Law Times

Law times • OctOber 15, 2012 Crackdown on auto insurance a good political tactic E COMMENT seats in last year's general election by ach day seems to bring a new scandal and yet another labour battle. Between revelations of the high cost of preserving Liberal cancelling two natural gas plants, news that authorities are paying some power companies to remain idle in order to off set oversupply, and ongoing eHealth Ontario failures, Premier Dalton McGuinty' government needs to fi nd some low-cost, populist issues to ride on. New rules to protect gas station s attendants, regulations related to creatures in zoos and aquariums, and a law banning kids from tanning beds are a good start. But those issues are small potatoes. Now take auto insurance. Everyone where soaring rates have also infl amed public sentiment. You' dollar global industry could collaborate to spot fraud and shut it down. But it just got around to that this year by creating a joint venture to mine insurance claims for signs of fraud. Th ere was no real rush. d think a trillion- Queen's Park $770 million to $1.6 billion per year. "Th is amounts to between nine per cent and 18 per cent of total auto premiums," it concluded. McCarter also notes the has a horror story about car-insurance premiums or knows of one. Minor tickets that people used to pay with a grudging admittance of guilt are clogging up the courts if only to avoid insurance renewal dates because even a no-point infraction can lead to cancellation or massive spikes in rates as carriers push even the most innocuous fi le onto the Facility Association. Th e Ontario is $1,400, making our rates the highest in Canada. Th e Insurance Bureau of Canada average insurance policy in blames organized crime rings and fraud. But strangely, that' insurance industry is making in Britain s the same claim the Th e industry has had a good ride from governments that not only make auto insurance mandatory but have capped payments at $3,500 for minor injuries (how to defi ne a minor injury is the real issue) and brought in other provisions the companies demanded, the big one, of course, being no-fault insurance. Th at change hasn't been so good for Ontario drivers. Four years ago, the Canadian Bar Association' the switch to a no-fault regime from a tort system has been a windfall for insurance companies and a ripoff for consumers. It' the same story around the world. Auditor general Jim McCarter also s had some criticisms when he noted last year that there' the industry arrived at its massive fraud estimates. In a belated response last summer, s little to substantiate how the Insurance Bureau released a KPMG report that found that fraud ranges from s research found Ian Harvey Insurance Act guarantees a return of 12 per cent even though the industry claims it barely makes eight per cent a year across all lines of business. McCarter acknowledged times higher in Ontario than elsewhere despite the cap on personal injury payouts. So what' that the average cost of accident injury claims is fi ve the world's worst drivers? Do we all feel it's s going on here? Are Ontarians fair to rip off the insurance companies? Brampton, Ont., NDP MPP Jagmeet Singh, a lawyer by profession, isn't buying into the claims of fraud. "I don't believe it for one minute, says. "Let' premiums and they cut fraud in half and they collect $10 billion in premiums. Th at' s say fraud is 10 per cent of would go back to consumers in savings, especially given that the rule changes so far have pushed rates down by less than one per cent. In any event, that' He doesn't believe the $500 million s $500 million." off the average premium, a number that's still not enough to justify the highest rates s only $70 " he PAGE 7 in Canada. "Insurance fraud is a gimmick and a use to goose premiums according to postal code. He notes a mature driver with a clean red herring of the politics of distraction," he fumes. Nor is he happy with the tricks carriers record driving a Ford Focus would pay $3,070 for an address at Jane Street and Finch Avenue in Toronto but only $1,710 for an address in the area of Yonge Street and Lawrence Avenue. It does seem a tad out of proportion. His private member' practice died the last time around but he's determined to revive it. He's hoping it's a s bill to outlaw the populist issue the Liberals can get behind if only to drive some good coverage their way. headlines again this fall when the antifraud task force' fi nal report. Based on the indications so far, however, the committee seems to be singing from the industry' auto insurance premiums is sure to make voters sit up and listen. It is, however, a populist issue. Cutting LT s songbook. Ian Harvey has been a journalist for 35 years writing about a diverse range of issues including legal and political aff airs. His e-mail address is ianharvey@ rogers.com. BY STEPHEN KERTZMAN For Law Times I Negative discount rate signals need for rule change u SPEAKER'S CORNER commencing in 2012, the statutory discount rate is zero per cent. Accordingly, there is no effective dis- count for the time value of money for trials com- mencing in 2012 and 2013. The result is an incen- tive for plaintiffs and their counsel to settle their cases or bring them to trial in 2013. Litigation matters in which these statutory dis- n accordance with Rule 53.09 of the Rules of Civil Procedure, statutory discount rates for trials commencing in 2013 are –0.5 per cent for the first 15 years of future losses. For trials count rates typically apply involve cases associated with insurance matters where an individual's loss of future income has been adjusted by an expert in loss quantification for contingencies such as mortality, unemployment, and illness. The rate also comes up in family law matters involving the calculation of obligations like lump-sum and compensatory sup- port as well as commercial litigation cases involving present-value calculations where there's nominal risk associated with future losses or obligations. These rates under Rule 53.09 don't usually apply covering losses beyond 15 years into the future, the 2.5 per cent still applies. The rationale for this change appears to be that the real rates for the year before the trial com- menced are a good indicator of short- to medium- term rates. Th e purpose of a discount rate is to take into ac- count the time value of money by converting a stream of future cash fl ows into a lump-sum amount. To il- lustrate, if $1 is invested today, it is worth more than receiving $1 in the future. Th ere is a discount as you would need less than a $1 today to provide $1 in the future as $1 invested today would grow through in- terest, dividends, and capital growth. For trials commencing in 2012, there was no ef- for the purposes of business and securities valuation or discounting a loss of profits in commercial liti- gation as there's inherently more risk to the future profitability of a business than with a government of Canada bond. By way of background, Ontario changed the way the statutory discount rate is calculated in 2000. Previously, Rule 53.09(1) required the court to use a real interest rate of 2.5 per cent when discounting future earnings. The new rule, established for trials beginning in or after 2000, divides the future loss into two peri- ods: the first for the initial 15-year period and the second for beyond. In the first period, Rule 53.09(1) indicates the use fective discount for the time value of money in ac- cordance with the rules as the statutory discount rate was zero per cent. In 2013, the statutory dis- count rate is negative. This means that the expected real rate of return in 2013 for the next 15 years is negative. While this is theoretically possible, it is unrealistic to assume that over a 15-year period the annual discount rate will be negative –0.5 per cent or, in other words, that $1 in 15 years from now will be worth approximately eight per cent more than $1 today. Under that scenario, you would have to invest more than a dollar today to get back $1 in 15 years. While this scenario is a theoretical possibility, of the rate observed on real return bonds for the 12 months ending in August of the year preceding the date of calculation less one per cent and rounded to the nearest quarter per cent. For the second period I believe a negative real return for the Canadian economy over a 15-year period is highly unlikely. Accordingly, there appears to be a theoretical flaw in the way the discount rate is calculated. Accord- ingly, the committee responsible for Rule 53.09 should consider making a change to the legislation. The main reason for the very low discount rates since 2009 is the Bank of Canada's pursuit of a low interest rate policy to help stimulate the economy in light of the prolonged global economic slowdown. But the current rate is significantly lower than www.lawtimesnews.com Th e issue may pop back into the s steering committee tables its trial in 2013. To illustrate the impact of the new discount rate, long-term historical levels that have averaged at about 2.5 per cent in Canada. In fact, the new rate means there's an incentive for plaintiffs and their counsel in insurance litigation and other matters to settle their cases or bring them to consider a personal injury case in which the injured plaintiff has the following characteristics: the plain- tiff is a male who will be 40 years old in 2013; the injuries have resulted in the plaintiff being totally and permanently disabled from competitive em- ployment; an appropriate contingency adjustment to the plaintiff 's projected earnings would relate to participation and unemployment rates of males re- siding in Ontario with a college education based on statistical information from Statistics Canada; the plaintiff had an earning capacity of $60,000 per year absent the injuries; and the plaintiff likely would have retired at age 65. Based on those factors, the loss of income for this individual over his working life would increase by approximately $290,000 or 33 per cent under a dis- count rate of –0.5 per cent compared to the long- term historical average in Canada of 2.5 per cent. As a result, Ontario should perhaps consider re- vising Rule 53.09 because in certain circumstances, the average monthly real discount rates in the year preceding the trial, less one per cent, may not be a good indicator for the next 15 years. Nevertheless, the court does have discretion to vary the rate. But there's a reluctance to vary the pre- scribed discount rate for reasons such as prevent- ing the general injustice of similar cases decided at or around the same time having different results as well as avoiding the expense of calling expert evidence related to discount rates. A more general change, then, is in order. LT Stephen Kertzman is a partner at ap Valuations Ltd. He has been involved in financial litigation and business-valuation matters since 1997 and has pro- vided expert testimony at the Ontario Superior Court of Justice.

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