Ontario’s auto insurance system is complex, aiming for fairness in compensating accident victims. A key part of this system is the loss transfer scheme. This blog explains the scheme’s purpose, how it works, and its effects on insurers (and policyholders).
1. What is Loss Transfer?
Loss transfer is a statutory mechanism in Ontario’s auto insurance system that enables the transfer of financial responsibility from one insurer to another following a motor vehicle accident. It allows the insurer responsible for paying statutory accident benefits to its insured to recover amounts paid from the insurer of specified types of automobiles in certain circumstances. This process helps distribute financial burdens among insurers, especially when accidents involve vehicles like heavy trucks or motorcycles, which can lead to higher claims costs due to their characteristics.
The Purpose of Loss Transfer
The main goal of the loss transfer scheme is to ensure fair distribution of claims costs among automobile insurers in specific situations. This is particularly relevant in accidents involving vehicles with varying levels of risk and potential damage. For instance, accidents between motorcycles and cars typically result in more injuries for motorcycle occupants. Similarly, car occupants are likely to experience more severe consequences than those in heavy trucks.
The scheme aims to balance the risk and costs of insuring these vehicles by transferring the costs of paying benefits from the insurer of the smaller vehicle to the insurer of the larger vehicle.
2. Where is Loss Transfer?
Loss transfer is purely a creature of statute: There is no common law or equitable right to claim loss transfer. The entire scheme is found in section 275 of the Insurance Act and section 9 of Ontario Regulation 664, and Ontario Regulation 668 (Fault Determination Rules).
Section 275(1) of the Insurance Act sets out when loss transfer applies:
275 (1) The insurer responsible under subsection 268 (2) for the payment of statutory accident benefits to such classes of persons as may be named in the regulations is entitled, subject to such terms, conditions, provisions, exclusions and limits as may be prescribed, to indemnification in relation to such benefits paid by it from the insurers of such class or classes of automobiles as may be named in the regulations involved in the incident from which the responsibility to pay the statutory accident benefits arose.
Regulation 664 sets out and names the classes of automobiles that would trigger loss transfer.
3. How Loss Transfer Works
Eligibility Criteria
Pursuant to section 275(1), for loss transfer to apply, certain eligibility criteria must be met:
- The insurer paying benefits and seeking reimbursement (known as the “first party insurer”) must be the insurer responsible for the payment of accident benefits to the claimant. This means the first party insurer must have priority over the claim, pursuant to the pecking order under section 268(2)-(5.2) of the Insurance Act.
- Pursuant to section 9(2) and 9(3) of Regulation 664 (and in very general terms), the insurer paying benefits to the claimant must be doing so under a policy insuring a smaller class of vehicle than the other vehicle involved in the accident. For example, if the claimant is receiving benefits under a policy that insures a motorcycle, the other vehicle involved in the accident can’t be a motorcycle. Likewise, if the insurer paying benefits is doing so under a policy insuring a car, the other vehicle involved in the accident must be a “heavy commercial vehicle” (a “commercial vehicle” weighing more than 4,500 kg).
Amount of Indemnification
Once the insurers agree (or an arbitrator finds) that loss transfer applies, pursuant to section 275(2) of the Act, the second party insurer’s obligation to indemnify the first party insurer is based on the degree of fault of the insureds:
275 (2) Indemnification under subsection (1) shall be made according to the respective degree of fault of each insurer’s insured as determined under the fault determination rules.
The determination of fault follows the Fault Determination Rules (FDRs) established under Regulation 668. These rules provide a standardized and somewhat common-sense approach to apportioning fault based on many usual accident scenarios. It’s important to note that fault determination for loss transfer purposes is separate from any legal or civil proceedings and is strictly for insurance claims processing.
To illustrate how loss transfer works, consider the following scenarios:
- Scenario 1: A car and a heavy commercial truck are involved in an accident, with the truck driver found to be 100% at fault under the FDRs. The car’s insurer can recover 100% of the statutory benefits paid to their insured from the truck’s insurer.
- Scenario 2: A motorcycle and a passenger vehicle collide. The motorcyclist is deemed to be 75% at fault under the FDRs and the car’s driver is deemed to be 25% at fault. The motorcyclist’s insurer can recover 25% of benefits paid to their insured.
Process of Loss Transfer
Once eligibility is established, the process of loss transfer involves several steps:
- Notification of Loss Transfer: The first party insurer seeking loss transfer notifies the second party insurer of their intention to seek loss transfer. The notice will usually indicate the percentage of fault that the first party insurer has allocated to the second party insurer’s insured.
- Loss transfer Request for Indemnification: The first party insurer will send a form to the second party insurer detailing the benefits paid for which they are seeking loss transfer indemnification.
- Assessment and Payment: The second party insurer reviews the claim and, if agreeable, reimburses some or all of the benefits as specified.
If the insurers can’t agree on the loss transfer indemnification, the issue is resolved in a private arbitration between the insurers. Common issues that arbitrators decide include:
- Loss transfer eligibility, including whether loss transfer applies in the circumstances. For example, the insurers might disagree on the weight of second party insurer’s vehicle, or whether loss transfer applies when an accident happens outside of Ontario.
- Fault of each insurers insured. This requires the arbitrator to determine the facts that make up the incident and then apply the fault determination rule that describes the accident.
- Amount of indemnification, such as whether the benefits paid were reasonable or whether some of the amounts paid are not subject to loss transfer (such as insurer examinations or surveillance expenses).
Pursuant to the terms of the arbitration agreement, a party will usually be allowed to appeal an arbitrator’s decision to the Superior Court on issues of mixed fact and law. Further appeals, if necessary, go to the Court of Appeal for Ontario (if the Court agrees to hear it).
It is very important to remember that loss transfer deals with indemnification only: Unlike a priority dispute, the second party insurer never handles the accident benefits file and the file never changes hands.
4. Implications for Insurers and Policyholders
For Insurers
The loss transfer scheme has significant implications for auto insurers. It helps mitigate the financial impact of high-cost claims, fostering a more balanced and sustainable insurance market. Insurers must be diligent in documenting and processing loss transfer claims to ensure timely and accurate recoveries.
For Policyholders
While the loss transfer scheme primarily affects insurers, it indirectly benefits policyholders by contributing to a more stable and equitable insurance system. By ensuring that high-risk vehicles bear a fair share of claims costs, the scheme helps maintain reasonable premium rates for passenger vehicle owners.
5. Challenges and Considerations
Despite its benefits, the loss transfer scheme is not without challenges. Disputes can arise over fault determination, claim validity, and reimbursement amounts. Insurers must navigate these complexities with thorough documentation and a clear understanding of the Fault Determination Rules.
6. Future Outlook
As Ontario’s auto insurance landscape evolves, the loss transfer scheme may undergo changes to address emerging trends and challenges. That said, the system has remained mostly untouched since it debuted in 1990. Ongoing dialogue between regulators, insurers, and stakeholders is essential to ensure the scheme remains effective and fair.
7. Conclusion
Ontario’s loss transfer scheme is a vital component of the province’s auto insurance system, promoting fairness and financial balance among insurers. By understanding its mechanics and implications, insurers can better navigate the complexities of accident-related claims and contribute to a more equitable insurance environment.
I have been lead counsel in many loss transfer disputes and appeals. Click here for a list of my reported decisions and please reach out to me if you have any loss transfer questions.