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University of Otago Law Festschrifts |
Last Updated: 31 May 2019
5 COMPENSATION SCHEMES, PRIVATE INSURANCE
AND PUBLIC POLICY: RECONCILING CONFLICTING PRINCIPLES
Craig Brown*
1. INTRODUCTION
The overlap of John Smillie’s academic interests with my own occurred most notably in the field of accident compensation. In 1991, we co-authored a paper in which we outlined a proposal whereby New Zealand’s accident compensation scheme would provide basic compensation (for income-replacement this would be capped at the national average income) and that people facing greater exposure could buy supplementary cover from the private market.1 In broad terms this would not be unlike another New Zealand public insurance scheme: that covering earthquakes and other natural disasters where the government scheme provides cover up to $100,000 for damage to residential property with private insurance available to provide cover for excess damage. The key there, as with our proposal, is that private insurance complements the public scheme: it does not compete with and undermine it.
In this paper I revisit the idea of public vs private providers of compensation for loss. In almost every modern society it is government policy to enact arrangements for the compensation of its citizens in the event of certain types of loss or need. Among other things, this may involve coverage for health care, unemployment, disability, death, old age, or crop failure.2 There are, of course, significant differences among societies in the extent to which this is done. And there are significant differences in the ways it is done. Sometimes the government provides the coverage directly either by tax-funded benefits or by administering a scheme involving the payment of premiums by those covered.3 In Canada examples of the latter are workers’
* This is a revised version of an article originally published in the Canadian Business Law
Journal [(2009), 47 CBLJ 266]. It is published here with the permission of
the editor of the CBLJ.
** Professor Emeritus, of Law, Western University
Canada.
1 Craig Brown and John Smillie “The Future of Accident
Compensation” [1991] NZLJ 249.
2 For discussion of these ideas in the
context of losses arising from climate change, see Craig
Brown and Sara Seck “Insurance Law Principles in the International Context: Compensating Losses Caused by Climate Change” (2013) 50 Alta L Rev 541.
COMPENSATION SCHEMES, PRIVATE INSURANCE
AND PUBLIC POLICY:
RECONCILING CONFLICTING PRINCIPLES
compensation, employment insurance and, notably, health insurance. In several provinces, the compulsory components of automobile insurance (providing for personal injury and death arising out of motor vehicle accidents) are provided by government agencies.
Sometimes a government finds it convenient to co-opt the private insurance industry and require citizens to purchase mandated coverage the terms of which are controlled by legislation and/or regulation. In Canada the prime example is compulsory automobile insurance in those other provinces that do not have government insurance. There the public policy goal of providing compensation for losses associated with death and personal injury in motor vehicle accidents is entrusted to the private insurance market.
It is not all a one-way street. Private insurers may see profit to be made in providing services hitherto considered the province of government and seek to persuade those in power that they be permitted to do so. This is currently the case with regard to health care in Canada and the Supreme Court of Canada has opened the door for serious consideration of it.4
But when it comes to compensation for loss, of whatever kind, governments and private insurers operate under different, sometimes entirely inconsistent, principles. Therefore, when government and the business of private insurance overlap, some compromise of principle by one or both is necessary. Where this is not properly understood, and where it is not properly reflected in the relevant legislation and regulations, problems inevitably arise. In this paper I outline and explain the principles that underlie the law of insurance and demonstrate their limits when it comes to public policy goals whose achievement might be seen to be possible through private insurance. This analysis has particular relevance to debates that arise from time to time about the proper role of private insurance in areas previously seen as the exclusive purview of government. Prime examples of these are health care in Canada and Accident Compensation in New Zealand.
2. THE PRINCIPLES UNDERLYING PRIVATE INSURANCE LAW
An examination of the history and content of insurance law reveals its underlying principles; those notions that provide a rationale for the rules that distinguish insurance law from the general law of contract. As we shall see, while some of
4 See Chaoulli v Quebec [2005] 1 SCR 791. For commentary see Colleen Flood “Chaoulli’s
Legacy for the Future of Canadian Health Care Policy” (2006) Osgoode Hall LJ 273 and Joan Gilmour “Fallout from Chaoulli: Is it Time to Find Cover?” (2006) 44 Osgoode Hall LJ 327.
these principles parallel those upon which public compensation schemes are built, there are crucial differences.
For present purposes private insurance law is that body of law, contained mainly in legislation and case law, that governs the operation of insurance companies and, in particular, the relationship between insurer and insured. Most obviously, it includes rules pertaining to the rights and obligations of people making claims under insurance contracts as well as the rights and obligations of insurers responding to those claims although it encompasses more, such as licensing and other forms of regulation of insurance companies, brokers, agents and adjusters.
At the heart of insurance law is the idea that insurance is about the transfer of risk. People facing the prospect (but not the certainty) of specified kinds of loss are provided protection from the financial consequences of such loss, should it occur. This preoccupation with risk transfer distinguishes insurance from other types of contracts and explains numerous rules peculiar to insurance law as opposed to contract law generally. Given two basic facts in play – potentially devastating loss to the insured and the uncertainty of its happening – it has been thought necessary to include in insurance law several unique rules. In general terms, it can be said that the purpose of insurance law is to strike an appropriate balance between the interests of those who face, or who have suffered, loss and the interests of insurers. That is easy enough to see in the law relating to insurance contracts. Once insurer and insured have consented to contractual relations the law’s role is to mediate between the possibly conflicting reasonable expectations each party has arising from the contract. But that is limited to those circumstances where there is a contract. Where there is no contract, say because the insurer refuses to accept the prospective insured’s offer, a narrow concept of insurance law has nothing more to offer. This is where the principles pertaining to private insurance law, on the one hand, and public compensation schemes on the other, part company.
However, at least in Canada, some insurance law, almost always in the form of legislation, has the purpose of making sure that cover is available for certain types of loss when, left to the market and private contract law, it might not be available to some or even all who need it. In other words, some insurance law addresses not only the transfer of risk when it happens, it mandates that the risk be transferred and creates mechanisms by which this is possible. This is where the principles relating to public compensation schemes and those pertaining to private insurance law have to be reconciled.
When all this is considered, insurance law can be seen to reflect five principles:5
5 See Craig Brown Insurance Law in Canada (8th student ed, Carswell, Toronto, 2013) at 1-2 ff.
COMPENSATION SCHEMES, PRIVATE INSURANCE AND PUBLIC POLICY:
RECONCILING CONFLICTING PRINCIPLES
(a) compensation,indemnity,
(b) fortuity,
(c) utmost good faith, and
(d) consumer protection.
Some of these have, at least on first consideration, to do with that part of insurance law dealing with contracts of insurance. But, on closer examination, it will be seen that they overlap and, in combination, relate to the broader concerns about providing for loss.
2.1 Compensation
The object of insurance is to provide for the financial consequences of loss such as that caused by fire, adverse weather, death, personal injury, business interruption, and so forth. Accordingly, one of the purposes of insurance law is to promote that goal. But in the private insurance model entitlement to compensation is constrained by the terms of the contract. A claimant is only entitled to as much compensation as was bargained for. Claims are subject to what is prescribed in the insurance contract including limits as to amount, deductibles and exclusions.
Within those confines, insurance law promotes the goal of compensation through the rules that have been developed by the courts for the interpretation of insurance policies. The “reasonable expectation” approach can be seen in this light. Although, the Supreme Court of Canada has said that policies should be construed according to the reasonable expectations of both parties to the contract,6 in practice it is mostly policyholders who benefit from its application. A more direct and express advancement of the compensation rationale is the maxim that coverage provisions should be interpreted broadly and exclusions interpreted narrowly.7
But it is legislation that has made the most dramatic statements about the compensation function of private insurance especially in regard to personal injury caused by motor vehicle accidents. Automobile insurance has been the subject of extensive legislation throughout Canada. Although different provinces have taken radically different approaches, the common theme has been the provision of more certain and more widely-available compensation. In every jurisdiction some level of automobile insurance is compulsory in order to ensure the availability of compensation in the event of personal injury arising from a motor vehicle
6 Reid Crowther & Partners v Simcoe & Erie Gen Ins Co (1993) 13 CCLI (2d) 161 (SCC), Jesuit
Fathers of Upper Canada v Guardian Ins Co [2006] 1 SCR 744
(SCC).
7 Derksen v 539938 Ont Ltd (2001) 33 CCLI (3d) 1 (SCC).
accident. There are differences in the extent to which tort law plays a role but, where it does, minimum levels of third-party liability insurance are required as a condition of registering a motor vehicle. Moreover, coverage against being injured by an uninsured motorist is also required. Given that tort-based liability requires a claimant to identify someone whose fault caused the injury, to ensure some compensation is available where this is not possible – and pending payment of damages where it is - all Canadian jurisdictions also require first-party, no-fault insurance. Quebec’s scheme is totally no-fault, in Saskatchewan, there is a choice between fault-based and no-fault coverage. Elsewhere there are varying versions of combined fault/no-fault systems.8
2.2 Indemnity
In one sense the word indemnity is a synonym for compensation. But, in insurance, most certainly private insurance, the indemnity principle is a limiting concept. Insurance protecting property and some accident insurance is designed to pay only for what is lost and no more. Unlike life insurance which typically provides for payment of a specified amount when the insured event happens regardless of the amount of financial loss, if any, suffered by the claimant, “indemnity” insurance requires proof of financial loss and only that amount is paid. While compensation is paid, it is limited by the indemnity principle to the amount actually lost. The main reason for this is protection of the integrity of the insurance fund. If claimants were able to obtain in insurance payments more than they lose, say by recovering for the same loss from more than one insurer, or for the loss of property in which they have no property interest, there would be an incentive to profit from loss. This is known as moral hazard referring to the fact that insured people might be inclined to collude in deliberately causing loss to happen or at least fail to take as much care to prevent loss as they otherwise would.9
Several rules of insurance law give effect to this principle. The claimant must demonstrate an “insurable interest” in the subject matter of the insurance at the time of loss. If the insurer pays for a total loss, the insured must surrender what is left of the insured property to the insurer by way of “salvage”. Where the insured
8 See Craig Brown and others Insurance Law in Canada (looseleaf ed, Carswell, Toronto) at
ch 7.
COMPENSATION SCHEMES, PRIVATE
INSURANCE AND PUBLIC POLICY:
RECONCILING CONFLICTING PRINCIPLES
has available to him/her another enforceable right to compensation, say from a negligent tortfeasor, the insurer is entitled to the benefit of that right under the doctrine of “subrogation” so that the insured does not obtain more than a single indemnity. Similarly, if there is more than one insurer, between them they only have to pay a total of a single indemnity. All this is to minimize waste and to remove incentives for insured people deliberately to engineer loss or fail to prevent it in the expectation of profit.
Although the apparent rationale for this principle is the prevention of unnecessary expenditure and exploitation – in other words, to protect insurers – in the broader picture it operates to uphold the compensation principle. By helping to preserve the fund from which compensation is paid, it helps also to ensure that money is available for more claims and that the cost of insurance is optimized. In other words, the indemnity principle promotes efficiency.10 In this regard, indemnity is as relevant to public compensation schemes as to private insurance.11
2.3 Fortuity
The fundamental principle of insurance, in the sense that it is the one that enables the idea of insurance to function at all, is fortuity. Insurers can provide protection against the financial consequences of loss for a fraction of the value of that loss because they afford similar protection to multiple policyholders knowing that loss is going to happen to relatively few of them. And it is not known in advance which of them will suffer loss. The key is the randomness of loss in terms of when it happens, to whom it happens and its extent.
Insurance law seeks to uphold the fortuity principle, and thereby assist the continuing viability of insurers, primarily through rules pertaining to the interpretation of insurance policies. For example, it is presumed that an insurance contract is not intended to provide for circumstances where the loss is brought about deliberately by the insured person. Most often this notion is given effect in disputes about the meaning of “accident” or “accidental” in policy wording,12 but it is not necessary for a policy specifically to restrict coverage to non-intentional conduct for the fortuity principle to apply. It is a presumption that can only be overridden by express language.
10 For an economic analysis of the purposes of insurance law, see Kenneth Abrahams Distribution of Risk: Insurance, Legal Theory, and Public Policy (Yale University Press, New Haven, 1986) ch 2.
11 For example, the Ontario Health Insurance Plan is afforded by statute a right of subrogation. See Health Insurance Act RSO 1990 c H.6, s 30.
12 See, for example, Canadian Indemnity Co v Walkem Machinery & Equipment [1976] 1 SCR 309; Cooperative Fire & Cas Co v Saindon [1976] 1 SCR 309.
It is also presumed that the parties to an insurance contract intend that there be no cover where the loss is certain to happen, as in the case of normal wear and tear to property or other inevitable damage.13 Even life insurance triggered by death, the quintessential inevitability, operates on the fortuity principle because the time of death is uncertain.
As the likelihood of potential loss becomes less uncertain, insurers respond in one or both of two ways. They limit cover through more restrictive insuring agreements or wider exclusions (or, indeed, withdraw from the particular type of cover entirely) or they increase premiums. Without specific legislation to the contrary, insurance law permits this. When the tighter market is judged to be sufficiently problematic in social terms, there is pressure for legislation, either to regulate insurers’ pricing policies, for direct government involvement in the supply of insurance, or for changes to insurance and related compensation law.14
Paradoxically, the same outcomes arise when loss becomes too uncertain in the sense that its frequency and severity defy a degree of predictability with which underwriters are comfortable. In these circumstances, costing assumptions and other underwriting decisions are based on worst-case scenarios. It is assumed that loss will happen often and will always be severe. In other words, highly unpredictable loss is treated as if it is almost certain.
In the context of this paper, fortuity is a key concept. Except for life insurance (as explained above), it simply does not make economic sense for private insurers to cover events that are certain or very highly likely to occur. Even for life insurance, where death is likely imminent because of age or disease, the relative absence of fortuity significantly affects insurers’ willingness to provide cover. In some senses, a public insurance scheme may also be concerned about fortuity. Because the New Zealand Accident Compensation scheme covers only personal injury by “accident,” the question of what is an accident is conceptually central to it. However, it is not really a question of fortuity as discussed above. In the New Zealand scheme “personal injury by accident” merely means that the harm was not the result of disease (except that arising from ones occupation) or not wilfully self-inflicted. In many if not most cases of disease the onset is fortuitous yet for cost and political reasons it is excluded.15 For coverage of accidents, the governing principle is comprehensive entitlement and no one is excluded even
13 See, for example, British & Foreign Marine Ins Co v Gaunt [1921] 2 AC 41 (HL).
14 For the story of auto insurance in Ontario, particularly in the late 1980s
and early 1990s see Craig Brown “Auto Insurance
Reform in Ontario; A Long
and Complicated Story” (1998) Cahiers de Droit (Special Issue) 63.
15
See Brown and Smillie, above n 1.
COMPENSATION SCHEMES, PRIVATE INSURANCE AND PUBLIC POLICY:
RECONCILING CONFLICTING PRINCIPLES
those engaged in highly risky behaviour so long as the injury is not intended. In Canada public automobile insurance corporations concern themselves with fortuity in that premiums are varied based on perceived propensity for involvement in accidents. But to accommodate the public policy objective of comprehensive coverage, provision is made for all licensed vehicles to be covered. In other words, the fortuity principle is not taken so far as to exclude extreme risks.
The incompatibility of the fortuity concept (as applicable to private insurance) with public policy whose objective is compensation is most dramatically illustrated in the area of health insurance. Leaving aside for the moment group insurance, as we have seen, for private insurance to work, insurers must be free to refuse coverage to those to whom loss is almost certain to happen. To put it in simple terms, it is not good business sense to insure someone (or renew the insurance of someone) known, owing to existing symptoms, to be certain to incur expenses and suffer losses in the near future unless the premium equals the full amount of those expenses and losses. That is not a viable commercial arrangement. But if we assume a public policy goal of health care coverage for everyone including (perhaps especially including) those already afflicted with disease, it is necessary to have a scheme that ignores fortuity as a governing principle.
The compromise in respect of fortuity made by the private insurance market is group insurance. For relatively large groups of people connected through a common employer, union or other association, it is feasible for an insurer to offer group coverage without individual proof of insurability. The arrangement is made feasible by the large numbers involved. Although there may be some individuals who will be certain to claim, this is offset by the many who will not make claims or whose claims will be small. And it is common for coverage to be limited by exclusions, caps and co-insurance clauses to minimize the effect of covering people whose losses will not be fortuitous. But even group insurance cannot cover an entire society because not everyone is connected to an entity offering it.
2.4 Utmost Good Faith
At different times in the life of the relationship between an insurer and an insured each is considered to be in a position of particular vulnerability. When the contract is being negotiated most of the information relevant to assessing the risk being transferred to the insurer is possessed by the inured (prospective insured is perhaps more accurate). For marine insurance, for example, it is the ship owner who knows the nature of the voyage, the type of cargo and the number and qualifications of the crew. For disability insurance it is the applicant who knows his/her medical history, recreational pursuits and so on. For this reason, historically the courts have imposed on applicants for insurance a duty of utmost
good faith the main component of which is to disclose to the insurer every fact within his/her personal knowledge that is material to the risk. Failure to do so renders the contract voidable. The purpose of this rule is to allow insurers more accurately to calculate the risk and therefore premiums. In helping to prevent highly unpredictable losses it protects against insurer insolvency and ultimately, the theory goes, harm to policyholders as a group.16
At the other end of the contractual time line, when a claim is made, it is the policyholder who is often vulnerable – financially, emotionally or even physically. The insurer’s position of relative strength in this situation has led courts in Canada to impose a duty of good faith upon the insurer to deal with the claim in a fair and timely manner. The insurer is required not to deny or delay a claim without reasonable grounds to do so. Failure to comply with this duty is under pain of punitive and/or aggravated damages when appropriate.17
In one way or another, these duties are intended to bolster the role of private insurance in providing compensation for loss. But there is a contradiction here. To the extent insurers’ greater knowledge of material facts, some of which is ascertained from applicants pursuant to their duty of good faith, leads them to make cover less widely available, the goal of compensating loss is frustrated. In these circumstances, the insurers’ duty is purely academic. Where the insurance scheme is designed to give effect to public policy intended to provide compensation on a comprehensive basis, the contradiction is thrown into starker relief. For example, if a health care scheme is intended to provide cover to all citizens regardless of existing illnesses or vulnerabilities, what is disclosed or not disclosed to the insurer is irrelevant. Patients may have duties but these do not include the duty of utmost good faith as understood in private insurance law.
On the other hand, it is consistent with public policy of this kind for the insurer to be under a duty of good faith in that it, the insurer, should be obliged to respond to claims promptly and fairly.
2.5 Consumer Protection
In a sense all insurance law is about consumer protection. Government regulation of the industry is heavily concentrated on ensuring financial soundness through conditions of entry into the market place and continuous scrutiny of insurers’ finances and business practices. The principles of indemnity, fortuity and utmost
16 For the historical origins of this, see Oldham, above n 9.
17 See, for
example, Whiten v Pilot Ins Co [2002] 1 SCR 595.
COMPENSATION SCHEMES, PRIVATE INSURANCE AND PUBLIC POLICY:
RECONCILING CONFLICTING PRINCIPLES
good faith have the same goal and compensation of loss is the reason for the concern with financial soundness.
Insurance law also has the object of protecting consumers’ interests in the face of what is thought to be the insurer’s position of relative strength in the bargaining process when it comes (a) to imposing terms and (b), to responding to claims. Accordingly rules have been legislated to preclude or control certain types of clauses for certain types of insurance, sometimes by the direct imposition on contracts of “statutory conditions”18or by granting courts power to strike down “unreasonable” terms.19 As described previously, the courts have held that insurers owe a duty of good faith to their customers when handling claims.
Thus the broad goal of consumer protection is pursued through legislation and regulation as well as judge-made rules. In the end, though, if insurers in the private market cannot make it work because of the prevailing risk environment, “consumers”, those facing the risk and needing cover, are not protected. That is where other solutions including more direct government involvement become necessary.
3. PUBLIC-PRIVATE COOPERATION: SOME EXAMPLES
The following examples illustrate different mixes of public and private involvement in the implementation of insurance-related public policy which have been more or less successful. They are relatively successful because (consciously or subconsciously) their architects recognized the limits of private insurance as a means of achieving public policy goals. The private insurance market has been regulated, government has created its own insuring agency, or there is a combination of both. Most importantly, the government insurer and the private sector complement each other. They do not compete.
3.1 Crop Insurance in Canada
In Canada a public policy goal, shared by the federal government and most provinces, is the protection of farmers against the consequences of crop failure or falling prices. The goals are very specific and include encouraging “long term social and economic sustainability of farm families and communities” as well as “long term environmental and economic sustainability.”20 These are not goals whose achievement can be left entirely to the private insurance market. Given,
18 See, for example, Ontario Insurance Act RSO 1990 c I-8, s 148.
19
Ontario Insurance Act RSO 1990, s 151.
20 Farm Incomes Protection Act SC 1991 c 22, s 4(2).
in particular, concerns about availability and affordability, the judgment has been made that a direct government role is necessary. In other words, the fortuity principle, which allows private insurers to reject and/or price risks according to their assessment of probability, must, to some extent, be compromised. Accordingly, the scheme calls for the federal and provincial governments to enter into arrangements whereby government commissions set up by the provinces21 provide subsidized crop insurance for farmers.
3.2 Natural Disaster Insurance in New Zealand
As events in recent years have demonstrated, earthquakes present a significant risk in New Zealand. On average there is a magnitude 8 earthquake once a century, a magnitude 7 once a decade and a magnitude 6 once a year. There are also active volcanoes and severe floods occur regularly.22 These phenomena pose “challenges”23 for the insurance industry in that the frequency and severity of occurrences, together with the relatively large number of people affected, make underwriting especially difficult. In these circumstances, insurers set premiums based on worst–case probability and historically the cost of earthquake insurance was three to four times greater than for fire insurance.
This problem of affordability (and therefore availability) of earthquake insurance led the New Zealand government to adopt a policy whereby any large losses caused by natural disasters were “deemed a national loss.”24 The policy was given effect by the creation of what is now called the Earthquake Commission to administer a fund for the compensation of losses caused by natural disasters paid for by levies attached to fire insurance premiums.25 Any person who buys insurance on residential property from the private insurance market is automatically covered by the Commission for the first $100,000 of damage to buildings and $20,000 for contents. The levy is 5 cents per $100 of value of the insured property up to a maximum of $67.50 per year.
For commercial property and residential property in excess of $100,000, insurance must be procured from the private market. At least for residential property owners this represents a practical partnership between the public and private sectors. Private insurance (subject to the usual principles of indemnity, utmost good faith and fortuity) is made more affordable by the government scheme effectively
21 For example, the Crop Insurance Commission of Ontario. See the Crop
Insurance Act RSO 1990, c C-46.
22 New Zealand Official Year Book
(104th ed, David Bateman Ltd, Auckland, 2004) at
4-6.
23 At 411.
24 New Zealand Parliamentary Debates, Vol. 266, at
619.
25 Earthquake Commission Act 1993.
COMPENSATION SCHEMES, PRIVATE INSURANCE AND PUBLIC POLICY:
RECONCILING CONFLICTING PRINCIPLES
covering a deductible of $100,000. The government scheme, in its essential aspects unencumbered by the need to adhere to these principles, is able to effect public policy goals otherwise unattainable.
3.3 Nuclear Risks in Canada
The size of potential losses associated with the operation of nuclear energy facilities or the transportation of nuclear material is such that no one insurer is able to underwrite the risk alone. In Canada those involved in these activities are subject to absolute liability for harm caused and this liability is insured by a pool of insurers known as the Nuclear Insurance Association of Canada. Where a nuclear incident causes damage in excess of $75 million the government is empowered by statute to provide for the excess liability if that is considered in the public interest.26 Note that this is the reverse of the New Zealand natural disaster scheme where the government is the primary insurer. But it is similar in that recognition of the limits of the private insurance industry’s capacity to fulfill government policy leads to a direct role for the government itself in providing compensation.27
3.4 Auto Insurance in Canada: Contrasting Approaches
As mentioned above,28 automobile insurance in Canada is compulsory. The cover provided includes first-party, no-fault insurance for personal injury as well as a minimum amount of third-party liability insurance. This is to advance the public policy goal of ensuring the availability of compensation for injuries caused in motor vehicle accidents. But there are radically different approaches to this among the provinces. As mentioned, the plans range from Quebec’s pure no-fault scheme to the predominantly tort-based regimes in Alberta and elsewhere. Of more central relevance to this paper is that fact that four provinces, British Columbia, Manitoba, Quebec and Saskatchewan, provide compulsory auto insurance directly through government agencies whereas, in the other provinces and territories, the private insurance industry is entrusted with providing the mandated coverage.
The difference in this regard stems from judgments made, in particular economic and political circumstances, about the best way to provide affordable insurance to all motorists and thereby ensure the availability of compensation for injury victims. But even in those jurisdictions where the private sector continues to hold sway, the market is heavily regulated. The product is mandated or subject to
26 Nuclear Liability Act RSC 1985 c N-28, s 18.
27 For a proposal that a similar approach be used for insuring the risks of
nanotechnology, see Maksim Rakhlin “Regulating Nanotechnology:
A
Private-Public Insurance Solution.” (2008) 2 Duke L & Tech Rev 1
28
Brown and others, above n 8, and accompanying text.
government supervision, premiums are subject to government approval and, one way or another, insurance must be available to all motorists.29
4. POTENTIAL EXAMPLES
4.1 Health Care Coverage in Canada
In Canada the financing of basic health care is subject to government monopoly. While it now appears that the state’s monopoly will not be upheld if it cannot honour its obligation to citizens to provide care in a reasonably timely manner,30 it remains the case that most basic health care will continue to be financed by the public, tax-funded arrangements whose essential structure is contained in the Canada Health Act.31 That federal statute sets out the “program criteria” with which provincial health care plans must comply as a condition of obtaining federal funding. These criteria are:32
Public administration means that the insuring organization must be a non-profit public authority responsible to the provincial government and subject to public reporting and auditing requirements.33 Comprehensiveness means that plans must insure all covered health services provided by hospitals, medical practitioners and other health care professionals and that parallel, private insurance for the same services is prohibited.34 Universality requires that one hundred percent of insured persons are entitled to insured services on uniform terms and conditions.35 Portability precludes new residents of a province from having to wait more than 3 months to be covered and allows any resident to continue to be covered while temporarily out of the province.36 Accessibility means that insured health services be provided under uniform terms and conditions, that access not be impeded
29 Brown and others, above n 8.
30 See Chaoulli v Quebec [2005] 1
SCR 791.
31 RSC 1985 c C-6.
32 RSC 1985 c C-6, s 7.
33 RSC 1985 c C-6, s 8.
34 RSC 1985 c C-6, s 9.
35 RSC 1985 c C-6, s 10.
36 RSC 1985 c C-6, s 11.
COMPENSATION SCHEMES, PRIVATE INSURANCE AND PUBLIC POLICY:
RECONCILING CONFLICTING PRINCIPLES
by unreasonable policies or procedures, and that hospitals and health care practitioners are compensated reasonably according to a tariff system.37
Note the salient features. The clear public policy is to provide for universal coverage for basic health care services for Canadians regardless of individual financial means. “Other insurance” is not permitted for those same services. Hospitals, physicians and other health care professionals may charge only the uniform fee for such a service and that is paid by the provincial plan, not the patient personally. Implicit is the principle that coverage is not dependent on pre-existing health, whether disclosed or not. Nor is it dependent on ability to pay premiums or any other manifestation of contractual relations between patient and insurer.
This is where the involvement of private insurance is problematic. The fortuity principle and the implicit requirement that insurers be free to reject applicants for insurance or set premiums according to their assessment of probability of claims contravenes the public policy principle of universal coverage and affordability. If private insurers are permitted to cover the same services as those provided by the public insurer they will take only the relatively good risks. For the rest the goal of compensation would have to be met by the public insurer a consequence likely to increase its per-patient costs and possibly also decrease standards of care.38
Drawing upon the examples of successful public-private insurance arrangements the key is to have one sector complement the other, not compete with it. Before the Supreme Court of Canada’s decision in Chaoulli v Quebec39 there was a consensus as to what goods and services should be covered by the public scheme for all citizens. The public insurer’s monopoly pertained to that. For other goods and services the private market operated according to the rules of private insurance law and its underlying principles, including fortuity. Now that the Supreme Court of Canada has opened the door to private insurance for “basic” health care, a new form of cooperation between the public and private sectors needs to be worked out. That may involve a new consensus about what is basic and what is not or some other form of allocation of responsibility between sectors but the hallmark should be cooperation rather than competition.
4.2 New Zealand’s Accident Compensation Scheme
In 1974 the New Zealand government enacted a scheme providing for the compensation of those who suffer personal injury by accident or who suffer
37 RSC 1985 c C-G, s 12.
38 For more on this and other disadvantages of private insurance in health
care see Flood, above n 4.
39 Chaoulli v Quebec [2005] 1 SCR 791.
financial loss because of the accidental death of another person.40 It abolished most tort rights in personal injury and fatality cases and replaced it with a government-run compensation plan. Funding comes from employers (for work-related accidents), motor vehicle owners (for road accidents), and individual levies (for other accidents). The scheme was based on recommendations contained in the Woodhouse Report.41 That report proclaimed five principles which, it said, should be the basis of a public accident compensation system. These principles are:
Although not identical, these principles reflect similar values to those enshrined in the Canada Health Act. The intention is to provide universal coverage for accident victims without discrimination including that based on the cause of the accident.42 The compensation should reflect actual losses and the scheme’s response should include not only payment for loss but also for physical restoration, as far as possible, to pre-accident health. Most significantly, compensating the losses of accident victims is seen as a collective responsibility. As declared by the government corporation charged with administering the scheme:43
This forms the major premise of the scheme. The New Zealand community has assumed a general responsibility for unintentional injuries and the circumstances of those injuries. As a result there is no need to try and determine liability, or apportion blame before help is provided for injured persons.
Between 1999 and 2008, private insurers were permitted to compete with the Accident Compensation Corporation (ACC) to provide the coverage mandated by the scheme for workplace accidents and the idea continues to get some traction. In theory at least the private sector could be permitted to compete to provide
40 Accident Compensation Act 1972, now the Accident Rehabilitation and Compensation Insurance Act 1992 as amended.
41 Report of the Royal Commission of Inquiry on Compensation for Personal Injury (NZ Government Printer, 1967).
42 Note, however, that persons with disability caused by disease (except
diseases caused by workplace conditions) are not covered.
The goal of remedying
this derogation from the principle of comprehensive entitlement has yet to be
achieved. For a related discussion,
see Brown and Smillie, above n 1.
43
Accident Compensation Corporation Unintentional Injury (Wellington,
1987).
COMPENSATION SCHEMES, PRIVATE INSURANCE AND PUBLIC POLICY:
RECONCILING CONFLICTING PRINCIPLES
coverage for all categories of accidents but this would be unfortunate. At present compensation for work-related accidents is paid out of a fund financed by levies on employers and the self-employed; compensation for motor vehicle accidents comes from a fund paid for by motor vehicle owners, and compensation for other accidents is paid from a fund contributed to by individuals along with income tax. With private competition, employers, vehicle owners and others could buy coverage from any insurer willing to sell it. But, as discussed above in reference to health care in Canada, private insurers are likely to take only the better risks, either by rejecting applications from bad risks entirely, or by charging premiums for those risks higher than ACC levies. The result would be that that the ACC’s revenue would decrease but its ratio of claims per number of people insured would increase. This has obvious implications for the ideal of administrative efficiency as well as affordability for those in higher risk categories.
The most significant compromise of principle relates to community responsibility. To allow a significant portion of the population essentially to opt out of the public scheme is to retreat from the notion that accidents to individuals are a community problem. It is true that there will continue to be a pooling of risk but there will be separate pools with those in a lower risk category having no responsibility for those outside their category. That is not to say that this is necessarily a bad thing but it is a major departure from the public policy reflected in the original scheme.
As indicated in the introduction, John Smillie and I advocated a different approach. We proposed involvement of the private insurance industry, not as competitors with the ACC, but as offering excess cover for those whose exposure to loss is greater than the limits of compensation available from the ACC. This would protect the ACC’s funding base and would go as far as possible in harmonizing the inconsistent principles guiding public and private insurance.
5. CONCLUSION
Private insurance and the law that governs it necessarily takes account of the fact that insurance is based in contract and seeks to balance the interests of both parties. Given the uniqueness of insurance among contracts generally there are several underlying principles peculiar to it. These include, in particular, the principle of fortuity. As a facet of freedom of contract, insurers are free to assess the probability of harm befalling an applicant for insurance and either reject the application or accept it on whatever terms can be agreed. The insurer is also entitled to full disclosure of facts material to the risk and failure in this regard by the insured invalidates the cover.
Especially in the fields of health care and accident compensation these principles may run counter to public policy goals of universal coverage and affordability. Yet a government may want to involve the private insurance industry in achieving these goals. The dilemma is how to reconcile two contradictory sets of principles. Experience shows that the choice is between a model whereby a public agency is created to provide the insurance, so that public policy goals are implemented directly, and a form of cooperation between the private and public sectors such that one complements the other rather than competes with it.
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URL: http://www.nzlii.org/nz/journals/OtaLawFS/2016/11.html