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Auto Insurance in Canada: Overview and Issues

Auto insurance is a central issue in provincial and territorial politics, and a highly complex area of public policy. In Canada, the industry reflects a collection of provincial and territorial systems, each differing significantly in how auto insurance is delivered and regulated. This article offers an introduction into auto insurance policy in Canada, and includes a look at auto insurance in the context of federalism, alternative models of auto insurance, provincial/territorial auto insurance systems, and key issues and debates in this public policy area.

Auto Insurance and Canadian Federalism

Federal and provincial jurisdictions in auto insurance

Alternative Models of Auto Insurance

Overview of different possible auto insurance systems

Auto Insurance Systems Across Canada

Comparison of provincial/territorial auto insurance systems

Issues in Auto Insurance in Canada

Key public policy debates on auto insurance

Sources and Links to More Information

List of article sources and links to more on this topic

Auto Insurance and Canadian Federalism

Federal and provincial jurisdictions in auto insurance

Canada does not have a national auto insurance system, but instead a collection of different provincial and territorial regimes. This is due, in large part, to Canada’s system of federalism, and its division of powers and responsibilities between the different levels of government.

Provincial/Territorial Jurisdiction in Auto Insurance

Under the Canadian Constitution, jurisdiction over auto insurance falls predominantly to the provincial level of government. Only provincial governments have the constitutional power to create auto insurance schemes and regulate auto insurance practices. As such, provincial governments have the power to establish public or private auto insurance schemes, to regulate the conduct of auto insurers (providers of auto insurance policies), and regulate the rights and obligations of the insured (holders of auto insurance policies). In sum, the various auto insurance options that are available to Canadians are the direct result of decisions and policies chosen by their respective provincial governments.

As territories, the Northwest Territories, Yukon, and Nunavut do not have any autonomous powers under the Canadian Constitution, but are instead entities of federal legislation. Nevertheless, the federal government tends to provide the territories with similar powers and jurisdictions as the Canadian provinces. This is also the case in the area of auto insurance; the territories enjoy the same powers as the provinces – both to create their own auto insurance schemes and to regulate general auto insurance practices.

Federal Jurisdiction in Auto Insurance

Under the Canadian Constitution, the federal government does not have jurisdiction over the establishment and regulation of auto insurance regimes. Nevertheless, it does have a significant role to play in the industry as a whole.

The federal government is responsible for the prudential supervision of auto insurance providers that are incorporated under federal legislation. This includes Canadian insurers that operate in more than one province, as well as foreign insurers that have branch operations in Canada. In its role as “prudential” supervisor, the federal government is responsible for ensuring these insurers exercise caution and good judgment in the management of their business matters. Of primary concern is protecting the solvency of insurers and reducing the risk of a general collapse of the insurance industry, which would be highly detrimental to the national economy.

For more information on the federal prudential supervision of auto insurers:

Federal responsibility in this area does not extend to regulating the general market conduct of insurers (such as the terms and conditions of their insurance policies). This falls strictly under provincial jurisdiction. Moreover, Canadian insurers that operate in only one province may incorporate under provincial legislation, with the respective provincial government being responsible for the prudential supervision of these insurers.

In addition to its role as prudential supervisor, the federal government also has an indirect influence on the basic terms and conditions of auto insurance policies. Many auto insurers, for example, deny insurance coverage in cases where a motor vehicle is operated in a prohibited manner, or is used in the commission of an illegal act (such as a robbery). What counts as an illegal act depends largely on federal legislation, such as the Canadian Criminal Code.

Another important aspect of federal influence is the Canadian Charter of Rights and Freedoms and the judicial branch of government. The Charter is legislation, entrenched in the Canadian Constitution, which sets out the basic citizen rights and freedoms. All government laws and regulations, including those regarding provincial and territorial auto insurance systems, must be consistent with the Charter. In Canada, the judicial system also plays a central role in relation to auto insurance in that it settles auto insurance-related legal disputes, in addition to reviewing provincial and territorial systems from a Charter perspective. At the pinnacle of the Canadian judicial system is the Supreme Court of Canada, a federally appointed and administered court.

Several examples illustrate the significance of these federal institutions on provincial and territorial auto insurance systems. In 2008, a provincial court struck down an Alberta law which capped insurance claims on soft-tissue injuries, concluding that the law violated the Canadian Charter (at the time of this article, the Government of Alberta had stated that it would appeal the decision). Additionally, during the 1970s, the Supreme Court of Canada rendered several decisions that effectively placed an upper limit on what persons could claim in financial compensation for non-pecuniary damages due to a motor vehicle accident. (These include damages such as a loss of future earnings, cost of future care, and awards for pain and suffering.)

Implications for Auto Insurance in Canada

The structure of federalism in Canada has an important impact on the auto insurance industry. As jurisdiction over the creation and general regulation of auto insurance falls exclusively under provincial and territorial authority, there is an absence of national institutions and legislation to create uniformity across the country. Instead, auto insurance in Canada is made up of a set of separate provincial/territorial auto insurance schemes based on rules and practices that differ greatly from one province/territory to another.

This, however, is not to suggest that national standards are impossible. Provinces and territories can voluntarily agree to uniform rules and practices. Moreover, the federal government also does enjoy some leverage in creating national standards through the use of other constitutional powers, such the federal spending power. In employing such as strategy, the federal government can offer financial enticements to persuade provincial and territorial governments to implement federal policies in auto insurance, much in the same way the federal government influences provincial/territorial health care insurance regimes. At the time of writing, however, no such cooperation has ever been pursued in any robust manner by either level of government.

Alternative Models of Auto Insurance

Overview of different possible auto insurance systems

Concept of Auto Insurance

Auto insurance is simply a system by which the owners/operators of motor vehicles may obtain financial protection against losses associated with that vehicle. This may include financial protection against the loss or damage of the vehicle, as well as personal injury or property damage caused in the vehicle’s operation.

Under most auto insurance schemes there is an insurer, which is the party (usually a private insurance company or government agency) that issues the insurance policy and provides the financial protection. Additionally, there is the insured, which is the party (either the operator or owner of the motor vehicle) that purchases the insurance policy and receives the financial protection.

In most cases, the insured purchases the insurance policy by paying an annual or monthly fee (or premium) to the insurer. In return, the insurer provides some guarantee of payment for any losses associated with the insured’s motor vehicle. If, for example, John (the insured) has his car stolen, then his auto insurance company (the insurer) will financially compensate John for the loss, usually by paying him the monetary value of the vehicle at the time it was stolen. The same is true in cases of personal injury. If John gets into an accident where the driver of the other vehicle is injured, then John’s insurance company will cover any financial liability incurred by John as a result of the accident (or up to the maximum compensation as set out in the insurance policy)..

Auto insurance, therefore, operates as a sort of financial safety net for persons in relation to the operation of their vehicles. On the one hand, it protects the insured from large financial losses stemming from the operation of his/her motor vehicle. Instead of having to pay for a new car, or pay for injuries incurred by others as the result of an accident, the insured only has to pay a regular and smaller insurance fee.

On the other hand, auto insurance provides financial protection to other persons besides the insured by guaranteeing financial compensation in cases of property damage or personal injury. If John didn’t have auto insurance, then the other driver may not have been able to receive compensation for his/her injuries, as John simply may not have had enough money on his own to pay. By having insurance, however, the other driver is guaranteed compensation – regardless of whether John personally has enough money, as the insurer should always have the capability to pay.

Within this basic framework, however, auto insurance schemes can operate in a number of very different ways. The following provides an overview of some key characteristics of different auto insurance systems.

Public versus Private Insurance Systems

One key distinction, especially in Canada, is private versus public systems of auto insurance. Public insurance systems are characterized by a single auto insurer which is publicly administered in some manner. The insurer may be a crown corporation or some other agency which is controlled by the government. Under pure public systems, then, persons seeking auto insurance only have the option of purchasing policies from the public insurer. Moreover, the public insurer is solely responsible for covering all financial liabilities incurred by insured owners and/or operators of motor vehicles in their jurisdiction.

Private insurance schemes, by contrast, are characterized by a plurality of private auto insurers. In a purely private system, auto insurers are non-governmental financial companies or institutions (such as banks or insurance corporations) which provide insurance policies to customers for profit. As such, persons seeking auto insurance may choose from a variety of different auto insurance products offered by a number of competing insurance providers.

It addition to purely public or private schemes, there can also be hybrid insurance systems, which incorporate both public and private characteristics. It may be the case that basic insurance products are provided through a single public insurer, while additional insurance products can be obtained through private auto insurance providers. Under such a system, all insured persons would have the same basic public coverage, but have the option of purchasing additional or secondary coverage from a variety of private, for-profit insurers.

Mandatory versus Voluntary Insurance Systems

Another key distinction is mandatory versus voluntary insurance system. Mandatory systems are characterized by government laws which require all persons whom own and/or operate a motor vehicle to purchase some level of auto insurance. As such, it is illegal, punishable under the law, to own and/or operate a motor vehicle without proper insurance. The purpose of this type of system is to ensure financial protection in the case of all losses associated with the operation of motor vehicles. As all persons or vehicles have (or should have) insurance attached to them, cases should not arise in which an injured party is unable to receive financial compensation because the driver does not have enough money to pay damages.

Voluntary insurance schemes, by contrast, are characterized by an absence of laws that require all persons whom own and/or operate a motor vehicle to obtain auto insurance. Persons are, instead, free to decide themselves whether or not to purchase insurance, and may own or operate a vehicle without coverage if they so choose. Under such a system, those without insurance are directly responsible themselves to cover any financial liabilities associated with operation of a motor vehicle.

Again, there can be hybrid systems, which blend characteristics of both a mandatory and voluntary system. It may be the case, for example, that persons are required to purchase insurance for certain kinds of financial liabilities (such as those arising from the injury of another party), but are free to purchase or decline insurance for other losses (such as theft, damage to one’s vehicle, or injury to one’s self).

Theoretically, public and private systems can involve either mandatory or voluntary insurance stipulations. In practice, however, it is generally the case that public systems involve some level of mandatory insurance. This can be due to a number of different factors. For example, public insurance systems are often viewed as “public goods,” in which the benefits and costs are to be shared by all in the community. It may also be the case that the government wishes to ensure the financial stability of its public insurance scheme by requiring all owner and/or operators to pay into the system.

Fixed versus Flexible Compensation Systems

Another key difference centres on the level of financial compensation that persons can receive when incurring property damage or personal injuries from automobile accidents.

Under a fixed system (also commonly referred to as a “cap system”), the level of compensation for specific damages or injuries is established by government legislation. In other words, the government explicitly sets out how much money persons can receive for particular sorts of property damage and/or personal injury. Persons are thus prohibited from negotiating or litigating for monetary settlements above the thresholds set out in the government legislation.

In a flexible system, by contrast, there is no fixed level of financial compensation – at least, not through government legislation. Under this sort of system, persons are free to negotiate or litigate whatever monetary settlement they desire. As such, compensation can range widely from case to case, as well as over time. What a person receives depends on what s/he can negotiate with the other party (be it an individual or insurance institution), or what is deemed proper by a court of law if the parties proceed to court.

Again, public and private schemes can have either a fixed or flexible system of compensation. Generally speaking, fixed systems are implemented as a means of reducing costs for the insurer, not only in terms of what they must pay for damages or injuries, but also in terms of the cost of litigating cases in the courts. Under a fixed system there is no opportunity to litigate the level of compensation; this is dictated by government legislation. Such savings can be beneficial in both a public or private context as a means of reducing or stabilizing insurance premiums.

At-Fault vs. No-fault Insurance

Another important distinction is between at-fault and no-fault insurance schemes. The key distinction here is which insurer is responsible for paying compensation for the damages or injury resulting from a motor vehicle accident.

Under an at-fault system, responsibility for paying compensation falls to the insurance institution that insured the person responsible for causing the accident and associated damages or injuries. Consider the example that follows: John and Jane are involved in an accident in which John ran a red light and side swipes Jane, causing damage to her car and minor injuries. As such, John is completely at fault for the accident. Under a fault-based system, John’s insurer is responsible for paying for the damages and injuries incurred by Jane. Moreover, in order to receive her compensation, Jane must either negotiate with John’s insurer or take her case to court.

Under a no-fault system, responsibility for paying compensation falls, at least initially, to the insurance institution of the person who experienced the damages or injury. In John and Jane’s accident, then, Jane would receive compensation for her loss from her own insurance company, even though it was John that caused the accident. Jane’s insurer would then be entitled to sue John’s insurer in order to recover the monies they paid out to Jane.

The commonly cited benefit of no-fault insurance is that it allows persons quicker access to financial compensation in addition to other insurance benefits (such as health care benefits). Under an at-fault system, responsibility for the accident often has to be established first before persons can access the benefits of their insurance. This can take some time, especially if the parties decide to litigate the case in court. Under a no-fault system, the issue of fault has no bearing on access to compensation or benefits. It is simply an issue for the insurers to figure out later on.

Regulation of Insurance Premiums

Auto insurance systems can also differ in their regulation of auto insurance premiums. Under a completely unregulated scheme, insurance institutions are free to charge any level of premiums to their clients they wish. Under a regulated scheme, the government establishes rules which restrict what insurers can charge their clients for insurance.

The level of regulation can differ substantially. It may be the case, for example, that a government simply wishes to protect consumers from large annual increases in insurance premiums. As such, it will enact legislation that limits the amount by which insurers can raise their premiums from one year to another. In may also be the case that a government wishes to deter profiling by insurance institutions when determining insurance. In this way, the government will pass legislation that prohibits insurers from charging higher premiums to particular individuals or groups because of their age, gender, or ethnicity. In the most extreme case, a government may wish to control insurance premiums completely, and will institute a government board or agency which has the power to set insurance premiums.

Auto Insurance Systems Across Canada

Comparison of provincial/territorial auto insurance systems

As already discussed, Canada’s auto insurance system is made up of a set of separate and different provincial and territorial regimes. The following section provides an overview of these provincial and territorial systems.

Mandatory Auto Insurance Regimes

All provinces and territories in Canada have mandatory auto insurance regimes which require motorists to purchase basic auto insurance. While this mandatory basic insurance always includes some level of coverage for property damage, personal injury, and third person liability, the precise level of this coverage can differ significantly from one jurisdiction to another. Above this mandatory basic insurance, motorists in all provinces and territories have the choice of whether to purchase additional coverage.

Public and Private Auto Insurance

All provinces and territories in Canada allow private institutions to offer insurance products to motorists. The level of this private participation, however, ranges greatly from one jurisdiction to another.

Nine provinces and territories have purely private auto insurance systems: Ontario, Alberta, Newfoundland and Labrador, Nova Scotia, New Brunswick, Prince Edward Island, Northwest Territories, Yukon, and Nunavut. In these jurisdictions, residents purchase their auto insurance strictly from private insurance institutions.

The four remaining provinces have hybrid auto insurance systems, which combine both public and private insurers. The hybrid systems of British Columbia, Saskatchewan and Manitoba are divided along “basic” and “additional” coverage. The mandatory basic insurance must be purchased through the provincial government insurer. If, however, residents desire additional insurance coverage, they have a choice of purchasing it either through the government insurer or through private insurance institutions.

Quebec’s hybrid system is divided along different lines. There, the government insures against injuries to people resulting from the operation of motor vehicles, while private institutions insure against damage to property. As such, residents have two auto insurance policies – one from the government and another from a private insurer.

Fixed versus Flexible Compensation Systems

All provinces and territories in Canada operate a fixed system in at least one respect. In a series of decisions during the 1970s, the Supreme Court of Canada established an “upper limit” or “cap” for non-pecuniary general damages resulting from motor vehicle accidents, which is applicable to all provincial and territorial auto insurance systems. As noted earlier, “non-pecuniary damages” include, for example, a loss of future earnings, the costs associated with future care, and awards for pain and suffering. “Pecuniary damages,” by contrast, include damages incurred during the accident. In 1978, the upper limit was set by the Court at $100,000, to be adjusted annually for inflation.

Generally speaking, most provinces and territories operate under a flexible compensation system within this general upper limit on non-pecuniary damages. Persons are entitled to claim any amount of financial compensation for pecuniary damages, and any amount up to the judicially established limit for non-pecuniary damages. The level of compensation persons receive depends on what they can negotiate with the insurer or successfully litigate in court.

Between 2000 and 2005, however, several provinces instituted elements of a fixed compensation system in order to curb rising auto insurance costs. New Brunswick, Nova Scotia, Prince Edward Island, and Alberta all introduced caps on compensation for minor injuries, ranging from $2,500 to $4,000.

These provincial caps for minor injuries have been recently challenged in the courts. In February 2008, an Alberta court ruled that Alberta’s $4,000 cap unconstitutionally violated the Canadian Charter of Rights and Freedoms. The decision potentially affects not only that province’s cap system, but also those of New Brunswick, Nova Scotia, and Prince Edward Island. At the time of this article, the Government of Alberta had announced its intention to appeal the decision.

No-fault Insurance Regimes

All provinces and territories in Canada have instituted some form of no-fault insurance, which provides motorists with some access to compensation and/or benefits through their own insurers, rather than having to deal strictly with the insurer of the at-fault party. The precise operation of no-fault insurance, however, ranges across jurisdictions.

On the one hand, Alberta motorists are only entitled to access very modest accident benefits through their own insurer, and must deal with the at-fault party’s insurer to recover additional damages. On the other hand, Quebec motorist have access to very substantial accident benefits through their own insurers, and are disallowed from suing the at-fault party’s insurer for additional damages. The other provinces and territories fall somewhere in between the Alberta and Quebec examples.

Regulation of Insurance Premiums

Each province and territory in Canada has its own system of regulating insurance premiums. Most jurisdictions have some government body which oversees the market conduct of insurers (private or public), including the amount of money they charge for their insurance policies. The power of these regulatory bodies, however, can range from jurisdiction to jurisdiction.

In Alberta, for example, the Automobile Insurance Rate Board (AIRB) has very robust powers to control premium levels for basic insurance coverage, including the authority to set the maximum chargeable premium for basic coverage. Private insurers (Alberta has a private insurance system) are prohibited from charging premiums above this government-set threshold; although, they are free to charge any amount less than the maximum allowable level. In Ontario (also a private system), the provincial government’s Financial Services Commission is responsible for overseeing auto insurance premiums. Unlike its Albertan counterpart, the Commission does not have the authority to set maximum chargeable premiums. That said, all insurers are required to submit applications to the Commission before changing their premiums. The Commission has the power to deny an application if it deems an increase to be unreasonable.

Additionally, all provinces and territories prohibit insurers from using certain profiling techniques when determining premiums for particular motorists. Again, this differs from jurisdiction to jurisdiction. Some provinces/territories place fairly severe restrictions on insurers, denying them from considering such things as age, ethnicity, marital status, and not-at-fault accident history. Other jurisdictions are more lenient in what insurers may and may not consider.

It’s also important to note that some jurisdictions have acted directly to regulate auto insurance premiums. During the early years of the new millennium, for example, several governments introduced legislation to temporarily freeze or reduce auto insurance premiums. This included the governments of Ontario, Alberta, Nova Scotia, New Brunswick, and Newfoundland and Labrador.

Issues in Auto Insurance in Canada

Key public policy debates on auto insurance

Auto insurance in Canada is often a highly political issue. The following section offers an overview of some of the key issues and debates that dominate this policy area.

Private versus Public Auto Insurance

One of the more contentious debates has been over basic framework of auto insurance; in particular, whether it should be a public or private system. The precise nature of this debate differs from jurisdiction to jurisdiction. In the Atlantic Provinces, for example, the debate is centred on whether or not to scrap current private auto insurance systems in favour of public systems. In British Columbia, by contrast, the debate revolves around whether to introduce more private participation in a predominately public industry.

The “private versus public” debate comes in many different shapes and sizes. Supporters of private auto insurance tend to emphasize the potential benefits of a free market system, such as greater choice for consumers and reduced premium cost due to competition by insurers. On the other side, supporters of public auto insurance tend to focus on the potential benefits of a universal, not-for-profit, and publicly administered insurance regime. This includes lower premiums overall (stemming from a larger economy of scale), reduced discrimination against certain groups of motorists (private insurers often charge higher premiums for certain demographic groups), and the ability to funnel any profits into other public goods, such as transportation infrastructure.

For an argument in favour of public insurance:

For an argument in favour of private auto insurance:

In assessing arguments in the private versus public debate, it’s important to remember the reality of auto insurance in Canada. There are no purely public or private systems. Instead, there are predominately public systems that have some level of private participation or predominately private systems that have high levels of government regulation. As such, the question is not necessarily which is better, a government system or a free market system? Instead, the issue is to what extent, and in what form, public and private actors should participate in the auto insurance industry?

Escalating Costs of Auto Insurance

Another key issue in auto insurance has been escalating premium costs. This issue was particularly resonant during the 2000-2005 period when many jurisdictions in Canada experienced substantial increases in insurance premiums from year to year.

One Year Change in Auto Insurance Premiums (2002-2003)

Jurisdiction

Type of System

Percent Increase

 

 

 

National Average

 

26.3

Alberta

Private

50.1

New Brunswick

Private

41.2

Newfoundland and Labrador

Private

40.0

Nova Scotia

Private

39.8

Quebec

Public/Private

30.9

Ontario

Private

27.7

Prince Edward Island

Private

24.8

Yukon

Private

18.1

Northwest Territories

Private

12.3

Saskatchewan

Public

9.5

British Columbia

Public

7.3

Manitoba

Public

0.1

(Source: CBC, February 18, 2005)

As the above table shows, jurisdictions with private insurance systems experienced the highest increases during this period. This resulted in public demands for governments to intervene in order to address the issue. As a result, several provincial governments took measures to curb auto insurance costs, ranging from instituting caps on damages for certain injuries, to enacting legislation which temporarily froze or reduced auto insurance premiums. New Brunswick even explored replacing its private insurance system with a fully public one, although the reform was never instituted.

One the more robust sets of reforms were implemented in 2004 by the Government of Alberta. Under new legislation, the government put into a place a Premium Grid which set out maximum thresholds private insurers could charge customers for basic coverage, in addition to placing a temporary freeze on auto insurance rates. Also, in an effort to control costs for insurers, the government instituted a $4,000 cap for minor injuries, such as minor sprains, strains, and minor whiplash. The limit did not extend to other damages, such as loss of income or medical expenses, or to serious injuries. (This limit was successfully challenged in court in 2008. See remaining paragraphs.)

Government Limits on Compensation

In 2003 and 2004, three provincial governments implemented caps on damages for minor injuries: New Brunswick, Nova Scotia, and Alberta. The purpose of these caps was to reduce auto insurance premiums for motorists by controlling costs for their insurers. With lower payouts for minor injuries, insurers could offer insurance policies at cheaper prices.

The government-instituted caps, however, were contested in court, and the first major ruling delivered in February 2008. An Alberta court found that province’s cap on minor injury damages to be in violation of the Canadian Charter of Rights and Freedoms on the grounds that it was discriminatory. At the time of this article, the Government of Alberta had stated its intent to appeal the court’s decision. If upheld, the decision could have important consequences for Nova Scotia and New Brunswick, whom have also instituted caps for damages in cases of minor injuries.

The issue highlights a difficult problem in auto insurance for both private and public systems: how precisely does one balance the rights of injured persons to receive fair compensation, while ensuring that persons have to access affordable auto insurance?

In this context, it’s worthwhile to note that other jurisdictions in Canada have attempted to address escalating auto insurance costs through other non-cap means. Newfoundland and Labrador has implemented a $2,500 deductible for all minor injury claims. While this is not a cap, it does reduce the sum that persons may receive for minor injuries. Other provinces, such as Ontario, have instituted special thresholds for minor injury claims. This threshold reduced the number of people eligible to make claims for minor injuries.

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