Who pays for pre-arbitration claims expenses in priority disputes between auto insurers?

Ontario auto insurers found to be priority insurers in arbitration are not required to reimburse the lesser-priority insurers’ pre-arbitration expenses for handling auto accident benefit claims, the Court of Appeal for Ontario ruled Tuesday.

The only time lesser-priority insurers can recover their pre-arbitration claims-handling expenses are in rare instances of improper ‘deflection,’ the Appeal Court found.

The decision adds some clarity to the ongoing legal debate of whether lesser-priority auto insurers are entitled to recover their pre-arbitration claims-handling expenses from priority insurers, once the arbitrator has found a different auto insurer has priority.

Under Ontario law, injured drivers may only make an auto accident benefits claim against one auto insurer. Auto insurers first receiving the claim must respond to the claim, even if they believe a different auto insurer should be handling the claim. The insurers’ priority dispute is then resolved later through arbitration.

Under the priority dispute regulations, when an insurer refuses to handle a person’s accident benefits claim until the insurers’ priority dispute is settled, that is called “deflection.” In that situation, arbitrators are allowed to order the deflecting auto insurer to pay the claims-handling fees of another insurer.

But what happens when deflection isn’t an issue? Are lesser-priority auto insurers routinely allowed to recover their claims-handling expenses from the priority insurer in cases when there is no deflection — for example, under the legal principle that prevents “unjust enrichment”?

No, the Ontario Appeal Court has ruled.

“It is difficult to imagine that the persons who drafted Regulation 283 [the priority dispute regulations], in close consultation with insurance industry participants, did not realize that insurers who comply with s. 2.1 of the regulation [i.e have not deflected] will often spend money administering SABs claims that are eventually found to be the responsibility of a different insurer,” the Ontario Appeal Court found Tuesday.

“If the Lieutenant Governor in Council [who drafted the regulations] had meant to let lower-priority insurers routinely claim reimbursement for these expenses in priority dispute arbitrations, it would have been easy to have provided for this expressly in the regulation.”

What it means for auto insurers

This decision is significant for insurers, claims professionals, and counsel navigating Ontario’s priority dispute scheme, says Daniel Strigberger, an insurance coverage and arbitration lawyer.

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“I do think the industry should consider pushing for legislative amendment to…allow recovery of handling expenses in certain circumstances or, at the very least, allow an arbitrator some discretion to award such reimbursement,” he writes in a blog post for his firm Strigberger Law.

“Established case law prevents insurers from disputing priority once they have accepted priority. Respondent [priority] insurers now have even less incentive to accept priority. They can delay acceptance or postpone the priority dispute hearing until the paying insurer has undergone a LAT [Licence Appeal Tribunal] hearing, reconsideration, and appeals, without facing any risk of having to reimburse the [lesser-priority] insurer for those expenses.

“Which is somewhat crazy, considering the [lesser-priority] insurer is fighting at the LAT to lower the amount of benefits it pays to the claimant under the SABS, which directly benefits the [priority] insurer when it must reimburse the [lesser-priority] insurer for benefits paid.

“To go even further, the [lesser-priority] insurer can win a CAT [catastrophic injury] hearing at the LAT, which means the [priority] insurer ultimately won’t have to pay the claimant CAT-level benefits for the life of the SABS file, but the [priority] insurer avoids the costly LAT hearing at the [lesser-priority] insurer’s expense.”

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Background

In Echelon General Insurance Company v. Unifund Assurance, an injured woman claimed accident benefits after a July 2012 collision, in which she was a passenger in a vehicle insured by Echelon.

She submitted her claim to Echelon in August 2012, and Echelon paid to handle her claim, even though it believed Unifund, which insured the woman’s father, was the priority insurer.

Echelon contended the woman was her father’s dependent, which would bring her under the father’s automobile insurance policy.

An arbitrator agreed Unifund was the priority insurer.

But the two insurers disputed whether Unifund should reimburse Echelon for the money Echelon spent defending and adjusting the SABs claim before the arbitration decision ultimately shifted responsibility for the claim to Unifund.

Echelon’s expenses totalled more than $100,000, including independent adjusting fees, mediation fees, legal costs, and disbursements.

Duelling decisions

In December 2019, the arbitrator released a supplemental decision in which he declined to order Unifund to reimburse Echelon for its pre-arbitration expenses. The arbitrator found the priority dispute regulations did not expressly give him authority to make such an order, since deflection was not an issue.

Echelon appealed to the Ontario Superior Court, which reversed the arbitrator’s decision. The court found the principle of “unjust enrichment” allowed the arbitrator to make such an order. And so, Echelon should be reimbursed by Unifund “for those reasonable expenses that were incurred for the ultimate benefit of Unifund,” as the Appeal court framed the Superior Court’s decision.

But the Appeal Court overturned that decision, ruling the arbitrator was correct. The appellate court cited previous caselaw noting “there is little room for creative interpretations or for carving out judicial exceptions designed to deal with the equities of particular cases.

“This makes it especially unlikely that the Lieutenant Governor in Council intended to let arbitrators invoke general equitable principles to make expense reimbursement orders on a case-by-case basis, even when there has been no improper deflection,” the Appeal Court ruled.

David Gambrill

David has twice served as Canadian Underwriter’s senior editor, both from 2005 to 2012, and again from 2017 to the present.