Loss Transfer: When Will Out-of-province Insurers Be On The Hook?
By Christine Matthews
Twenty-five years after the overhaul of the automobile insurance regime in Ontario, some interesting questions have yet to be resolved. One, discussed here, concerns the potential exposure of insurers that do not write auto business in Ontario to loss transfer arising out of Ontario accidents.
One of the principal changes brought by the 1990 amendments to the automobile insurance regime in Ontario was that the entitlement of an injured person to receive benefits arising from automobile accidents was greatly enhanced and the responsibility to pay these benefits, at first instance, was established to be entirely the responsibility of the injured person’s own insurer.
It was determined by the provincial legislature that unfairness could result in circumstances where motorcycle or snowmobile riders were injured in accidents with cars and trucks and where car operators were injured in accidents with heavy commercial vehicles.
And so, with those changes came the introduction of the loss transfer regime, found in section 275 of the Insurance Act.
Indemnification in certain cases
275. (1) The insurer responsible under subsection 268 (2) for the payment of statutory accident benefits to such classes of persons as may be named in the regulations is entitled, subject to such terms, conditions, provisions, exclusions and limits as may be prescribed, to indemnification in relation to such benefits paid by it from the insurers of such class or classes of automobiles as may be named in the regulations involved in the incident from which the responsibility to pay the statutory accident benefits arose.
The purpose of the loss transfer regime is to balance the costs of accident benefits among the insurers of different classes of vehicles. 
Ontario’s loss transfer regime is unique, and unfamiliar out-of-province insurers are bound to be unhappy about the notion of paying up to an additional 2 or 3 million dollars in loss transfer in addition to their limits, or a portion thereof, in the tort action.
The starting place for the inquiry of whether an insurer that does not write insurance in Ontario will be required to pay loss transfer must start with an understanding of where the accident occurred.
ACCIDENTS OCCURRING OUTSIDE OF ONTARIO
There is some high judicial authority in Canada concerning loss transfer claims that arise from accidents occurring outside of Ontario, involving out-of-province insurers and Ontario residents. Generally, Ontario residents will commence their tort actions in the jurisdiction where the accident occurred, while their applications for accident benefits and any disputes, will be commenced in Ontario.
The Supreme Court of Canada has made it clear that in these circumstances, as long as the out-of-province insurer is not licensed to write insurance in Ontario, the insurer will not be subject to loss transfer claims, even if it has filed a PAU. Note that the PAU appears to have little application to disputes in Ontario unless Ontario is the situs of the accident. 
In Unifund v ICBC, the court’s analysis was two-pronged: since it was well established that a province had no legislative competence to legislate extra-territorially, the right to claim loss transfer (which is created by section 275 of the Insurance Act) would only be available if: (i) there was a real and substantial connection between the out-of-province insurer and Ontario’s Insurance Act or (ii) if by agreement (the reciprocal scheme of insurance), the out-of-province insurer had attorned to Ontario’s jurisdiction.
The majority of the court found that the PAU did not apply and that there was an insufficient connection between an out-of-province insurer (which didn’t write in Ontario) and Ontario’s Insurance Act in circumstances where the accident occurred outside of Ontario.
ACCIDENTS OCCURING INSIDE ONTARIO
The situation is much less clear when loss transfer claims arise from accidents that occur inside Ontario, involving out-of-province insurers.
Although Unifund v ICBC involved an accident outside of Ontario, and is distinguishable on that basis, the Supreme Court of Canada’s analysis provides a useful framework for a consideration of the issue.
A. Do Out-of-Province Insurers, Become Responsible to Pay Loss Transfer Claims by Executing a PAU?
By executing a PAU, an out-of-province insurer agrees:
Not to set up any defence to any claim, action, or proceeding, under a motor-vehicle liability insurance contract entered into by it, which might not be set up if the contract had been entered into in, and in accordance with the laws relating to motor-vehicle liability insurance contracts or plan of automobile insurance of the Province or Territory of Canada in which such action or proceeding may be instituted, and to satisfy any final judgement rendered against it or its insured by a Court in such Province or Territory, in the claim, action or proceeding, in respect of any kind or class of coverage provided under the contract or plan and in respect of any kind or class of coverage required by law to be provided under a plan or contracts of automobile insurance entered into in such Province or Territory of Canada up to the greater of
(a) the amounts and limits for that kind or class of coverage or coverages provided in the contract or plan, or
(b) the minimum for that kind or class of coverage or coverages required by law to be provided under the plan or contracts of automobile insurance entered into in such Province or Territory of Canada, exclusive of interest and costs and subject to any priorities as to bodily injury or property damage with respect to such minimum amounts and limits as may be required by the laws of the Province or Territory.
The PAU has been interpreted to allow claims against out-of-province insurers for coverage that is mandatory in Ontario including accident benefits, uninsured and unidentified motorist coverage and for Ontario minimum limits, regardless of whether those classes of coverage or limits were available under the foreign policy. By Ontario law, these types of coverages are mandated and are generally available to Ontario insureds even if the insured vehicle is not being operated in Ontario at the time of the accident.
Loss transfer is a different kind of obligation. Section 275 of the Ontario Insurance Act is an indemnity provision that does not arise out of the motor vehicle policy itself. It is significant that section 275 is omitted from the list of insurance coverages that extra-jurisdictional insurers must offer to be compliant with Ontario law. If the loss transfer regime was intended to apply to out-of-province insurers, one would expect section 275 to be referred to in section 226.1 of the Insurance Act. It has been observed that the concern of the Ontario legislature appears to have been directed toward the victims of accidents rather than the entitlement of insurers.
In Unifund v ICBC, despite finding that the PAU had little relevance to an accident that happened outside of Ontario, the court discussed the reach of the PAU anyways. Its view was that the actions contemplated by the PAU involved dollar amounts and “kinds or classes of coverage” contained in the original motor policy itself. The reciprocal system, of which the PAU was a key part, had what might loosely be described as a pro-compensation, consumer protection function. It had nothing to do with inter-insurer indemnification procedure under section 275 of the Insurance Act.
Interestingly, in an earlier Ontario Court of Appeal case  involving a British Columbia resident involved in an Ontario accident, ICBC was able to recover loss transfer from the Ontario insurer. By filling a PAU, ICBC was obliged to pay accident benefits to the BC resident as mandated by section 268(1) of the Insurance Act, as if the policy were a valid Ontario motor vehicle liability policy. Consequently, the court held that ICBC met the pre-condition under section 275 of the Insurance Act and was entitled, as a matter of statutory interpretation, to claim loss transfer.
The Supreme Court of Canada decision in Unifund v ICBC and the Court of Appeal decision in ICBC v Royal are, at first glance, difficult to reconcile. The reasoning of the Supreme Court of Canada suggests that the PAU does not extend to inter-insurer disputes, whereas the Court of Appeal case suggests the contrary. However a more careful look allows for some reconciliation.
In the Court of Appeal case, ICBC was required to pay accident benefits in Ontario by virtue of the PAU (the PAU applied because the accident occurred in Ontario). Having paid those benefits, the court found that ICBC qualified, as a matter of statutory interpretation under Ontario legislation, to bring a loss transfer action. There was no constitutional issue before the court.
In Unifund v ICBC, the PAU did not apply because the accident did not occur in Ontario. However, the court went on to discuss the reach of the PAU and suggested that while the PAU did apply to claims for accident benefits, it was not intended to be used to resolve inter-insurer disputes for loss transfer.
It is the opinion of the authors that based on the comments of the Supreme Court of Canada, the filing of a PAU does not impose upon on out-of-province insurer not licensed to write insurance in Ontario, an obligation to pay loss transfer to an Ontario insurer arising out of an accident that occurs in Ontario.
B. Is There a Real and Substantial Connection Between the Ontario Insurance Act and Out-of-Province Insurers Arising from Accidents that Occur in Ontario?
Clearly the Ontario Insurance Act is well within Ontario’s jurisdiction to pass, as it regulates aspects of property and civil rights in Ontario (Section 92(13) of the Constitution Act, 1967). What is questionable is the Insurance Act’s applicability to out-of-province entities.
The real and substantial connection test was applied by the Supreme Court of Canada in Unifund v ICBC. The consideration of the constitutional applicability of the Ontario Insurance Act to an out-of-province insurer was organized around the following propositions:
- The territorial limits on the scope of the provincial legislative authority prevent the application of the law of a province to matters not sufficiently connected to it.
- What constitutes a sufficient connection depends on the relationship among the enacting jurisdiction, the subject matter of the legislation and the individual or entity sought to be regulated by it.
- The applicability of what would otherwise be legislation within the competence of the province legislature to an out-of-province insurer defendant is conditioned on the requirements of order and fairness that underlie our federal arrangements.
- The principles of order and fairness, being purposive, are to be applied flexibly according to the subject matter of the legislation.
The court found the connection between ICBC and Ontario’s Insurance Act insufficient. In particular the court found the following:
- ICBC was not authorized to sell insurance in Ontario;
- The insured vehicle did not enter into Ontario;
- ICBC was not in the Ontario marketplace and it was not required to “comply with the rules of the Ontario game”;
- Order in Canada would be undermined if every provincial jurisdiction took it upon itself to regulate aspects of the financial impact of the British Columbia car crash in relation to its own residents at the expense of a British Columbia insurer;
- Despite ICBC’s participation in litigation in Ontario from time to time, and on some occasions its benefit from the Ontario Insurance Act (including s. 275 of the Insurance Act), its sporadic entries into Ontario were the result of motor vehicle accidents occurring in Ontario, where Ontario law applied and involving motor vehicle policies issued in British Columbia;
- The decision of the Ontario legislature to impose no-fault benefits on Unifund could not be bootstrapped into legislative jurisdiction to impose a corresponding debt on ICBC, which was beyond the territorial jurisdiction of the province.
In its analysis, the court referred to two products liability cases involving the applicability of provincial legislation to out-of-province entities. In the first, the presence of the defendant manufacturer in the jurisdiction was considered unnecessary. The relationship created by the knowing dispatch of goods into the enacting jurisdiction with the reasonable expectation that they would be used there was regarded as sufficient.
In the second, a New Brunswick manufacturer of farm machinery who contracted with an Alberta dealer to sell and promote its machinery in Alberta was held to have committed an offence under the Alberta Farm Implement Act. That statute, which regulated aspects of the farm equipment business in Alberta, provided that on termination of a dealership, the supplier was required to repurchase unsold equipment and parts. The court found it significant that the manufacturer had done more than make a simple contract for the sale of goods. It had hired a local dealer to promote its products and goodwill within the province. Its relationship with Alberta was more than just that of an out-of-province vendor. In that sense, the manufacturer had entered into the marketplace. However, it is important to note that no constitutional question had been raised by the accused. Laskin CJ, dissenting, squarely addressed the constitutional issue and found that the relationship between the New Brunswick manufacturer and the province of Alberta did not expose the manufacturer to Alberta’s regulatory regime.
In Economical Mutual Insurance v Liberty Mutual Fire Insurance Co., an out-of-province insurer was required to pay loss transfer even though it didn’t write insurance in Ontario and it did not file a PAU. The case did not analyze the constitutional issues, and turned solely on the statutory interpretation of the word “insurer” in s. 275 of the Insurance Act. While decided after Unifund v ICBC, the territorial limits of the Insurance Act were not argued before the arbitrator or the Court on the appeal and this was noted by Hoy J in the Gore Mutual Insurance Co. v John Deere Insurance Co. decision. There are, therefore, reasons to be careful about the reach of this decision.
There do not appear to be any Ontario court decisions that analyze the constitutional issue of whether an out-of-province insurer is required to pay loss transfer claims arising out of an accident that occurs in Ontario.
Analogous to the products liability cases, out-of-province insurers of commercial vehicle trucking outfits underwrite policies knowing, in some cases, that their insureds will be travelling through Ontario. Often the insurers will file a PAU and other undertakings including the protected defendant undertaking.
The connection becomes much more tenuous where the insured’s visit is a “one-off”, or where the loss transfer claim arises from an incidental visit to Ontario by an automobile operator who strikes a motorcycle.
There is evident tension between the approach that would limit the extra-provincial reach of the Ontario insurance regime for constitutional reasons, and the statutory interpretation approach, taken by the Court in Economical. This is our way of saying the issues need a good airing out next time a case with the right facts rolls around.
 Bulletin No. A-9/92, Property & Casualty – Auto, Loss Transfer, Ontario Insurance Commission, Donald C. Scott, Commissioner, July 7, 1992. http://www.fsco.gov.on.ca/en/auto/autobulletins/archives/Pages/a-09_92.aspx.
 Unifund Assurance Co. v Insurance Corp. of British Columbia,  2 SCR 63 [Unifund v ICBC].
 In order to assist motorists who travel outside their province or state of residence, all Canadian insurers of motor vehicles, and many insurers in the United States, have exchanged what is called a Power of Attorney and Undertaking (“PAU”), which denotes compliance with minimum coverage requirements and facilitates acceptance of service. The PAU is part of a reciprocal scheme for the enforcement of motor vehicle liability insurance policies in Canadian provinces and territories
 See Griffiths v State Farm Mutual Automobile Insurance Co.,  OFSCID No 122 for a well reasoned discussion by arbitrator Killoran on why the accident must occur in Ontario for the PAU to apply in Ontario.
 These were the comments of Arbitrator Neville in Economical Mutual Insurance Company v Liberty International Canada [unreported judgment dated February 20, 2006]. Arbitrator Neville also discussed the significance of self-insurance and conformity to statute clauses found in the Liberty policies. On appeal, Low J found that Liberty was required to pay loss transfer solely as a matter of statutory interpretation of the word “insurer” in s. 275 of the Insurer Act. See Economical Mutual Insurance Co. v Liberty Mutual Fire Insurance Co.,  OJ No 1072 (SCJ).
 Insurance Corp. of British Columbia v Royal Insurance Co. of Canada,  OJ No 1668 (CA) [ICBC v Royal].
 Supra, note 2 at paras 100 to 104.
 Ibid at para 65 referring to Moran v Pyle National (Canada) Ltd.,  1 SCR 393.
 Ibid at paras 76-79 referring to R v Thomas Equipment Ltd.,  2 SCR 529.
  OJ No 1072 (SCJ).
  OJ No 2638 (SCJ) at para 24.
For more information on this topic, or others, please contact Christine Matthews.
This blog entry has been placed on our website to inform readers in a general way of the authors’ view of the law at the time of its presentation. It is not intended as legal advice and no reliance may be placed on its contents. Some principles of law or procedure may have changed and may no longer be applicable since its publication. The authors and our firm disclaim any liability arising from reliance on any part of this blog entry.