The rules governing priority and its timelines for initiating a dispute are notably stringent. Yet, what recourse, if any, does an insurer have in the event that it accepts priority of a claim in error or inadvertence? Arbitrator Shari Novick considered this question in her decision in Pembridge Insurance Company v. Sovereign General Insurance Company.
BH was a single, thirty-year old woman who suffered serious injuries when she was struck by a taxi as she was crossing King Street in downtown Toronto, on November 10, 2014. BH’s parents were insured by Pembridge at the time, while the taxi that struck her was insured by Sovereign. Upon receipt of a Notice of Loss from its broker, Pembridge assigned the file to a junior claims adjuster, who had very little experience in priority disputes or with handling more serious claim files. The adjuster took very minimal steps to investigate priority, before closing the file a few months later when no OCF-1 was received.
Following the subject accident, Sovereign was also provided with a Notice of Loss, and shortly thereafter, received a completed OCF-1 from BH on December 10, 2014. The claim was assigned to an outside adjusting firm for handling and an investigation into priority was conducted. In the weeks that followed, notice was provided to four insurers, one of whom was Pembridge, that Sovereign disputed its obligation to pay benefits to the claimant. A few days letter, Sovereign received a letter from the Pembridge adjuster, advising that the insurer agreed to take over priority for the claim.
Once the AB file contents were received by Pembridge, which included an OCF-19 Application for Determination of Catastrophic Impairment, the claim was transferred to a more senior adjuster in the Serious Injury Unit. It was at this time that the insurer discovered an error had been made and that further investigation should have been undertaken before accepting priority. Based on the facts gathered thus far, the claimant was not a minor and was likely not financially dependent upon her parents, which would mean that BH was not an “insured person” under the Pembridge policy. Instead of advising Sovereign of the mistake, however, Pembridge went on to send a Notice of Dispute Between Insurers form to Sovereign, among other insurers, without mention of the earlier acceptance of priority by its junior adjuster.
Arbitration was commenced and the two insurers eventually proceeded to a hearing before Arbitrator Shari Novick. The majority of the parties’ submissions centered around the validity of Pembridge’s initial acceptance of priority and the question of whether an insurer should be permitted to withdraw that acceptance, once it realized that it had been made in error.
Ultimately, Arbitrator Novick answered this question with a resounding “No.” In her twenty-nine page decision, she provided a thorough analysis of the parties arguments and review of case law before coming to the conclusion that Pembridge was the insurer responsible for paying benefits to BH under section 268(2) of the Insurance Act. Despite inadvertence and error on the part of its adjuster, Pembridge’s acceptance of priority for this claim was valid and binding on the insurer.
In support of this decision, Arbitrator Novick cited several arbitration cases that have grappled with this same question and had reached a consensus that insurers who accepted priority should only be permitted to withdraw their acceptance in “extreme situations” such as bad faith or deliberate misrepresentation. Similar to Aviva v. State Farm or TD v. Markel, where there is a clear lack of diligence by an adjuster in investigating the priority issue, the insurer should not be entitled to walk back from its agreement to accept priority for the claim. To allow this, would throw the entire system into “chaos” where the back and forth transferring of files between insurers could have a detrimental effect on the adjusting of a claimants’ benefits claim and the treatment that they require. While Arbitrator Novick recognized the tension between efficiency and expediency on the one hand, and the general notion of fairness on the other, she concluded that the balance should tip in favour of an efficient system.
What this means for insurers is that the consequences of human error in the priority context may be costly. Arbitrator Novick rejected Pembridge’s submission that the insurer should be penalized in some other way, rather than being saddled with the obligation to pay benefits to the claimant for the life of the claim. In particular, she distinguished the present situation from instances where the remedy of costs would be more appropriate; that is, in cases where an insurer has deflected an OCF-1 onto another insurer, thereby breaching section 2 of the regulation. She subsequently determined that the case of an insurer accepting priority after an incomplete or inadequate investigation was arguably different, in the sense that it was the insurer’s own mistake that caused the difficulty. Moreover, unlike for breaches of section 2, there is no parallel provision codified in the regulation where costs are the legislated remedy to an acceptance of priority in error.
Ultimately, this case enforces the notion of insurers as sophisticated litigants. When one of those sophisticated litigants makes an error due to a lack of diligence in conducting a standard type of investigation, Pembridge v. Sovereign, states that it should pay for the price of that error.
Laura Meschino is author of this blog and a member of the Loss Transfer and Priority practice group. If you have a question about this decision or a similar file, please contact Laura.