New Accident Benefits Rules

September 2010 ushered in what should prove to be some of the most significant changes to the Statutory Accident Benefits Rules (S.A.B.S.) in many years. Of particular note, the changes to the manner in which Income Replacement Benefits, or IRB’s, are to be calculated will affect every single driver on the road, though as we’ll show, some will be affected more than others.

Let’s consider John, an employed forklift operator earning $40,000 per annum. John’s been injured in a motor vehicle accident and hasn’t been able to return to work; his only income is in the form of short term disability benefits from his employer in the amount of $200 per week. How would we calculate John’s weekly IRB’s?

In essence, the new rules calculate IRB’s in exactly the same way as the old rules did, except we now have to replace the phrase ‘80% of net weekly income’ with the phrase ‘70% of gross weekly income’. We follow the same rules and the same steps; we just don’t have to worry about calculating income taxes. Let’s see how this subtle change affects John’s weekly IRB’s before and after the new rules came into effect:

Old Rules Versus New Rules

The new rules have been kind to John. The weekly difference of $46.53 begins to add up over time, totalling over $2,400 per year of additional, non-taxable income. Good news for drivers, right?

Not So Fast

IRB calculations under the new rules may end up being unkind to individuals earning lower income. Consider how IRB’s are calculated under the new rules: instead of using 80% of net income, we now use a lower benefit percentage of 70% but you won’t have to worry about making all those statutory deductions for income taxes, C.P.P. and E.I. payments. As we start considering lower and lower incomes though, those deductions start becoming smaller and 70% of gross income starts looking a lot less attractive than 80% of net. Lower income earners may also get hit twice, as they are also less likely to benefit from an employer sponsored disability insurance plan.

Consider our friend John, hit by the recent recession and downturn in manufacturing employment only able to secure part-time employment earning $200 per week with an employer that doesn’t provide disability insurance.

Section 7 (5) - What It Will Mean

It’s a small difference. The new rules will see John net a total of $11.25 per week less than he would have under the old methodology, but that’s $11.25 someone like John can’t afford on his meagre income. The new rules will have effectively cost John $585.00 for each year he receives IRB’s or 5.63% of his pre-accident income.

One provision of the new rules in particular has caught our attention: Section 7 (5). This provision requires an insurer to pay for the preparation of IRB entitlement reports with a cap of $2,500, effectively placing the risks and costs of challenging IRB payment amounts in the hands of the insured should additional information become available or circumstances change. We have identified a number of scenarios where the inclusion of this additional provision under the new rules may have adverse financial consequences to insured persons.

Self-employed individuals frequently require adjustments to their weekly IRB’s in light of the fact that their income is rarely earned on a consistent basis. As time passes, they may be operating at different working capacities as they learn to adjust to their injuries or start withdrawing from their business. As such, their entitlements may change from year to year or even more frequently, necessitating a recalculation of their benefits at each time. In light of the new provision set out in Section 7 (5), an insured person may be forced to weigh the cost benefits of commissioning new reports given that their financial liability for doing so has been greatly increased.

Government employees or union members may also be affected due to the number of benefits they may have available to them. These individuals may have access to short and long-term disability benefits, CPP disability benefits, and depending on their age at the time of the accident, retirement benefits. The difficulty lies in the fact that these benefits are typically awarded or elected at different times, the result being a change in their entitlement to IRB’s. It’s not uncommon for these individuals to require several updates to their IRB’s up to the date of trial.

Medical, Rehabilitation, Attendant Care and Housekeeping & Home Maintenance Benefits

The amounts payable for medical, rehabilitation and attendant care benefits have undergone perhaps the most sweeping changes under the new rules. The table below summarizes the major changes:

The new rules will end up placing a larger burden on those people who suffer serious injuries as a result of a motor vehicle accident, but who fall short of meeting the technical definition of ‘Catastrophic’. Optional benefits that top-up coverage for injuries that are deemed to be non-catastrophic can be purchased at extra cost, but the likelihood that lower and middle income drivers – in other words, the people that would be hardest hit by the reduction in benefits – will end up paying more now in order to better their coverage is probably very slim.

You’ll also notice the introduction of a new classification called ‘Minor Injuries’ under medical and rehabilitation benefits, where benefits are limited to a mere $3,500 (including the cost of any medical assessments).

The Krofchick Opinion

The overall thrust of these new rules appears to shift the financial burden for individuals with non-catastrophic injuries to the tort defendant from the AB carrier. From the perspective of the insurance companies, these provisions make a lot of sense; the majority of automobile injuries would tend to fall under the category of non-catastrophic and the new rules would appear to provide insurers with a lower limit on their liabilities.

These changes will also affect the damage recovery process. With the insurers’ liability to pay statutory benefits substantially reduced, tort defendants are now open to even greater exposure and as a result, picking that pocket could become an even greater uphill battle. Knowing that drivers may be entering negotiations in financial duress due to what will end up being lower accident benefit settlements, tort defendants may end up using this additional leverage to settle their disputes more quickly and on more favorable terms. On the other hand, the insured now have the opportunity to recover a greater portion of their damages through tort, which treats certain losses more favorably than the accident benefits scheme.

It will be interesting to watch how the public and the legal community will receive the new IRB formula. Many drivers will stand to benefit from the new formula and calculation of benefits has been made quicker and easier to understand; but as with medical, rehabilitation and housekeeping benefits (and indeed, with many proposed changes to the statutory benefits), it will be the lower income earners that will bear the brunt of the financial fallout.

Krofchick Valuations

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