A new report from accounting firm MNP has revealed that litigation costs are a major contributor to the rising cost of auto insurance in Alberta. The Canadian Underwriter reports that legal fees have risen 31% since 2018 and account for approximately 20% (or $200 for each policy annually) of the premiums Alberta drivers pay for their mandatory coverage.
Every province has its own minimum insurance coverage requirements. In Alberta, required coverage includes third-party liability ($200,000 minimum, although most people have at least $1 million), medical payments ($50,000 per person), disability income (80 percent of lost wages), funeral expense benefits ($5,000), and death benefits (minimum $10,000). Most drivers also choose collision coverage to help cover costs associated with car repairs after an accident.
Drivers who haven’t had accidents or haven’t had to file any claims may be surprised to hear that their insurance premiums go to cover another person’s legal fees, but this is standard practise in the insurance world, and not unusual at all. What is unusual, however, is the number of claims in Alberta.
“Claim frequencies have been stable or declining across Canada, while claim severity is increasing,” MNP said. “In Alberta, claim frequencies tend to be higher. It has consistently had the highest claims frequency for third-party liability, accident benefits, and collision coverages.”
The average amount of third-party liability (bodily injury) claims have increased 70% in Alberta over the last 10 years, compared to 35% for the rest of Canada.
In addition, the average amount of accident benefits claims has risen by 147% over the last decade, compared to 53% or less in other provinces.
This, of course, directly affects the cost of premiums.
“In Alberta between 2018 and 2022 the frequency with which those injured in collisions sought legal representation and pursued a bodily injury claim increased 48%. This is leading to fewer injury claims being subject to the minor injury cap and increasing claim severity,” MNP said.
Over those four years, more than $1.2 billion was spent on costs associated with litigation for bodily injury claims. That money goes to legal fees, payments to claimants, and legal costs incurred by insurers.
It isn’t the claimants that are ending up with the fattest pocketbooks, though. The money that goes towards legal costs is more than double that what the claimants receive. Approximately 38% of a settlement goes to the claimant’s lawyers, while only about 15% goes to the claimant for pain and suffering.
What can be done?
The Insurance Bureau of Canada (IBC) has put forth a proposal titled “Enhancing Care and Expanding Choice,” which they say can help lower drivers’ premiums approximately $325 a year. Among their recommendations are:
- The removal of the “hidden” 4% Insurance Premium Tax, which is added on to the sale of every auto insurance policy in the province and costs $60.
- $65 in savings can be achieved by removing the provincial grid system, which forces good drivers to subsidize the premiums of bad drivers.
- Doubling treatment and care provided to the injured and giving drivers more choice and control over their coverage will result in $200 in savings.
Current cap on rate hikes in Alberta
In addition to skyrocketing legal fees, the IBC and other industry experts have pointed to the Government of Alberta’s current pause on private auto insurance rate increases early this year as another reason why Albertans continue to pay more than other for their auto insurance. At least one auto insurance company has left the province, citing the rate freeze as the reason. Rate freezes do help the consumer for the short term, but are not ideal as a long-term solution. Insurance companies are unable to keep up with rising costs, which leads them to decrease coverages, or even just leave the province. This all results in less choice for car owners.
Get more from your insurance with Lane’s
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