This paper is an overview of the framework of Loss Transfer law.
The Ontario Court of Appeal stated, “The purpose of the legislation is to spread the load among insurers in a gross and somewhat arbitrary fashion, favouring expedition and economy over finite exactitude”.1
Statutory Framework
The Loss Transfer framework is mostly contained in Ont. Reg. 664, an Insurance Act Regulation, but it is also rooted in the Insurance Act.
- Section 275 of the Insurance Act and Ont. Reg. 664
Section 275 of the Insurance Act states that an insurer responsible “under subsection 268(2)” for statutory accident benefits is entitled to indemnification by another insurer with respect to those benefits. Essentially this covers all Statutory Accident Benefits. The provision specifies that a Regulation will be responsible for further details. For the most part, that is done by Ont. Reg. 664.
Section 275 of the Insurance Act also indicates that the indemnification (although very loosely described in section 275) will be according to the degree of fault under the Fault Determination Rules (a separate regulation). Section 275 also provides there is a $2000 deductible for any such indemnification claim. Caselaw has determined that the $2000 deductible applies to each claimant involved, as opposed to being a single deductible per accident.2
Section 275 sets out that any dispute in relation to a Loss Transfer Claim will be resolved through the Arbitration Act, which is the legislation that governs private arbitrations. It also notes that a private arbitration Hearing under this section will be stayed if there is a pending License Appeals Tribunal (LAT) Proceeding. Essentially a Loss Transfer dispute can continue on, but any Hearing will be stayed pending an actual resolution of any LAT Proceeding. This is an important procedural issue to be aware of.
Ont Reg. 664 is the standard Insurance Act Regulation for automobile insurance. Section 9 of Ont. Reg. 664 contains most of the operative provisions of the indemnification regime described only generally in the Insurance Act, although section 1 has some applicable definitions.
There are two mostly separate branches of Loss Transfer indemnification, and both are fully described in Section 9 of Ont. Reg. 664.
- Accidents Involving Motorcycles or Motorized Snow Vehicles
First, Loss Transfer indemnification claims arise when an accident involves a motorcycle or motorized snow vehicle. In this branch, an insurer of an at-fault vehicle must indemnify the first party insurer for any Statutory Accident Benefits Schedule benefits, if the second party insurer's policy insures any type of vehicle other than motorcycles, off-road vehicles and motorized snow vehicles. For inclusion in this regime, an insurer would be considered a second party insurer even if its policy insured a motorcycle, off-road vehicle or snow vehicle, so long as it also insures a regular vehicle. The first party insurer can claim indemnification against the second party insurer if either (1) the motorcycle/motorized snow vehicle was involved in the accident, or (2) the first party insurer's policy only insures motorcycles/motorized snow vehicles. When these conditions are met, the second party insurer is responsible for indemnifying the first party insurer in proportion with the fault of the vehicle insured by the second party insurer.
To illustrate, in one situation, if a person on a motorcycle/motorized snow vehicle is injured in an accident with a regular car, the motorcyclist/motorized snow vehicle's insurer would be indemnified by the regular car's insurer in proportion with any fault of the regular car. Another situation is, even if no motorcycle/motorized snow vehicle is involved in the accident, if the person claiming the benefits is doing so under their own policy which only insures a motorcycle or motorized snow vehicle (i.e. a person only has their own insurance under a motorcycle/motorized snow vehicle policy, but is injured as a pedestrian or an occupant in a different vehicle), the person's insurer would be indemnified by a regular car's insurer in proportion with any fault of the regular car.
The legislative rationale for this type of Loss Transfer Claim is that persons injured on motorcycles or motorized snow vehicles may be disproportionately susceptible to injuries when involved in accidents involving larger vehicles such as cars. So the Loss Transfer regime mitigates this and presumably entices insurers to offer insurance products for these types of vehicles, and reduces premiums.
Although “off-road” vehicles are often discussed as part of this regime, it is important to note that it is only accidents involving motorcycles and motorized snow vehicles that are actually subject to the Loss Transfer regime and not off-road vehicles. Off-road vehicles are only included in the Regulation to specify that the second party insurer, to be a valid target, must insure something other than motorcycles, motorized snow vehicles or off-road vehicles.
- Heavy Commercial Vehicles
The most commonly litigated Loss Transfer indemnification claims belong to the second class: accidents involving “heavy commercial vehicles”. If a person is injured in an accident that involves a heavy commercial vehicle, that person’s insurer has the right to indemnification as against the heavy commercial vehicle’s insurer, proportionate to the amount of fault of the heavy commercial vehicle.
A “commercial vehicle” is a vehicle generally being used for business purposes. It is defined in a different section of Ont. Reg 664, at section 1, and means “an automobile used primarily to transport materials, goods, tools or equipment in connection with the insured’s occupation”. There are a few types of vehicles that are specifically included, such as police, fire department, “driver training”, or a “vehicle designed specifically for construction or maintenance purposes”. However, it is noted that this is contrasted with the definition of “public vehicle” in the same section, and therefore an ambulance, bus, funeral vehicle, limousine and a tax are not commercial vehicles. A quick distinction is that vehicles that are primarily used to transport the public are considered “public vehicles” and not “commercial vehicles”.
“Heavy” essentially means a vehicle with a gross vehicle weight of over 4500 kgs. For reference, any transport truck, bus or dump truck (or similar construction truck) would easily satisfy the “heavy” requirement. Most regular use vehicles (cars, SUVs, vans, pickup trucks) would not satisfy the “heavy” requirement on their own, although some larger regular use trucks or cargo vans may reach this level. However, gross vehicle weight includes load (including cargo, occupants, gas, etc.).
It simplifies things significantly that Ont. Reg. 664 uses the definition for “heavy commercial vehicle” that is common for many other Ministry of Transportation and Highway Traffic Act purposes, so there is often vehicle documentation on this exact issue for vehicles that would qualify.
However, because load at the time of the accident is included, for some vehicles it is not sufficient to rely on the Ministry designation. Instead, a factual determination of the full weight of the vehicle at the time of the accident is required, which offers some logistical challenges, especially if this is investigated at a later stage.
Fault, Fault Determination Rules and the Common Law
As will be discussed below, there is little room for argument or interpretation regarding the quantum of a Loss Transfer Claim, and the quantum can often be higher than a typical accident benefits file (accidents involving motorcycles, motorized snow vehicles, and heavy commercial vehicles are more likely to involve serious injuries).
Once it is established that the vehicle-type criteria is satisfied (heavy commercial vehicle, motorcycle or motorized snow vehicle not insured together with regular vehicle on policy), which often has limited room for interpretation, often the only contentious issue for Loss Transfer files is liability.
Accordingly, Loss Transfer claims can regularly involve a disproportionately high emphasis on liability.
Loss Transfer claims are also unique in that they are the only heavily litigated disputes involving the Fault Determination Rules in Ont. Reg. 668 (the Fault Determination Rules are also used for determining whether an insured is reimbursed for property damage, or if they have collision coverage whether a deductible applies, but those are typically small first-party issues that infrequently lead to serious disputes).
The Fault Determination Rules list different categories of collisions (i.e. rear-end, side-swipe, left-turn, right-turn, t-bone, etc.) with illustrative diagrams, and for each category assign a set/rigid allocation of fault for each vehicle involved.
For the most part, the Fault Determination Rules roughly approximate the general case-law for motor vehicle accident liability in tort, the Highway Traffic Act and common sense. However, the existing non-Fault Determination Rules case-law is generally very fluid in apportioning fault by percentage points based on an appreciation of the full context of how the accident happened, especially in tort.
In contrast, the Fault Determination Rules have very strict apportionments of fault with no room for context and interpretation. In fact, Fault Determination Rule 3 indicates that the degree of fault is determined “without reference to” the circumstances, including road conditions, visibility or pedestrians.
One of the more common disputes is debating which rule from the Fault Determination Rules is applicable. For example, was an accident a rear-end collision under Rule 6 in which case the rear-vehicle is at fault; or was the front vehicle still changing lanes, in which case Rule 10 assigns complete fault to the front vehicle.
To determine liability in these sorts of claims, an Arbitrator will still be weighing evidence obtained at examinations, as well as any other available evidence (physical evidence, road conditions, ect.), to determine which Fault Determination Rules rule applies.
- Section 5 of the Fault Determination Rules: Revert to “Ordinary Rules of Law”
Another common dispute for fault involves section 5 of the Fault Determination Rules. That section provides that “if an incident is not described in any of these rules” or “if there is insufficient information...to determine the degree of fault” the degree of fault shall be determined in accordance with the ordinary rules of law”.
... the Courts have been mindful of this, and have interpreted the Fault Determination Rules to be “liberally construed and applied”... |
When the Fault Determination Rules are not particularly favourable to a party, it is common for them to assert that the relevant rule does not describe the collision, and argue that the Arbitrator must use the “ordinary rules of law” instead of the Rules. This is because the Fault Determination Rules are very rigid, and specifically often will not consider context. So when a party is presumptively at fault if the Fault Determination Rules apply, they are often keen to try arguing that section 5 applies, to escape the Fault Determination Rules to the more flexible common-law, where they might have a chance at a more nuanced finding, or leverage for negotiation.
However, the Courts have been mindful of this, and have interpreted the Fault Determination Rules to be “liberally construed and applied” in accordance with its purpose to provide an “expedient and summary method” of fault determination.3 The Courts have tried to protect the broad application of the Fault Determination Rules, making the test difficult for excluding the Fault Determination Rules based on the section 5 criteria: that the incident is “not described” in the Rules or that there is “insufficient information concerning an incident”.
The Ontario Court of Appeal in 2016 dealt with a situation where a party was trying to argue that the Fault Determination Rules do not apply. That case involved a car waiting to turn left at a busy intersection, being “waved through” by a third party vehicle, and failing to notice the motorcycle before entering the intersection. Critically, the vehicle and the motorcycle did not make contact, but rather the motorcycle lost control because of the car. The Court of Appeal found that no rule in the Fault Determination Rules applied. Even so, the Court of Appeal ruled that the “ordinary rules of law” do not mean the “ordinary rules of tort law”. Importantly, this means that section 3 still applies even if no actual rule applies. Section 3 states that fault is to be determined “without reference to...the circumstances in which the incident occurs”, which is irreconcilable with tort law. The Court of Appeal was clear that the “lengthy, detailed and nuanced process” of tort law liability does not apply to Loss Transfer disputes, even when section 5 is engaged. Even when an issue must be determined by the “ordinary rules of law” because no rule from the Fault Determination Rules applies, Arbitrators are to consider the expedient and summary purpose of the Loss Transfer Regime, without regard to contextual factors. This does not mean tort liability law is completely irrelevant or cannot be considered, but it is a fundamentally different inquiry.
When looking at the “ordinary rules of law”, parties will usually focus on Highway Traffic Act equivalents. Almost all of the relevant case law will be tort law, which is useful to a point but is particularly difficult to apply in situations where tort law has considered the factors excluded in the Loss Transfer regime by section 3, namely contextual factors such as weather, visibility, road conditions and actions of pedestrians.
Quantum of Indemnity Loss Transfer Claim
Part of the reason why many disputes focus on liability is there is not much opportunity for argument and interpretation regarding quantum.
The Loss Transfer claim is paid out directly proportionate as to fault of the second party insurer. For example, if the heavy commercial vehicle involved is found to be 50% at fault, then the first party insurer is indemnified for 50% of the benefits paid by the heavy commercial vehicle’s insurer.
The indemnification covers “benefits paid to the insured person”. This includes settlements.
However, the indemnification does not include, unlike in many Priority Claims, costs and expenses of the first party insurer in adjusting the claim. This includes insurer examinations,4 surveillance, investigation and legal costs (excluding legal costs specifically directed to the Loss Transfer aspect of the claim, which may be claimed as expenses of the Arbitration). The Loss Transfer regime specifically only provides for indemnification for benefits of the first party insurer by the second party insurer, and not for full reimbursement or transfer of the file.
The only restriction on the quantum for indemnification is that the benefits payments, including the settlement, must have been “reasonable”.
Generally speaking, it is difficult to argue that the benefits paid by the first party insurer are not reasonable. In terms of common sense, there is no real incentive for the first party insurer to pay an unreasonably high amount in benefits. Often the second party insurer may assert they would have handled the file differently (pushed for a lower settlement, for example). However, these assertions are subject to significant scrutiny, given the second party insurer asserting the benefits/payment was unreasonable has obvious motivations for doing so, and has the benefit of hindsight. When asserting that a settlement is unreasonable, it is difficult to impeach the motives of an agreement negotiated in good faith by the first party insurer and the arms-length injured claimant.
Decisions finding that a first-party insurer’s payments were unreasonable are very rare, and there is no set framework. However, the Ontario Court of Appeal has generally commented on the appropriate way to frame such a claim. If the first-party insurer “simply paid Statutory Benefits without exercising its right to an insurer generated medical assessment in appropriate cases”5 it could become disentitled to Loss Transfer indemnification. It discusses that such allegations would be probably framed as the first party insurer owing a duty of “good faith” to the second party insurer.
Generally, there is a high onus on a second-party insurer attempting to assert that benefits paid by a first-party insurer are unreasonable. Indeed, most cases making these allegations are based in gross negligence and/or bad faith, coupled with a high level of proof required.
Limitation Periods and Timing of Requests
Loss Transfer disputes are sometimes grouped with Priority Disputes. One key difference is the different limitation periods and timelines, which are notoriously rigid in Priority Disputes and all contained within the main Priority Regulation.
In Loss Transfer disputes, conversely, there are no real limitations or deadlines in the Regulation.
Rather there is the standard two-year limitation period in the Limitations Act. However, determining the starting point for the limitation period is difficult for the Loss Transfer regime.
As it stands, there is no real limitation on when a Request for Indemnification must be made... |
The Ontario Court of Appeal endorsed the interpretation by Arbitrators that the two-year limitation begins to run for Loss Transfer claims as of the date of a Loss Transfer Request for Indemnification by the first party insurer to the second party insurer.6 The alternative rejected interpretation was that the limitation period commences when the benefit, for which indemnification is claimed. is originally paid by the first party insurer.
So, it is clear there is a two year limitation period starting when a first-party insurer provides the second party insurer with a Loss Transfer Request for Indemnification, and satisfied when an Arbitration has been commenced.
While this makes good sense within the context of a Request for Indemnification being delivered in the normal course, there is no real timeline or limitation that obviously applies to when the first party insurer must make the request in the first place.
Although there were not clear decisions, insurers have generally been mindful of the doctrine of laches in relation to delaying requests for Loss Transfer. Basically, the idea is that for extreme delays, the equitable doctrine of laches would prevent extremely late Loss Transfer requests, despite the lack of any obvious limitation period.
The Ontario Court of Appeal has found rather conclusively that the doctrine of laches has no application to the Loss Transfer regime, on the basis that it is an equitable doctrine that has no applications to the statute-based Loss Transfer regime.7
As it stands, there is no real limitation on when a Request for Indemnification must be made, relative to when the benefits are paid. However, certainly, a long delay opens the possibility of another insurer trying another creative argument that the claim should be barred for delay. For instance, if a Loss Transfer request is made so late that there is real prejudice to the second party insurer (for instance, evidence about the accident is no longer available due to the long delay), the second party insurer may make a compelling argument. Even without an explicit limitation, it is possible that a second party’s delay-based prejudice argument would be compelling as to factual determinations made by an Arbitrator or Court. Finally, it is worth noting that there is no obviously apparent advantage by a first-party insurer delaying their Request for Loss Transfer Indemnification, so often it is an actual oversight, and first-party insurers should not intentionally delay making the request.
Carriage
Unlike Priority Disputes, these claims are not transferred. Rather the first party insurer must continue to adjust the claim, and seek indemnification payments periodically from the second party insurer.
Even when there is no dispute as to the obligation to indemnify, the first party insurer continues to adjust the file, and send periodic requests to the second party insurer.
Arbitration
The Insurance Act requires that all Loss Transfer disputes are handled by a private Arbitration under the Arbitration Act.
The Arbitration Act contains a fairly flexible and informal process for hearing disputes. There are not very many free-standing deadlines or procedures outlined. The Arbitrator has considerable discretion over the entire process.
Typically, the process involves a pre-hearing. If examinations or productions are required by third parties/insureds, they can be ordered by the Arbitrator.
Commencing an Arbitration (key for limitation purposes) is done by “any way recognized by law”, but usually either by serving a “Notice to Appoint Arbitrator”, “Notice to Participate in Appointment of Arbitrator” or “Notice Demanding Arbitration”.
It is further noted that the Statutory Powers Procedures Act contains some further procedural provisions that are incorporated into the Arbitration Act.
It is typical that there is a cost award to a successful party, meant to be commensurate with the legal costs of the Loss Transfer dispute.
Appeals are made to the Superior Court of Canada, then the Court of Appeal.
Miscellaneous
It is worth noting how the Loss Transfer regime operates in some complicated situations.
As with many other Insurance Act issues, a vehicle operated by an excluded driver is completely outside the Loss Transfer regime. For example, if an at-fault vehicle covered by the second party insurer was driven by a driver excluded on that policy, Loss Transfer would not be available against that insurer, even if all the other conditions are satisfied.8
Conversely, Loss Transfer claims are valid in the same situation if the at-fault vehicle covered by the second party insurer was operated by an unauthorized or uninsured driver.
International Consequences
It is worth noting that many US insurers may be unaware of the Ontario Loss Transfer Regime, and are surprised to learn they are subject to it. This issue arises surprisingly often, as there is a high volume of US-insured heavy commercial vehicles operating in Ontario (any US transport truck making a run to or from Ontario, for instance).
US insurers may be surprised by some of the unusual aspects of this system, including the restricted ability to contest quantum and the summary nature of determining fault.
If a vehicle is insured by a US insurer who has signed and filed a Power of Attorney and Undertaking to provide the statutory minimum coverage in Ontario, they would be subject to the Loss Transfer regime.
Some US insurers have not signed the Power of Attorney and Undertaking, and would not be subject to the Loss Transfer regime, but that would be rare for heavy commercial vehicles expected to operate regularly in Canada.
Practice Tips
- Have a system where any accident involving a motorcycle, snowmobile, or heavy commercial vehicle is flagged for a potential Loss Transfer claim.
- Request declaration pages for types of insurance.
- Immediate investigation, especially for vehicle weight. Look at Bills of Lading, registration, weight-in station documentation, etc.
- Involve Loss Transfer target in accident benefits settlement discussion to avoid issues going forward (i.e. involved at mediations), subject to privacy concerns for the insured. Conversely, a Loss Transfer target may want to involve themselves in some aspects of the AB file while ongoing, subject to privacy concerns for the insured.
- Ensure that Arbitration is commenced within 2 years of Loss Transfer Request for Indemnification.
- As a first-party insurer paying benefits, remember that benefits paid “unreasonably” could jeopardize the loss transfer claim. Keep in mind that the ONCA discussion on this point involved conducting Insurer Examinations where appropriate.
- Despite the lack of a limitation period for requesting Loss Transfer Indemnification, first-party insurers should make the request promptly, to avoid potential arguments of prejudice, which may be applicable to factual determinations even without a limitation.
1 Jevco Insurance Co. v. York Fire & Casualty Co. [1996] O.J. No. 646 (ONCA)
2 Economical Mutual Insurance Company v Northbridge Commercial Insurance Company, 2016 ONSC 458
3 Jevco Insurance v. York Fire & Casualty Co. [1996] O.J. No. 646 (ONCA).
4 Wawanesa Mutual Insurance Company v. Axa Insurance (Canada), 2012 ONCA 592.
5 Wawanesa Mutual Insurance Company v. Axa Insurance (Canada), 2012 ONCA 592.
6 Markel Insurance v. ING Insurance and Federation v. Kingsway, 2012 ONCA 218.
7 Zurich Insurance v. TD General Insurance Company and Intact Insurance Co. v. Lombard General Insurance, 2015 ONCA 764.
8 Jevco Insurance v. Wawanesa Insurance [1998] 42 O.R. (3d) 276 (Ont. Ct. Gen. Div.).