group or men who were married or older. So the insurance industry as a practice charged those men a higher rate of car insurance
  • Here the complaints said this was discriminatory as no basis for the discrimination
  • SCC: There were no reasonable alternatives, it was the standard industry practice. There was evidence and not fair for this company to go out and do research to find another way. The distinction being made here is in good faith
  • Dissent: It was convenient for you to rely on this industry practice, no evidence that there is no practical alternative to the insurance industry.
  • You should be able to show a direct causal link between the factors and the high accident rate. The high accident rate can be explained by other factors
  • They propose a two part test for reasonable and bona fide grounds: subjective and objective elements to it
  • Do you find reference to standard industry practice as evidence of reasonable practice convincing?
  • The industry practice can be inappropriate, they are looking out for their own profit margin. So to allow the courts to look at the industry practice may be problematic
  • Courts generally will still ask the question if a customary standard is reasonable. So why are we not doing it in respect of the insurance industry?

BC Human Rights Code