Motor Vehicle Insurance Versus Non-Motor Vehicle Insurance Regimes and Their Application to Insurance Limits
The insurance industry is heavily regulated and shaped in part by public policy concerns. These concerns can come into conflict and create uncertainty for insurers involved in third party liability litigation, particularly where there are multiple claimants advancing claims that may be greater than the limit of available insurance. This paper provides a general overview of the public policy concerns affecting insurance limits in motor vehicle versus non-motor vehicle liability claims, addresses the steps that insurers and counsel can undertake to expedite the resolution of liability litigation, and briefly describes the risk of long-tail liability exposure and how it can be mitigated.
II. PUBLIC POLICY OBJECTIVES
Motor vehicle liability insurance is subject to a different legal regime than non-motor vehicle liability insurance. The statutory framework for motor vehicle insurance is found in the Insurance (Vehicle) Act, RSBC 1996, c. 231, and associated regulations. For non-motor vehicle insurance the statutory framework is found in the Insurance Act, SBC 2012, c. 1, and associated regulations. A quick glance at the respective statutes and regulations reveals that motor vehicle insurance is subject to a far more comprehensive and detailed framework than non-motor vehicle insurance. Furthermore, the Insurance Company Vehicle Liability Insurance Regulation, BC Reg. 84/91, which is a regulation enacted under the Financial Institutions Act, RSBC 1996, c. 141, requires foreign motor vehicle insurers to whom a business authorization has been issued to meet the limits requirements for motor vehicle insurance and to not present defences that are unavailable to a British Columbia motor vehicle insurer if an action is brought against it or its insured in British Columbia.
There are competing policy concerns at issue regarding the availability of insurance funds for those suffering a loss. It is a policy concern of the courts that matters are adjudicated in a quick and efficient manner (see Re: Aviva Canada Inc., 2006 BCSC 1578 at para. 23; Commerce & Industry Insurance Co. of Canada, Inc. v. Singleton Associated Engineering Ltd., 2005 ABQB 500 at para. 41; Harmon v. State Farm Mutual Automobile Insurance Co., 232 So. 2d 206 (US Fla Ct App 1970) at p. 206). Another policy concern of the courts is those who put resources towards pursuing litigation in which they are successful should see the fruits of that effort (Laidlaw Inc. Re (2003), 46 CCLI (3d) 263 (Ont. SCJ) at para. 13-14; Cox v. Bankside Members Agency Ltd.,  2 Lloyd’s Law Reports 437 (CA) at p. 457; Aviva, at para. 23). In contrast, it is also a policy concern that those who are wronged and suffer a loss are able to obtain a remedy.
Motor vehicle insurance is mandatory and subject to comprehensive legislation. This underlines an important policy objective the legislation is attempting to address: those who are injured by negligently operated motor vehicles in British Columbia ought to have access to insurance funds for compensation (see Aviva at para. 16, Bartkow v. Merit Insurance Co.,  ILR 1-068, 1962 CarswellBC 77 (CA) at para. 39, Stobbe v. Allwood Estate (1993), 81 BCLR (2d) 117 (S.C), 1993 CarswellBC 169 (SC) at paras. 26 – 27). This is augmented by often used provisions of the Insurance (Vehicle) Act which provide compensation to those injured by unidentified drivers, uninsured drivers and underinsured drivers. There are also “no fault” benefits available for both the negligent and non-negligent victims of motor vehicle accidents (see Insurance (Vehicle) Regulations, BC Reg 447/83, Part 7). Finally, section 76(1) and (2) of the Insurance (Vehicle) Act entitles those injured by negligently operated motor vehicles in British Columbia to have access to insurance proceeds. It is primarily this section which can cause an insurer to be liable in excess of its limits in certain circumstances.
The statutory regime under the Insurance Act provides less of a deviation from the common law roots of insurance than does motor vehicle insurance. The legislature has not taken the same steps as it has under the Insurance (Vehicle) Act to ensure those who suffer a loss are compensated. The legislature has taken some steps to assist those who suffer a loss to obtain a remedy, such as section 25 of the Insurance Act which allows a judgment creditor to claim indemnity directly against the judgment debtor’s insurer where insurance proceeds may be available. However, there is not the same emphasis on providing a remedy to multiple persons who have suffered a loss as there is under the Insurance (Vehicle) Act regime (see Aviva at para. 23). The “common law” policy concerns – that claims are adjudicated in a timely and efficient manner; and those who put resources towards pursuing litigation in which they are successful should see the fruits of that effort – have more influence on entitlement to insurance proceeds in claims under this regime.
III. APPLICATION OF COMPETING POLICY AND LEGISLATIVE REGIMES WHEN THERE ARE MULITPLE CLAIMANTS WITH CLAIMS THAT THREATEN OR EXCEED INSURANCE LIMITS
A. MOTOR VEHICLE CLAIMThe application of the legislation and policy concerns in a motor vehicle case where limits are at risk with multiple victims results in those victims being entitled to at least a pro rata share of the available limits (see I.C.B.C. v. Pozzi, 2004 BCCA 440 at para. 22; Stobbe at para. 28, Henry v. Zurich Insurance Co.,  ILR I-3540, 1998 CarswellBC 431 (SC) at para. 25; Thoreson v. Insurance Corporation of British Columbia, 2011 BCCA 130 at para. 22).
Example: at-fault insured has $1,000,000 third party liability insurance and there are two claimants. Claimant #1 settles her claim for $750,000 and receives her funds before claimant #2’s claim is quantified. It is later assessed at $500,000, exceeding the policy limit by $250,000. The insurer cannot resist paying claimant #2 the over-limit amount because claimant #2 is entitled to insurance proceeds under the legislation (Insurance (Vehicle) Act at s. 76.). In short, the insurer settled-out claimant #1 at its own risk (see Bartkow at para. 57 and Stobbe at para. 21 – 22).
To avoid this result the insurer, usually through defence counsel, can take steps to make the entirety of its indemnity limit available for a pro rata sharing among all claimants.
Example: the claims of claimants #1 and #2 total $1,250,000. Claimant #1’s $750,000 award is 60% of the $1,000,000 policy limit ($750,000 / $1,250,000 = 0.6), so her pro rata share of the limit is $600,000. Claimant #2’s pro rata share would be the remaining $400,000.
This result can be achieved by not paying any claims until all potential claims are quantified or, if a claimant has a judgment and is threatening execution, by paying the limits into court (see Insurance (Vehicle) Act at s. 78, and see Stobbe at para. 20, but also see Henry at para. 22).
It is noteworthy that in the cases where an insurer has had to pay in excess of its limits to a victim because of earlier settlements, those earlier-settled victims do not appear to have had their entitlement to insurance funds limited to a pro rata share of the insurance limits as if those limits had been paid into court in accordance with the legislation (for example, see Bartkow). Why they were not limited is unclear in the body of the reasons, though one infers the insurers involved assumed the earlier settlements would erode the available limits by the full amount of each of the earlier settlements.
B. NON-MOTOR VEHICLE CLAIMS
In non-motor vehicle claims there is no statutory entitlement to share in insurance proceeds. Thus, the starting position is if claimant #1 settles the claim for 100% of the limits, claimant #2 is left with no insurance proceeds available (see Aviva at para. 23; Pope & Talbot Ltd., Re, 2009 BCSC 1823 at para. 15; Laidlaw Inc., Re (2003), 46 CCLI (3d) 263 (Ont SCJ) at paras. 13 – 14; Cox v. Bankside Members Agency Ltd.,  2 Lloyd’s Law Reports 437 (CA) at 457; Sun-Times Media Group Inc. v. Royal & SunAlliance Insurance Co. of Canada, 2007 CarswellOnt 7559 (Ont SCJ)). This approach has been described by the British Columbia Supreme Court as the “first-to-the-post” method of dividing insurance money. This method of paying claims can lead to hardship on claimants who are slow to bring or prosecute their claims and rewards those who pursue them in a timely manner. It can also be prejudicial to insureds who may be left to face greater personal liability for the excess, uninsured claims. As such, counsel on both sides of such disputes must exercise high level vigilance to monitor the impact of multiple claims on the available limit of insurance.
The court cases in British Columbia where the first-to-the-post method has been endorsed involve pre-emptive petitions or applications where an insurer wishes to settle claims with known claimants without risking payment in excess of the policy limit to potential or unknown claimants. In those cases, before settling the claims with known claimants or after agreeing to a settlement in principle, the insurer has petitioned or applied to the court for a declaration that insurance proceeds can be paid to existing claimants on a first-past-the-post basis.
In British Columbia there has yet to be a reported case where a party adversely affected by the first-to-the-post regime attended at court to oppose such an application or petition. Therefore, there are no cases in British Columbia in which a court has held the first-past-the-post system applies when faced with a specific claimant who would suffer obvious hardship. Note though the comment of Walker J. in Pope at para.14:
The decision of the Court of Appeal in Insurance Corp. of British Columbia v. Pozzi, 2004 BCCA 440, 244 D.L.R. (4th) 641, makes it clear that in an automobile liability policy setting, division of policy limits on a pro rata basis principle is applied (as opposed to “first to the post”). There is no dicta in that decision, however, suggesting that the pro rota approach applies only to automobile policies.
In short, on suitably compelling circumstances we may yet see the pro rata basis of division of insurance funds applied in a non-motor vehicle insurance case.
C. APPLICATION OF JUDICIAL DISCRETION IN THE SHARING OF INSURANCE PROCEEDS
Whether indemnity limits are shared pro rata or are subject to a first-to-the-post regime, the distribution of insurance money for those claims is arguably subject to judicial discretion (See Pozzi at para. 20, Pope at para. 16 and see Solway v. Lloyd’s Underwriters, 2005 CarswellOnt 1333 at paras. 66 – 68). Thus the court might order a deviation from the usual application of law. However, in exercising discretion the court will likely look at the policy concerns behind the usual rule in each case.
In Aviva, for example, the insurer made an unopposed petition to the court for a declaration that it could pay out claims in a non-motor vehicle context without exposing itself to liability beyond its limits. The court confirmed the insurer could do so using the first-to-the-post method. The court was impressed that the insurer in that case went to some lengths to identify potential claimants – including some infants – and gave them an opportunity to come forward. There is nothing to indicate the steps taken by the insurer in Aviva are obligations on an insurer but these are potential factual issues one could use to differentiate Aviva from another first-to-the-post limits case.
The court in Stobbe – a motor vehicle claim – observed that usually the claims of the most seriously injured claimants take the longest to quantify and it is unfair to them if other claimants are, to use the words of the court, “scooping” the limited insurance money while the serious claims proceed more slowly through litigation. In Condominium Plan No. 96PA02840 v. Kolbuck, 2009 SKQB 480 – a non-motor vehicle case – the Saskatchewan Court of Queen Bench explicitly used its statutory discretion to allow a pro rata sharing of proceeds between two claimants while stating a third claimant was subject to the first-to-the-post regime. The reasons for the decision are fact-specific and based on the governing legislation, which does give explicit discretion to the court regarding the allocation of insurance funds. The court essentially relaxed the first-to-the-post regime for one claimant who diligently pursued her claim but not for another who did not.
For non-motor vehicle claims, the first-past-the-post system is the default, but an insurer should be wary of settling where limits are in issue and where there is legitimate concern that a diligent claimant may be deprived of funds. In such a case, a pre-emptive application or petition as in Aviva is advisable.
A court may also be able to deviate from the pro rata method in a motor vehicle claim; however, the circumstances under which a court might do so are less clear. In Pozzi, the Court of Appeal deliberately left this question unanswered. There, the insurance indemnity limit was $1,000,000 and there were three claimants with damage awards of approximately $226,000, $749,000 and $7,500,000, respectively. In the Supreme Court the limit was divvied up other than by the pro rata method. The Court of Appeal ruled that the pro rata division of that limit applied; but, writing for the court, Donald J. added:
Much argument was addressed to the subject of discretion. The discretion is said to arise from the words in s. 21(14): “… and the money must be dealt with as the court orders…”. I.C.B.C. argues there is no discretion because the pro rata approach is the only fair and rational method, it is invariably used at common law and it governs class proceedings. The other side concedes that pro rata is the usual formula, but says it can be deviated from in special cases of which this case is an example.
In my view we need not pronounce definitively on the question of discretion. Assuming without deciding that the chambers judge had the discretion to choose a formula other than pro rata, I would nevertheless hold that the distribution in this case was not a valid exercise of the discretion.
IV. SPECIFIC CHALLENGES FOR INSURERS: MINORS, INDIVISIBLE INJURY AND THE ALLOCATION OF INSURANCE FUNDS
In practice insurers often have knowledge of all potential claims arising from an occurrence prior to judgment or settlement because claimants must bring their actions within the limitation period. This is not always the case however; hasty settlements can trigger obligations to indemnify other victims in excess of insurance limits. The most challenging situations for insurers are those in which claims may be made many years, or even decades, after the occurrence. This paper will examine two scenarios in which this might occur. The first situation is the challenge created in managing infant claims, and the second is the troubling judicial creation of indivisible injury and the resulting joint liability among tortfeasors.
Generally, actions for personal injury damages must be brought within two years following the accident, or the claim will be statute barred (Limitation Act, SBC 2012, c. 13, at s. 6). However, minors are not subject to a two year limitation period because of ss. 10 and 18 of the Limitation Act, which postpone the basic limitation period from running. The two year limitation period for a minor does not start to run until the minor turns 19 years old. Insurers and defence counsel should be aware that the postponement provisions related to minors in the Limitation Act do not apply to claims brought pursuant to Part 7 of the Insurance (Vehicle) Regulations (see Marin v. Insurance Corp. of British Columbia, 1993 CarswellBC 2864).
Assume two vehicles are involved in a collision. Vehicle one contains a driver (D1) and a passenger who is a baby (M1). Vehicle two contains only a driver (D2). D2 has a policy limit of $1,000,000. Assume there is no question that D2 is fully liable for all of the losses suffered by D1 and M1.
The first thing to consider is how an injury to M1 affects the quantification of the claim and the extent of the insurer’s obligation to indemnify. The risk to insurers in this situation arises from the lengthy time which may pass before a minor commences legal proceedings. It is easy to conceive of the situation where insurers and defence counsel initially assess that M1 has suffered no injury and settle D1’s claims. However, the possibility remains that M1 could make a substantial claim some 18 years in the future. If the insurer has already settled D1’s claim under the policy the insurer may be liable to pay M1 up to the policy limits, despite the fact that part of the policy has already been paid out (see Bartkow). In such circumstances an insurer cannot be certain that the limit of its indemnity obligation to D1 and M1 is the policy limit.
The best practice to protect the insurer from this type of exposure is to issue a Notice to Proceed under the Limitation Act early in the claim to start the limitation period running, and to force the minor to commence a lawsuit before he or she turns 19 years old.
By issuing a Notice to Proceed, a potential defendant can start the two year limitation period running before the minor turns 19 years old. The procedure for issuing a Notice to Proceed is set out in sections 10, 18 and 20 of the Limitation Act. The requirements of a Notice to Proceed are technical and must be strictly complied with.
A Notice to Proceed must be delivered to the minor’s “caregiver”, and the Public Guardian and Trustee (Limitation Act at s. 20(1)). The term “caregiver” is defined in s. 1 of the Limitation Act, and means a parent, guardian or other person who usually has care and control of the minor. When delivering a Notice to Proceed to the Public Guardian and Trustee, one must also pay a review fee of $500 pursuant to the fee schedule in the Public Guardian and Trustee Fees Regulation, BC Reg 312/2000. If a minor’s caregiver fails to properly protect the minor’s interest, the Public Guardian and Trustee is authorized to act on behalf of the minor when a Notice to proceed has been issued (Infants Act, RSBC 1996, c 223 at s. 9).
Counsel must be aware of the requirements for Public Guardian and Trustee approval of settlements if the plaintiff is a minor at the time of settlement. When the settlement is under $50,000, and no action has been commenced, the Public Guardian and Trustee must consent to the settlement (Infants Act, s. 40(4)). If an agreement to settle a claim by an infant is proposed before an action has been commenced, and the settlement is greater than $50,000, the parties must obtain comments from the Public Guardian and Trustee and court approval of the settlement (Infants Act, ss. 40(5), 40(10)).
When a proposed settlement is under $50,000 after an action has been commenced, the litigation guardian may consent to an order awarding damages in favour of the infant, but the Public Guardian and Trustee must also consent to the order (Infants Act, s. 40(7)). When an action has been commenced and a settlement greater than $50,000 is proposed, the parties must obtain the Public Guardian and Trustee’s written statutory comments and obtain court approval of the settlement (Infants Act, ss. 40(8), 40(9), 40(10)).
B. INDIVISIBLE INJURY
The use of the first-to-the-post method when a pro rata allocation of insurance money is required and the failure to issue a Notice to Proceed when minors are involved are two possible situations when an insurer has to provide compensation in excess of the policy limits. Another situation could be when a previously compensated injury is alleged to be part of a new indivisible injury.
The British Columbia Court of Appeal in the decision in Bradley v. Groves, 2010 BCCA 362, at para 37, stated that an indivisible injury is not qualitatively different from the aggravation of an earlier injury and it occurs when “subsequent tortious action has merged with prior tortious action to create an injury that is not attributable to one particular tortfeasor.” A common example of an indivisible injury is a back pain that has been aggravated on multiple occasions by separate tortious incidents. The decision in Athey v Leonati,  3 S.C.R. 458, established that when there is an indivisible injury all tortfeasors are jointly liable for the victim’s losses and are entitled to contribution and indemnity from each other.
Indivisible injuries are a logical conclusion from the policy, confirmed in Athey, that tortfeasors are liable for all injuries caused or contributed to by their negligence. This means that an insurer that has settled a claim for a back injury may have liabilities if that injury is later aggravated. An insurer may become liable when the insured is named directly by the plaintiff or when the insured is brought in as a third party defendant by an alleged joint tortfeasor, and it may include the duty to defend the insured, an obligation to compensate a victim for their loss, and the obligation to contribute to a joint tortfeasor.
The risk of the preceding scenario arising is, as yet, hypothetical as we have not found any case law specifically addressing the point; however, as the common law continues to evolve, we may yet see a case arguing the point, especially where there is a paucity of readily available insurance.
B1. Managing Risk Through A BC Ferries Agreement
An insurer cannot protect itself from the risk of liability for an indivisible injury through any of the techniques described above: an indivisible injury is a new injury and is not affected by the policy limits of a previous injury or by a notice to proceed. The best way for an insurer to protect itself from liability for an indivisible injury would be to settle with a claimant and enter into a “BC Ferries Agreement.” A BC Ferries Agreement is named after the decision in British Columbia Ferry Corp. v. T&N, plc, (1986) B.C.L.R. (2d) 353 (S.C.) and includes both a covenant not to sue and a waiver of any claim to damages that are attributable to the fault of the settling tortfeasor. In a BC Ferries Agreement the claimant accepts the risk of under-compensation due to the settlement agreement.
The inclusion of a covenant not to sue instead of a release is theoretically for the benefit of the settling claimant. A covenant not to sue is used to prevent the triggering of the common law rule that a release of one joint tortfeasor is a release of all tortfeasors and it should allow the plaintiff to maintain the action against the other tortfeasors. For the benefit of the insurer the covenant not to sue should include any claims derived from the vulnerability created by the settled injury. This means that it should apply to a future indivisible injury because, as stated in Aschcroft v. Dhaliwal, 2007 BCSC 533, the settled injury is implicated in a future indivisible injury because the “vulnerability caused by the initial injuries” is within the “scope of causation” of the indivisible injury. (at paras 26 and 27).
The waiver of any claim to damages should protect the insurer from any liability for contribution to a joint tortfeasor for a future indivisible injury. Contribution is founded on the claim that a joint tortfeasor who is not obligated to compensate a victim is unjustly enriched by the compensation provided by another tortfeasor in excess of their apportioned fault. However, the victim’s waiver of a claim to damages avoids this unjust enrichment because neither tortfeasor is obligated to provide compensation for those damages.
The duty to defend would probably still be triggered if there is an alleged indivisible injury. However, if there is a BC Ferries agreement in place the exposure of the insurer to compensate the victim or contribute to a joint tortfeasor is limited and the cost incurred as a result of the duty to defend can be successfully managed.
B2. Managing Risk In The Absence of a BC Ferries Agreement.
The benefits provided by a BC Ferries Agreement are extensive but there is the possibility that an insurer will be involved in an allegation of an injury when there is no BC Ferries Agreement in place. The first thing that an insurer should do when a personal injury claim is made is determine whether the alleged injury may be indivisible. It if could be an indivisible injury the insurer should add any potential joint tortfeasors as third parties.
An insurer should also consider the techniques described in Section II and attempt to expedite a settlement that involves a BC Ferries Agreement. There are two significant reasons for an insurer to attempt to settle a claim with a BC Ferries Agreement. The first is that a court judgment does not provide protection from a future claim involving an indivisible injury and therefore is potentially much less valuable to an insurer than a BC Ferries Agreement. The second is that the value to an insurer of a BC Ferries Agreement increases with the increased potential that there may be a subsequent indivisible injury.
Of course all of the techniques for managing risk with respect to the liability of the insured or the quantum of the damage are available to an insurer for the current allegations, regardless of whether it is an alleged indivisible injury or not.
B3. A Quick Comment On Legislative Reform
The Court of Appeal in Bradley v. Groves, at para 36, acknowledged that the doctrine of indivisible injury may “represent an extension of pecuniary liability for consecutive or concurrent tortfeasors.” It also stated that if this extension represents an injustice that legislative reform or contractual agreements for contribution and indemnity between tortfeasors the appropriate remedy is through.
The BC Law Institute in its March 2013 “Consultation Paper on Contribution after Settlement under the Negligence Act” provides an excellent analysis of the current Negligence Act, RSBC 1996, c 333, describes the most common forms of settlement agreements, and provides recommendations regarding legislative reform. While the Paper does not directly address indivisible injuries its recommendation would have the effect of statutorily providing the benefits of a BC Ferries Agreement to every settling defendant.
Counsel must be aware of how public policy objectives influence the allocation of insurance money when there are concerns regarding policy limits. There is a risk that an insurer will be obligated to indemnify an insured in excess of the policy limits if the funds are issued before all of the claims have been quantified.
In the majority of occurrences, insurers are aware of all claims within the basic two year limitation period and can take steps to quantify those claims in a reasonable period of time. Risk of liability beyond existing policy limits is therefore usually the product of a hasty settlement with one claimant before the other claims have been quantified. This risk can be managed by evaluating the potential quantum of all the claims and determining whether limits are at risk. If the limits are at risk, the insurer can then take steps to ensure a proper allocation of insurance funds. Which steps are proper will depend on the type of claim, which policy objectives apply, and the specific facts of the case.
The case of minors and indivisible injury present a challenge to insurers. The existence of a claim, or the actual quantification of a claim, may not be known for many years or even decades after an occurrence. Although this risk exists, there are prudent steps available to insurers to minimize the risk of such situations.
This paper was originally prepared for CLEBC’s “Insurance Law Conference 2013” , held at Vancouver , B.C. on Sept. 12, 2013