Expansion Without Contraction

Tort awards for catastrophic cases in Canada have doubled since the late 1990s due to a convergence of factors. Understanding what’s causing this trend will help the insurance industry determine if these increases are permanent, and what can be done to stem the tide. Ultimately, this analysis will affect reserve levels and how insurers price their products.

Tort awards are increasing for a variety of reasons, including:

• higher health care costs;

• reduced discount rates;

• higher future care awards for claimants with behavioral issues; and

• a more aggressive and experienced plaintiff’s bar that has been pushing an aggressive agenda featuring an ever-expanding variety of claims.

It is important to understand how each of the above four factors contributes to the final award amount. The combined effect of these factors has resulted in average award increases of Cdn$5 million or more for catastrophic injuries.

CONTRIBUTING FACTORS

Health costs

Rising health care costs have had the greatest impact on higher tort awards for catastrophic cases in recent years. In a leading case in 1999, Osborne (Litigation guardian of) v Bruce (County), an Ontario court awarded 24-hour care by a registered practical nurse (RPN) at what was then the prevailing rate of $21 per hour. Today, the approximate hourly rate for an RPN is at least $35 per hour. This difference in the hourly rate alone produces an increase of approximately Cdn$2.2 million, assuming a life expectancy of 20 years and equivalent present discount rates. Osborne involved a 14-year-old passenger in a motor vehicle who was rendered a paraplegic with minimal brain function. The Court in this case determined the awards for the various heads of damages, but it did not total same in the judgment. Taken together, the total awards equal approximately Cdn$7 million, plus interest and costs.

Reduced discount rates

Reductions in the discount rate, particularly for future care costs, have had a dramatic effect on overall awards in recent years. Changes in discount rates for the purposes of calculating a present value for future payment streams can result in an enormous adjustment to the ultimate cost of a claim.

The statutory discount rate in 2008 of .75% for the first 15 years and 2.5% thereafter has been greatly reduced from the flat statutory rate of 2.5% for all years applied to awards in 1999. On an award of Cdn$300,000 per year for more than 20 years, the impact of the statutory discount rate changes since the 1990s to today results in an increased award of approximately Cdn$800,000.

Furthermore, economists have been called as witnesses to testify to the need for further reductions in the discount rate in light of escalating health care costs in the future. In one case, the court adjusted the discount rate for future care costs to 0% for the first 15 years and 1.5% thereafter.

Higher future care awards

Insurers are seeing an increase in the frequency and severity of claims made for supervision costs on losses involving head-injury cases in which behavioral impairments are alleged. Claims are being presented for around-the-clock care in these and other cases, and it is important to question the need for these expenses in each case. Why is this important? One only need examine the jury verdict in Sandhuv. WellingtonPlace Apartments, confirmed by the Ontario Court of Appeal in 2008. The plaintiff, 2, fell five floors from the bedroom window of an apartment. His injuries included permanent and severe frontal lobe brain injury. The court affirmed an award for future care costs in excess of Cdn$10 million. Leave to appeal to the Supreme Court of Canada has been sought.

Aggressive plaintiff’s bar

Over the past several years, plaintiffs’ counsel have been cooperating more often with each other and sharing best practices. The result is a more aggressive and sophisticated presentation of their cases and a corresponding number of higher rewards. However, there are some pro-active measures that can limit extraordinary awards in these cases.

TORT AWARD REDUCTION STRATEGIES

To reduce these awards, it is important to focus on areas in which change is possible.

Although it is not possible to control the escalation of health care costs and reductions in the statutory discount rate, one can begin to identify areas in which cost reductions can be achieved by breaking down/dissecting recent awards and breaking them down into their component parts.

The determination of future care costs is predicated on a projection of extraordinary future care costs to be incurred by the claimant as a result of the loss. Many items included in recent claims — such as cell phones and computers — are not extraordinary; arguably, they are not recoverable as part of a settlement or judgment. This can also include certain housing costs. Plaintiffs are only able to claim extraordinary housing costs and should not be compensated at a level above what’s reasonably expected if the catastrophic injury had not occurred.

Over the past several years, much has been written about litigation management, which is an important subject. Insurers and the defence bar need to be able to conduct open dialogues with one another on this topic.

“Insurers need to support and invest in defence counsel and seek opportunities for continuing education,” says Greg Somerville, executive vice president of claims and reinsurance at Aviva Canada. “Insurers and defence counsel need to partner on cases and implement strategies to handle the catastrophic case exposures and be sensitive to any joint and several exposures. The right counsel needs to be assigned, someone who brings in the best available experts to challenge expenses that are either inappropriate or will never be utilized by the plaintiff.”

The defence bar and insurers need to work as a team to ensure only the proper sum of money is placed in the plaintiff’s hands. The handling of each case needs also to be considered as a time of learning for how best to manage future cases.

There will be instances in which a trial must take place, but it must be remembered a trial can be a financial and emotional drain. Insurers and their counsel need to be alert to any and every opportunity to settle a case that has merit before it escalates into a situation in which a trial is the only route to resolution. Through teamwork with their counsel, Insurers need to exercise creativity in the negotiation process so that fair settlement can be reached.

Life expectancy and home care are two additional factors to consider.

Life expectancy estimates used by plaintiff’s counsel are often overstated; they might be reduced based on an evaluation conducted by a qualified expert who has specific knowledge of the plaintiff and the plaintiff’s specific injuries and health history.

Although home care has become the default arrangement for courts, no legal requirement mandates home care. There is a big difference between the cost of home care and that of residential care. Costs associated with home care, including housing and case management fees, are removed when a plaintiff is placed in residential care. In addition, home care staffing is not always available, even when awarded, and home care is often not feasible for the duration of the claimant’s life expectancy. Taking into account the nature and duration of future care required can dramatically reduce the total award in many cases.

The use of structured annuities needs to be considered in settlements and in presentation to the courts. This should provide a safety net for claimants on a tax-free basis, allowing the elimination of a gross-up for income taxes and a reduction of guardianship and management fee amounts sought. In Sandhu, the Ontario Court of Appeal recognized the security of an annuity fo r the infant claimant.

The large awards in recent cases have set a precedent. It will take a thorough understanding of all the factors contributing to these high amounts, as well as a concerted effort on the part of the defence team, to ensure reasonable, fair and appropriate amounts are delivered to claimants.

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Over the past several years, plaintiffs’ counsel have been cooperating more often with each other and sharing best practices. The result is a more aggressive and sophisticated presentation of their cases.

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The use of structured annuities needs to be considered in settlements and in presentation to the courts.