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Self Insured Retention and Loss Transfer

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CERTAS (Stuckless) v. ACE INA, Arbitrator Bialkowski, December 22, 2016

A new and important decision dealing with loss transfer and the implications of municipalities/commercial fleets having self-insured retentions ("SIR") has just been released by Arbitrator Bialkowski.

The narrow issue in this case was whether Ace Ina, the insurer of a heavy commercial vehicle involved in the accident and owned by the City of Toronto (“City”), should be considered the “second party insurer” with respect to accident benefits paid within the stipulated deductible (the SIR amount), which was payable by the City. Arbitrator Bialkowski concluded that Ace Ina was indeed subject to loss transfer, despite the SIR agreement.

A heavy commercial vehicle, owned by the City, was involved in an accident with a vehicle insured with Certas. The city had a $5 million SIR, per occurrence, but the vehicle was insured with ACE INA. For the purposes of the arbitration the two insurers agreed that the SIR was a “side agreement”.

Arbitrator Bialkowski examined the applicability of loss transfer in a case where the claim would be payable by the “insured” as opposed to the “insurer”, given the SIR agreement.  

In St. Paul Fire and Marine Insurance Company v. Intact Insurance Company, March 21, 2014, Arbitrator Densem, upheld on appeal by Justice Whitaker (St. Paul Fire & Marine Insurance Company v. Intact Insurance, 2014 ONSC 6039), a City of Mississauga vehicle was involved in an accident with a heavy commercial vehicle insured by Intact. The City of Mississauga paid accident benefits to the claimants, pursuant to its SIR, and sought loss transfer against Intact. Arbitrator Densem found that it was the City of Mississauga that actually paid the underlying accident benefits. Because it was not an “insurer”, the City of Mississauga could not seek loss transfer against Intact. Further, St. Paul, its insurer, could not claim loss transfer on behalf of the City of Mississauga as it did not suffer a loss by way of paying accident benefits. Arbitrator Densem’s decision was upheld on appeal.

In light of the St. Paul decision, Ace Ina advanced the position that a self-insured entity should not be exposed to a loss transfer claim when it itself was unable to advance a claim for loss transfer indemnity.

Certas, on the other hand, advanced the argument that any SIRs were “extraneous factors” that had no impact on entitlement of loss transfer indemnity. Case law established that the enforceability of third-party liability coverage had no bearing on the liability for loss transfer indemnification that was imposed by law on a second party insurer. Such enforceability issues included misrepresentation that resulted in voiding the contract ab initio, no consent position, the accident occurring in a non-loss transfer jurisdiction and the second party insurer not being obligated to pay accident benefits under its own auto policy.

Arbitrator Bialkowski concluded that insurance companies licensed in Ontario are obligated to indemnify a first part insurer under loss transfer provisions. This liability is independent of the insurer’s rights and obligations to its insured. In other words, SIRs fall within the scope of an “extraneous factor” that is irrelevant to a second party insurer’s responsibilities under the loss transfer scheme.

There is an unfairness that results when a municipality is subject to paying loss transfer indemnification to first party insurers but remains precluded from claiming loss transfer indemnification from second party insurers. To avoid this, the SIR agreement itself could provide greater protection to the insured municipality.

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