O.E.F. 45: Excess Economic Loss Endorsement

By Brian C. Atherton
Atherton Barristers

There are two components to all damage awards:

1. General Damages
2. Pecuniary Losses

The first damage award is intended to compensate for pain and suffering, and a loss of enjoyment of life. Pecuniary Losses are generally considered to be the loss of a benefit or advantage that is capable of being expressed in money. A Pecuniary Damage Award is usually broken down into the following subsections:

1. Special Damages (Loss of wages and extraordinary expenses).
2. Prospective (future) loss of earnings.
3. Future Care Costs.

After the Supreme Court of Canada's Decision in the "Trilogy" cases, which capped general damages, inventive plaintiff counsel found ways of increasing the Pecuniary Losses such that by the mid 1980's they had become, by far, the most significant portion of a damage award. The escalating nature of these awards lead to the "Insurance Crisis" in the mid-1980's, which in turn lead to the introduction of the Ontario Motorist Protection Plan. Under the Plan the right to sue was severely restricted in exchange for enhanced No Fault Benefits.

However, many lobby groups argued that much of the Pecuniary Losses sustained under the Plan were not compensated for by the enhanced benefits, and many legitimate claimants who did not meet the "threshold" would suffer significant financial losses. The efforts of the lobbyists were successful, but produced an unexpected result. Bill 164 has addressed many of the concerns raised by the lobbyists but has incorporated them into the Statutory Accident Benefit Schedule. Almost all losses that would have been awarded under the Tort System can be found in the Statutory Accident Benefit Schedule. However, in exchange for this enriched First Party System, the Government has taken away the right to sue for any Pecuniary Loss. The same lobbyists that fought O.M.P.P. have continued to argue for some method of compensation to cover the gaps that may be created by Bill 164. This has resulted in the formulation of O.E.F. 45 - The Excess Economic Loss Endorsement.

Overview
Like the S.E.F. 44 Endorsement, coverage under O.E.F. 45 is personal and portable. It will not form part of the basic package of first party benefits and, if purchased, a separate premium will be charged for it.

It is not intended to provide coverage for all Pecuniary Losses. It only applies to losses related to past and future income, including competitive advantage and earning capacity; as well as the costs of services to replace the contribution of a deceased spouse or parent to the family.

The coverage offered by O.E.F. 45 is excess to any amounts recovered under the Statutory Accident Benefit Schedule. It is intended to provide compensation only in the event that the actual gross annual income of the insured exceeds the deemed gross annual income of the insured for the purposes of calculating the weekly income benefit. If the insured's gross annual income does not exceed this deemed amount, then no benefit is payable. Similar considerations apply in the event of death.

In those circumstances the death benefit payable under the Schedule is contrasted with the insured's gross annual income.

If there is a difference, it is payable, up to a maximum of $200,000. In the case of replacement services, amounts actually incurred are taken into consideration in addition to the death benefits. If there is any entitlement under the endorsement, it is reduced by the insured's contributory negligence. There is an aggregate limit of one million dollars regardless of the number of endorsements claimants, injuries, or number of events in a one-hour period.

The one million-dollar limit is not indexed to inflation. This will have a significant effect on a calculation of a loss of future earnings, or earning potential. The benefits payable under this Schedule are indexed to inflation, as would, presumably, a calculation of a loss of future income. The one million-dollar limit should be sufficient protection in all but the most severe cases.

There are a number of potential defences available under the endorsement:

1. The application for coverage must be completed prior to the accident
2. Failure to disclose the identity of claimants, or their income, may void coverage
3. The insured must "duly and diligently seek out coverage" for accident benefits; although a failure to do so will not deprive the insured person of the right to collect benefits but the entitlement will be reduced as though such benefits were collected in full
4. Injuries which do not meet the "threshold" will not attract coverage
5. Suicide or its attempt is precluded
6. Individuals in contravention of the Statutory Exclusions are not covered, i.e. convictions for impaired driving, taking the vehicle without consent, etc.
7. There is no coverage for any loss with respect to the first seven days of any disability.

As additional protection, the insurer may require the insured person to submit to an examination under oath. The insured person is permitted counsel at this examination. In the event of a continuing dispute, it may be resolved by private arbitration or, presumably a claim can be issued in the Ontario Court (General Division). However, any claim must be issued within three years of the date of the accident.

Specific Considerations

DEFINITIONS
"accident", "spouse" and "dependent" have the same meaning under the O.E.F. 45 Endorsement as they do under the Statutory Accident Benefits Schedule.

However, for the purposes of this endorsement only, an "insured person" has a different definition. It refers to the applicant and:

1. His or her spouse, if residing in the same dwelling premises and
2. His or her child, if a dependent, and

(a) residing in the same dwelling premises and under the age of eighteen years, or
(b) attending in educational institution on a full time basis.

The specific wording of this definition precludes individuals who may be named in the policy as occasional drivers, but who are not otherwise named in the excess economic loss endorsement. This should clarify the confusion over who is a "named insured."

The net of potential insured persons has been further restricted by the stipulation that the "insured persons" must live in the same dwelling premises. This should effectively exclude "spouses" and "dependents" from earlier marriages and/or common law associations.

The economic considerations of dependency still prevail, and therefore care should be taken to ensure that young individuals, who may not be in school, and have a full-time job, are not considered "dependents."

In an attempt to further restrict coverage, only "insured persons" who are named in the endorsement are eligible for coverage. In accordance with the provisions of Section VI of the endorsement, the insurer on each policy renewal, has an obligation to warn the insured of the need to amend the application to include additional insured persons, if warned, failure to properly amend the number of insured persons, will be deemed a material change in risk, which may exclude those individuals from coverage.

A failure to provide accurate information, may also be considered a material misrepresentation, which would also void coverage. However, in practice, especially with respect to self-employed individuals or young professionals, it will be difficult to hold them to an estimate of their gross annual income. Furthermore an error in describing this income would only have relevance to a past loss of income and would probably not exclude these individuals from maintaining a loss of future income.

The concept of a "loss" under the endorsement has been specifically defined, as "an amount of money calculated in accordance with principles applied by Ontario Courts in assessing damages in personal injury and death cases....." This will have a significant impact on cases involving loss of competitive advantage or loss of economic opportunity. The significance of the distinction will be seen at the 104-week level when insured persons, who still qualify for benefits, are submitted to an assessment to determine their residual earning capacity which is then translated into a weekly income benefit. There are specific criteria which are used by the assessment centres in arriving at their determination of an individuals residual earning capacity. Insurers will undoubtedly take advantage of the provisions in the regulations which entitle them to dispute the findings, or the nature of the entitlement.

If an insured person is also making a claim pursuant to the O.E.F. 45, there will be a separate "trial" to determine the same issues; but the criteria used will be vastly different. This will result in two sets of costs to determine essentially the same issue. It will also lead to different results, neither of which will probably be in the insurer's favour.

INSURING AGREEMENT: LOSS OF INCOME (PAST AND FUTURE)
No amount is payable under O.E.F. 45 unless the insured person can establish that their gross annual income exceeds the deemed gross annual income used for the purpose of calculating their net weekly income benefit. Unfortunately it is not clear whether "gross annual income" refers to income declared for tax purposes, or whether it has some other meaning. For individuals who are paid a salary, and have a readily ascertainable income, it will not be difficult to determine whether they are entitled to any benefit.

However, a number of scenarios come to mind involving self employed individuals who take a "draw" from their business which may be very different from their actual "gross annual income" as determined by their accountant, for the purposes of claiming under this endorsement. In such cases, reference might be had to the application, which has listed their gross annual income. Attempts to utilize a different amount should be strenuously opposed, and may be considered a material misrepresentation in accordance with the provisions of VI B of the endorsement.

As a practical matter however, it is unlikely that anyone other than individuals with a gross annual income greater than $100,000 will receive payments under this endorsement for past loss of income. This is due to the method of calculating the net weekly income benefit. The insured person chooses the 4, 52 or 156 week period that translates into the greatest income over a 52-week period. This amount will, in most cases, have no relationship to the insured person's actual gross annual income. Therefore it is unlikely that there will be any excess between the actual gross income and the deemed gross income.

Once the maximum weekly benefits of $1,000 a week are reached, this will translate into a deemed gross annual income of approximately $100,000, hence leading to the assumption that only very high income earners will be able to take advantage of the past loss of income provisions.

Different considerations apply with respect to calculating the future loss of income. Such losses are determined in accordance with the principles established by Ontario Courts, and therefore evidenced as to improved economic conditions, potential for advancement, and other factors that will have the effect of escalating the future loss of income beyond the rate of inflation. The deemed gross annual income is fixed to increases in the inflation rate, which creates a lower base increase.

The disparity between assessing a future loss in accordance with traditional principles, and the deemed annual income, becomes wider when discussing a loss of competitive advantage or a loss of earning capacity. Students age 16 or older, spouses who plan to re-enter the workforce, young professionals and young self employed individuals will benefit the most by the wording of the endorsement. At this point the assessment becomes not what these individuals would have earned but for the accident, but what they could have earned. It is unlikely that any insurer will accept such assessments at face value, which will result in a restoration of the "tort" system of determining these losses.

COST OF SERVICES
At first glance, the inclusion of cost of services in the endorsement does not appear to be significant. A number of factors limit the potential recovery, i.e. it only applies in the event of death, which means that serious injuries such as quadriplegia and paraplegia are not included. The provision only applies to the death of a spouse or parent and not a dependent; and there is a further limitation that the death must arise out of the use or operation of an automobile. The qualifying words "directly or indirectly," which are found in the Schedule for entitlement to weekly income benefits, are omitted from the endorsement. Finally the cost of services is excess to any amounts recovered under the policy, including the death benefit, and those services incurred pursuant to Section 55 of the Schedule.

However it is submitted that this endorsement will, eventually, attract a great deal of attention. Assume that a homemaker is survived by her husband and three children, ages 1, 3 and 5. Further assume that the deceased spouse was entirely responsible for items such as childcare, cooking, washing, cleaning, and gardening. It does not take a great stretch in the imagination to appreciate that these services can only be replaced by many individuals including a nanny, cook, maid, chauffeur, and gardener.

The salary for a live-in nanny alone would probably be somewhere in the range of $25,000. This may be a conservative estimate. The nanny would probably be required until the youngest child reaches age 18. Therefore the benefit, calculated on a straight basis and not discounted for contingencies of remarriage, would result in a gross payment of $425,000,00. The death benefit payable under the regulations is $50,000, resulting in a net payment of $375,000. If one further assumes that the surviving spouse had the assistance of friends and relatives, and did not incur any expenses by hiring such individuals, there would be no further deductions. Furthermore this benefit would have to be paid notwithstanding the fact that the deceased spouse may not incur any such expenses.

Undoubtedly one would be able to argue that the contingencies of remarriage should reduce the amounts payable, and that some of the services performed by the deceased spouse could be performed by the husband. However, even if the analysis is incorrect by 50%, it is still a substantial payment. As with claims involving a loss of earning capacity or competitive advantage, insurers will be forced to incur significant costs in defending these claims.

CONTRIBUTORY NEGLIGENCE
It is uncertain whether the reduction for contributory negligence will be applied before or after the deduction for the statutory accident benefit.

Two scenarios are possible.

(a) Income of $200,000
(b) 50% contributorily negligent
(c) Is the benefit $200,000 X 50% = $100,000 - $100,000 (Deemed maximum gross annual income) = 0

or

(d) $200,000 - $100,000 (deemed maximum gross annual income) = $100,000 X 50% = $50,000

The specific wording of the endorsement suggests that the entitlement is reduced to the extent to which the individual caused or contributed to the loss sustained. This wording suggests that the 50% reduction is taken into account after deducting the benefits payable under the schedule. Therefore it is more likely that the second scenario as outlined above will apply.

LIMIT OF LIABILITY
The aggregate limit of $1 million is separate and distinct from third parry liability limits. The O.E.F. 45 is not analogous to the S.E.F. 44 Coverage in this respect. All O.E.F. 45 Endorsements will contain the same aggregate limit of $1 million.

The endorsement also differs from the S.E.F. 44 in that costs are, apparently in addition to the amounts paid pursuant to the endorsement. There is nothing in O.E.F. 45 comparable to the provisions in S.E.F. 44 which declares costs to be included in the aggregate amount. However, it would appear that the wording of Part Five of the endorsement precludes increasing the limits for prejudgement interest, beyond the $1 million level.

CONDITIONS AND WARRANTIES; EXCLUSIONS
These are fairly straightforward. However reference should be had to Section 58 of the Statutory Acts and Benefit Schedule which lists all the statutory exclusions.

PROCEDURES
There is an onus on the insured to "properly" give notice of any claim under the endorsement. However it does not appear as though a failure to comply with this provision has any adverse consequences, given that there is a three-year limitation period, which runs from the date of the accident.

If a claim is submitted and rejected, then the dispute may be resolved by way of private arbitration (not through the O.I.C.) or presumably through initiating legal action in the Ontario Court (General Division). The inclusion of private arbitration as a means of dispute resolution suggests that there could be three separate disputes ongoing at the same time, arising out of the same accident, i.e. mediation and arbitration with respect to accident benefits; defending a threshold claim; and either private arbitration or litigation over the entitlement to benefits under the O.E.F 45 Endorsement.

To further complicate matters, the insurer has been given a right to compel the insured person to attend an examination under oath to answer questions concerning their entitlement under the endorsement. It is not clear whether this is deemed to be an examination pursuant to the Rules of Practice, or something else. Furthermore there does not appear to be any limit on the number of times the insured person can be compelled to submit to this examination. Presumably if a Court Action is initiated to recover under the endorsement, the discoveries would be in accordance with the Rules of Practice and they would supersede the endorsement; but this is by no means clear and undoubtedly will require direction from the Courts.

Conclusion
The intention of the O.E.F. 45 Endorsement is to "fill in the gaps" for pecuniary losses which may not be covered by the Statutory Accident Benefits Schedule. However, given the method of calculating the benefit, and some of the more restrictive provisions, it is unlikely that it will have wide spread, general application. However, those that are able to utilize the endorsement will probably find it a "rewarding" experience. One thing is certain; the ultimate effect of the endorsement will probably bear no relationship to the ideals which lead to its creation.

For more information on how we can assist you, please contact us at Atherton Barristers at (416) 365-1030 or toll free at (866) 237-1030.

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