Market spotlight

Trends and prospects What are the current trends in and future prospects for the insurance and reinsurance markets in your jurisdiction?

Technology

InsurTech has received significant attention recently. While in some cases this presents the possibility of disrupting the traditional insurance market, in many cases insurers are looking to collaborate with the right technology innovators to improve and grow their business, including the increasing use of the analysis of big data and predictive analytics, machine learning and cognitive computing to provide competitive advantage to the identification and underwriting of risks in all lines of business.

M&A and consolidation On the property and casualty insurance side, the market is still relatively fragmented and mergers and acquisitions have been steady for over 20 years. While several players are highly motivated to grow by acquisition, few targets of sufficient size are available, particularly since the market comprises a large number of Canadian insurers (including mutual and cooperative insurers), a few foreign-owned insurers, Lloyd’s and a number of international commercial players.

The situation is different on the life insurance side, where three large insurance groups dominate the market. Each of these groups has a significant international presence. At the same time, there continues to be a number of small (or smaller) life insurers in the market.

Distribution Given the highly competitive market for insurance, insurers are driven to create new specialised products with varying distribution models. Independent agents and brokers have been the main distribution channel of insurance in Canada for many decades. However, alternatives to this traditional structure are becoming more common, including restricted licensing regimes and digital platforms.

Regulation and emerging risks The effects of the financial crisis have not been forgotten and lessons continue to be learned from its aftermath. Indeed, the increased degree of regulation that has occurred over the past decade is expected to continue. Canada is a lead participant in international regulatory developments, and increased and enhanced regulation in this area is expected.

Emerging and growing risks to the insurance industry include climate change, cyber risk and data security (especially around the collection, use and disclosure of private information). This will lead to greater plans among (re)insurers for resilience and recovery in all of these areas.

Regulatory framework

Legislation What is the primary legislation governing the (re)insurance industry in your jurisdiction?

Federally incorporated (re)insurers and foreign (re)insurers that have established a Canadian branch are governed by the Insurance Companies Act. (Re)insurers are also governed by provincial and territorial insurance statutes in the provinces and territories in which they operate.

While some of the provincial insurance statutes continue to allow for the incorporation of an insurance company, federal incorporations have become the norm and are much more prevalent. In recent years, many (re)insurers that were incorporated under provincial insurance statutes have continued under the Insurance Companies Act.

(Re)insurers and foreign branches are subject to other federal and provincial/territorial legislation, including, in the case of life (re)insurers, the Proceeds of Crime (Money Laundering) and Terrorist Financing Act.

Regulators Which government bodies regulate the (re)insurance industry in your jurisdiction and what is the extent of their powers?

Federally incorporated (re)insurers and foreign branches are regulated by the Office of the Superintendent of Financial Institutions with respect to prudential matters (eg, capital and liquidity adequacy, corporate governance and risk management), and by the provincial or territorial regulators (in the jurisdictions within which the company or branch operates) with respect to the distribution of insurance (eg, market conduct and consumer protection).

Where a (re)insurer is provincially incorporated, the provincial regulator in the jurisdiction within which it was incorporated would be the prudential regulator, whereas the regulators in any of the provinces or territories where it carries on the business of insurance would regulate the distribution of its products.

All life insurers in Canada are subject to federal anti-money laundering and anti-terrorist financing requirements, which are overseen by the Financial Transactions and Reports Analysis Centre of Canada.

Ownership and organisational requirements

Ownership of (re)insurers Are there any restrictions on ownership of or investment in (re)insurers in your jurisdiction, including any limits on foreign ownership/investment?

The Insurance Companies Act imposes restrictions on the acquisition or increase of a significant interest in, or acquisition of de factocontrol of, a federally incorporated insurer. A person has a significant interest in a class of shares of a company if the aggregate of any shares of that class beneficially owned by the person and any shares of that class beneficially owned by entities controlled by the person exceeds 10% of all of the outstanding shares of that class of shares of the company. Restrictions are also imposed on the ability of the federal and provincial governments (or any agent or agency thereof), as well as a foreign government (or any agent or agency thereof), to hold shares in a federally incorporated (re)insurer.

The Competition Act imposes restrictions on mergers and acquisitions. The commissioner of competition, who heads the Competition Bureau, has the power to challenge any merger captured by the Competition Act up to one year after the merger has been substantially completed if the merger will or is likely to prevent or lessen competition substantially. The pre-merger notification provisions provide that parties to a merger transaction of a specified type and exceeding specified thresholds must, subject to certain exceptions, provide the commissioner of competition with advance notice and specified information with respect to such a transaction.

The Investment Canada Act imposes restrictions on a foreign entity looking to acquire control of an existing Canadian insurer or which wishes to establish a new Canadian insurance business. The Investment Canada Act generally applies to the establishment of a new Canadian business and the acquisition of control of existing Canadian businesses by non-Canadians. Frequently, non-Canadian investors are required only to file a notification. In some instances, pre-merger approval of the investment based on a ‘net-benefit to Canada’ test is required. The Investment Canada Act also provides for the review of foreign investments that may be injurious to national security.

What regulations, procedures and eligibility criteria govern the transfer of control of/acquisition of a stake in a (re)insurer?

The approval of the minister of finance is required for the acquisition or increase of a significant interest in, or acquisition of de factocontrol of, a federally incorporated (re)insurer. The Insurance Companies Act sets out certain factors that the minister of finance must take into account in determining whether to approve the transaction.

Mergers, including those involving (re)insurers, are subject to review by the commissioner of competition to determine whether the merger is likely to have anti-competitive effects. Part VIII (Sections 91 to 103) and Part IX of the Competition Act contain the merger review provisions. Part VIII is concerned with substantive merger review, including factors that are considered when assessing whether the merger will or is likely to prevent or lessen competition substantially. Part IX is concerned with merger notification. Under the pre-merger notification provisions, parties to a merger transaction of a specified type and exceeding specified thresholds must provide the commissioner with advance notice and specified information with respect to such transaction. The obligation to file a pre-merger notification is on the parties to the proposed transaction.

A foreign entity, subject to certain exceptions, must either file a notification or an application for review with the minister of innovation, science and economic development where it is looking to make an investment in Canada. Where pre-merger approval of the investment based on a ‘net-benefit to Canada’ test is required, the minister must be satisfied that such investment is likely to be of net benefit to Canada. The Investment Canada Act sets out factors that are to be taken into account, where relevant, when assessing net benefit to Canada.

Organisational requirements Must (re)insurers adopt a certain legal structure in order to operate? If no mandatory company organisation applies, what are the common structures used?

The most common legal structures adopted by (re)insurers are federally incorporated (re)insurance corporations under the Insurance Companies Act. Foreign (re)insurers can also opt to establish a Canadian branch rather than incorporating a separate entity. In some provinces, it is still possible to incorporate an insurance company under provincial legislation.

Whether a (re)insurer incorporates as an insurance company or establishes a Canadian branch, or incorporates as an insurance company under a provincial insurance statute, the (re)insurer cannot carry on business as both a property and casualty (re)insurer and a life (re)insurer.

Many corporate groups have adopted a holding company structure, whereby one or more (re)insurers are held by a single entity. In such cases, it is possible for a corporate group to hold (re)insurance companies carrying on business as both property and casualty (re)insurers and life (re)insurers.  

Do any particular corporate governance requirements apply to (re)insurers, including any eligibility criteria for directors and officers?

The Insurance Companies Act imposes certain governance requirements on federally incorporated (re)insurers, including with regard to:

  • meetings and voting of shareholders and policyholders;
  • proxies;
  • eligibility and election of directors;
  • meetings of the board;
  • bylaws;
  • committees of the board;
  • authority of directors and officers;
  • fundamental changes to the company;
  • auditors;
  • actuaries; and
  • ownership.

The expectations of the Office of the Superintendent of Financial Institutions (OSFI) with respect to corporate governance are set out in the Corporate Governance Guideline, which addresses the importance of sound corporate governance for (re)insurers and identifies three fundamental components of corporate governance: the role of the board of directors, risk governance and the role of the audit committee.

The Insurance Companies Act provides that a director cannot be a person who:

  • is less than 18 years of age;
  • is of unsound mind;
  • has the status of a bankrupt;
  • is an officer, director, employee or agent of the federal or a provincial government or an agent or agency of a foreign government;
  • is a minister of the federal or a provincial government;
  • is an agent or employee of a foreign government; or
  • is an insurance agent or broker of the company.

OSFI expects every (re)insurer and branch to have a written policy regarding the performance of assessments of the suitability and integrity of its ‘responsible persons’, which include directors, senior management and, in the case of a branch, the chief agent.

Operating requirements

Authorisation procedure Which (re)insurers must obtain authorisation from the regulator before operating on the market and what is the procedure for doing so?

Before carrying on the business of insurance, the following orders from the Office of the Superintendent of Financial Institutions (OSFI) must be obtained:

  • in the case of federally regulated (re)insurers, an order to commence and carry on business; and
  • in the case of a foreign branch, an order approving the insuring in Canada of risks.

In order to distribute insurance products in a province or territory, a (re)insurer or foreign branch must obtain an insurer’s licence from the applicable provincial or territorial regulator. The Canadian Council of Insurance Regulators has developed a standardised application form which is used by each regulator. While the application requirements across Canada are largely the same, some additional requirements must be met, depending on the jurisdiction. 

Financial requirements What are the minimum capital and solvency requirements for (re)insurers operating in your jurisdiction?

To incorporate a federally regulated (re)insurer, the applicant must have paid-in capital of at least C$5 million or more as required by the minister of finance. For newly incorporated federally regulated (re)insurers, OSFI generally expects the internal Minimum Capital Test target ratio (for property and casualty (re)insurers) or the Minimum Continuing Capital Surplus Requirements target ratio, which as of January 2018 will be replaced by the Life Insurance Capital Adequacy Test (for life (re)insurers), to be at least 300%.

To establish a Canadian branch, the applicant must have:

  • consolidated assets of at least C$1 billion in the case of a life (re)insurer or C$200 million in the case of a property and casualty (re)insurer; and
  • a capital and surplus of between 5% and 10% of liabilities in the case of a life (re)insurer or at least 20% of assets in the case of a property and casualty (re)insurer.

For newly established branches, OSFI generally expects the internal Branch Adequacy of Assets Test target ratio (for property and casualty (re)insurers) or the Test of Adequacy of Assets in Canada and Margin Requirements target ratio (for life (re)insurers) to be at least 300%.

Do any other financial requirements apply?

Following incorporation or the establishment of a branch, federally regulated (re)insurers must continue to meet minimum capital and solvency requirements (see Guideline E-19 Own Risk and Solvency Assessment) and file returns with OSFI, including property and casualty/life quarterly and annual returns, external auditor’s reports and reports of the appointed actuary.

Personnel qualifications Are personnel of (re)insurers subject to any professional qualification requirements?

Each federally regulated insurer must appoint an actuary and notify the superintendent of financial institutions, in writing, of the appointment. The appointed actuary must be a fellow of the Canadian Institute of Actuaries. There are no professional qualification requirements for officers or directors of an insurer, or for the chief agent in the case of a branch.

Business plan What rules and requirements govern the business plans of (re)insurers?

In order to incorporate an insurer or establish a branch under the Insurance Companies Act, as part of the application to OSFI, the applicant must include a minimum three-year business plan for the proposed company or branch, which must include:

  • reasons why the applicant will be successful (and the overall strategy for achieving that success);
  • a detailed description of each line of business to be conducted by the applicant;
  • financial projections; and
  • a detailed description of all projected reinsurance arrangements.

As part of the application for a provincial insurer’s licence, the provinces of Alberta, British Columbia, Manitoba, Nova Scotia, Ontario, Quebec and Saskatchewan require the applicant to submit a business plan. The business plan must include:

  • the financial statements of the applicant;
  • a five-year financial forecast that discloses underwriting information by class of business and by jurisdiction; and
  • a narrative presenting the (re)insurer’s business case for licensing in the jurisdiction.

Risk management What risk management systems and procedures must (re)insurers adopt?

OSFI expects federally regulated (re)insurers to develop a risk appetite framework that is enterprise-wide and tailored to their domestic and international business activities and operations. All operational, financial and corporate policies, practices and procedures of the (re)insurer should support the risk appetite framework. The (re)insurer should have a senior officer who is responsible for the oversight of all relevant risks across the company (ie, a chief risk officer or equivalent).

OSFI expects operational risk management to be fully integrated into the company’s risk appetite framework and to support the overall corporate governance structure of the insurer. OSFI expects effective accountability for operational risk management by using a ‘three lines of defence’ structure.

OSFI expects federally regulated (re)insurers to establish and maintain an effective enterprise-wide regulatory compliance management framework. With respect to reinsurers in particular, effective reinsurance practices and procedures must be in place.

Reporting and disclosure What ongoing regulatory reporting and disclosure requirements apply to (re)insurers?

There are a number of regulatory reporting and disclosure requirements with which federally regulated (re)insurers must comply. Depending on the jurisdictions within which the insurance company or branch operates, it will be required to submit various financial and corporate reports (including reports of the auditor and actuary) on a quarterly and annual basis. These requirements vary depending on whether the insurer is a company or a branch, and whether it is engaged in a property and casualty or life insurance business. 

Other requirements Do any other operating requirements apply in your jurisdiction?

In many provinces and territories insurers must renew their licence to carry on business in the jurisdiction. Where a renewal is required, the frequency of the renewal depends on the jurisdiction, but in many cases it is annual. In some provinces, (re)insurance companies and branches are required to register as extra-provincial corporations. Typically, these registrations must be renewed on an annual basis.

Non-compliance What are the consequences of non-compliance with the operating requirements applicable to (re)insurers?

(Re)insurance companies and foreign branches that fail to comply with operating requirements under federal or provincial legislation could find themselves guilty of an offence, punishable by fine or imprisonment, or subject to an administrative monetary penalty. Under the Insurance Companies Act and most provincial and territorial insurance statutes, any officer, director or agent of the insurance company or branch who directed, authorised, assented to, acquiesced in or participated in the commission of the offence is a party to and guilty of the offence and liable to punishment for the offence.

Failure to file required financial and corporate information with OSFI could result in a monetary penalty under the Late and Erroneous Filing Penalty Framework. 

Contracts

General What general rules, requirements and procedures govern the conclusion of (re)insurance contracts in your jurisdiction?

The conclusion of a (re)insurance contact is largely governed by the common law rules of contract formation in the province (other than Quebec) or territory within which the contract is entered into. In the province of Quebec, the conclusion of a (re)insurance contact is governed by the rule of contract formation under the Civil Code of Quebec. In addition, the insurance legislation in each of the provinces and territories contains certain requirements that must be satisfied in order for a contract of insurance to be valid, including that all the terms and conditions of the contract be set out in full and that there be an insurable interest.

All provinces and territories have electronic commerce legislation of general application (unless an activity is expressly excluded or if subject to other legal provisions that prohibit or regulate the use of electronic information or electronic documents). In general, insurance contracts can be executed by electronic means; however, many provincial and territorial insurance statutes impose exclusions on the scope of electronic commerce (eg, delivery of certain notices, declarations and other documents). All electronic commerce legislation provides that no one can be compelled to use, provide or accept information or a document in an electronic form – consent is required.

Mandatory/prohibited provisions Are (re)insurance contracts subject to any mandatory/prohibited provisions?

Depending on the province or territory, as well as the nature of the insurance contract (eg, accident and sickness, life, hail), certain statutory conditions must be included in a contact of insurance. These conditions impose obligations on both the insurer and the insured (eg, termination of a contract, providing notice, material change, dispute resolution, determining when a loss is payable)

The Office of the Superintendent of Financial Institutions (OSFI) Guideline B-3 Sound Reinsurance Practices provides that the terms and conditions of a reinsurance contract should provide clarity and certainty on reinsurance coverage and that funds will be available to cover policyholder claims in the event of either the cedant’s or reinsurer’s insolvency. In this regard, reinsurance contracts should include an insolvency clause, and particular attention should be paid to the appropriate use of set-off or cut-through clauses, the structure of ‘funds withheld’ arrangements and other types of terms or conditions that may frustrate the scheme of priorities under the Winding-Up and Restructuring Act.

Implied terms Can any terms be implied into (re)insurance contracts (eg, a duty of good faith)?

Under common law in Canada, both insurer and insured are subject to a duty of utmost good faith to one another. This manifests itself, for example, in the insured being required to disclose all matters to the insurer that are relevant to the risk even when the insurer does not ask (or risk having the policy voided where there has been a failure to disclose something material), and in the insurer being required to investigate every claim with an open mind and without unreasonable delay, or risk being subject to an award of punitive damages for bad faith. As for implied terms, insurance policies are contracts and as such are subject to the same legal principles as apply to other forms of contract (subject to certain principles of interpretation that courts have developed specifically for insurance contracts). Under Canadian common law, terms can be implied into contracts on the basis of:

  • presumed intention;
  • custom or usage;
  • business efficacy; or
  • whether an officious bystander would have suggested such a term at the time that the parties were negotiating their contract.

Standard/common terms What standard or common contractual terms are in use?

Please see the answer to the question above (“Are(re)insurance contracts subject to any mandatory/prohibited provisions?”).

‘Smart’ contracts What is the state of development in your jurisdiction with regard to the use of ‘smart’ contracts (ie, blockchain based) for (re)insurance purposes? Are any other types of financial technology commonly used in the conclusion of (re)insurance contracts?

The use of smart contracts continues to be the subject of increased attention, especially within the (re)insurance sector. However, no particular legal or regulatory response with respect to its use has been signalled by OSFI or provincial/territorial regulators.

Breach What rules and procedures govern breach of contract (for both (re)insurer and insured)?

An insured whose claim has been denied and who is unable to persuade the insurer to reverse its position may commence legal proceedings against the insurer. If the policy provides for arbitration of disputes, the proceedings will commence with a notice of arbitration. If there is no arbitration clause, the proceedings will typically begin with the issuance of an ‘originating process’ in the provincial superior court. The originating process (known as a ‘statement of claim’ in most provinces) will be served on the insurer, which will then serve and file a statement of defence to the claim. The statement of claim sets out the material facts on which the plaintiff relies, as well as the nature of the relief claimed. The statement of defence contains the defendant’s version of the facts and any affirmative defences. The plaintiff may submit a reply and typically the proceedings (known as an ‘action’) will then proceed through production of documents by each side, out-of-court examinations for discovery, mediation and then (barring a settlement) trial. If the insurer is of the opinion that other parties should share in liability to the plaintiff, may be liable to the insurer for an independent claim for relief or should be bound by a determination of an issue arising between the insured and the insurer, the insurer may commence a third-party claim (if such other party is not already a party to the action) or a cross-claim (if such other party is already a party to the action). In most circumstances a third-party claim will proceed in tandem with the main action and will be tried together with, or immediately after, the main action.

In some cases involving a liability policy, there may be a preliminary issue as to whether the insurer is under a duty to defend the insured against claims in an underlying action. In such cases, the insured may bring a motion within the action to have that issue summarily determined, or may bring separate proceedings (known in some provinces as an ‘application’) for that purpose. The issue of the duty to defend lends itself in many cases to summary determination because the duty is determined based on whether the pleadings in the underlying action allege acts or omissions that fall within the policy coverage, and generally speaking extrinsic evidence (outside of documents that are referred to in the pleadings) is not admissible. Summary proceedings may also be employed to determine issues of allocation of defence costs among multiple insurers or between insured and insurer (eg, where there is coverage under policies over a period of years involving multiple insurers or years in which the insured did not have coverage).

Consumer protection

Regulation What consumer protection regulations are in place to safeguard the rights of purchasers of insurance products and services?

All provinces and territories have consumer protection statutes which establish regimes for protecting consumer rights. In some cases, these statutes (or a portion thereof) apply to the sale and delivery of insurance products and services, while in other cases they do not. Several provinces and territories have separate regulations of a consumer protection nature under the primary insurance statute which apply to the sale and delivery of insurance products.

Pursuant to provisions introduced in 2017 by the Canadian Council of Insurance Regulators, certain insurers are now required to submit an annual statement on market conduct to the regulator in each jurisdiction within which the (re)insurer operates. The annual statement requires insurers to provide information related to their governance, practices and policies with respect to the fair treatment of consumers. Insurers writing only commercial insurance or reinsurance are exempted from filing the annual statement.

Claims

General What general rules, requirements and procedures govern the filing of insurance claims?

Most insurance policies will dictate when and how the insured must provide notice of a loss or claim to the insurer. For certain types of insurance, notice requirements are set out in statute. In other cases, the policy dictates when notice and/or proof of loss must be given, as well as the required content of the proof of loss. Where there has been imperfect compliance with a provision regarding notice or proof of loss, relief from forfeiture may be available pursuant to statute. The chances of obtaining relief from forfeiture depend in large part on how significant the failure to comply is, whether the insured acted reasonably and the extent of prejudice to the insurer.

Where there are statutory or contractual requirements regarding notice and/or proof of loss, an insured may be precluded from bringing legal proceedings against an insurer unless and until it has satisfied those requirements.

Time bar What is the time bar for filing claims?

Statutory provisions in each province establish time limits for the commencement of legal proceedings arising from disputes, including disputes under insurance policies. There are both limitation periods prescribed by statute for specific types of insurance policies, and also general limitation periods that apply to all disputes. Where there is no specific prescribed limitation period for the policy in question, the general Limitations Act of the province will apply.

Denial of claim On what grounds can the (re)insurer deny coverage?

An insurer may deny coverage for any of the following reasons:

  • the claimant does not come within the definition of ‘insured’ in the policy;
  • the claim or the loss falls outside the insuring agreement;
  • the claim is for a loss that falls within a policy exclusion;
  • the insured has breached a material condition of the policy and thus has forfeited coverage;
  • the insured lacks an insurable interest in the subject matter of the insurance;
  • the insured made a material misrepresentation in its application for coverage or failed to disclose a material matter, thus entitling the insurer to void the policy;
  • fraud on the part of the insured in respect of the claim or the proof of loss; or
  • the claim exceeds the policy limits.

What rules and procedures govern the insured’s challenge of the denial of a claim?

An insured whose claim has been denied and who is unable to persuade the insurer to reverse its position may commence legal proceedings against the insurer. If the policy provides for arbitration of disputes, the proceedings will commence with a notice of arbitration. If there is no arbitration clause, the proceedings will typically begin with the issuance of an ‘originating process’ in the provincial superior court. The originating process (known as a ‘statement of claim’ in most provinces) will be served on the insurer, which will then serve and file a statement of defence to the claim. The statement of claim sets out the material facts on which the plaintiff relies, as well as the nature of the relief claimed. The statement of defence contains the defendant’s version of the facts and any affirmative defences. The plaintiff may submit a reply and typically the proceedings (known as an ‘action’) will then proceed through production of documents by each side, out-of-court examinations for discovery, mediation and then (barring a settlement) trial. If the insurer is of the opinion that other parties should share in liability to the plaintiff, may be liable to the insurer for an independent claim for relief or should be bound by a determination of an issue arising between the insured and the insurer, the insurer may commence a third-party claim (if such other party is not already a party to the action) or a cross-claim (if such other party is already a party to the action). In most circumstances a third-party claim will proceed in tandem with the main action and will be tried together with, or immediately after, the main action.

In some cases involving a liability policy, there may be a preliminary issue as to whether the insurer is under a duty to defend the insured against claims in an underlying action. In such cases, the insured may bring a motion within the action to have that issue summarily determined, or may bring separate proceedings (known in some provinces as an ‘application’) for that purpose. The issue of the duty to defend lends itself in many cases to summary determination because the duty is determined based on whether the pleadings in the underlying action allege acts or omissions that fall within the policy coverage, and generally speaking extrinsic evidence (outside of documents that are referred to in the pleadings) is not admissible. Summary proceedings may also be employed to determine issues of allocation of defence costs among multiple insurers or between insured and insurer (eg, where there is coverage under policies over a period of years involving multiple insurers or years in which the insured did not have coverage).

Third-party actions On what grounds can a third party file a claim directly with the (re)insurer?

A third party can claim against an insurer where the insured has made a valid assignment to the third party of its right to indemnity under the policy, or of the policy proceeds. Notice of the assignment must be given to the insurer. Any assignment is ‘subject to the equities’, meaning that the assignee has no greater rights under the policy than did the assignor.

In certain cases (eg, in commercial liability policies), third parties will be given status as ‘additional insureds’ under the policy, and they may claim against the insurer (often the claim must go in through the named insured) to the extent that their losses are covered. In other cases (eg, with property insurance policies), the policy may provide that in the event of loss the proceeds will be payable to the mortgagee of the property, and that the mortgagee may sue for the proceeds. In policies of personal insurance (eg, life insurance), the insured will designate a beneficiary who, it follows, would have a right to claim directly against the insurer under the policy.

All Canadian provinces have provisions in their insurance statutes that permit persons who have judgment against an insured for injury or damage to persons or property, in cases where the judgment debtor’s liability policy would have covered him or her for the judgment, to bring proceedings directly against the insurer.

Punitive damages Are punitive damages insurable?

This is an unsettled area of law in Canada. Some courts have relied on public policy considerations to refuse to extend coverage to punitive damages, whereas other courts have held that punitive damages are covered. The consensus in the case law is that coverage for punitive damages will depend on the specific terms of the insurance policy in question. Where a commercial general liability policy covers ‘compensatory damages’ alone, the policy will likely be interpreted as not including coverage against punitive damages. However, there may be coverage for punitive damages where the policy is more broadly worded. Many directors’ and officers’ policies will expressly cover punitive damages. Other types of policy will expressly exclude them.

Subrogation What regime governs (re)insurers’ subrogation rights?

Insurers that have paid insureds under an insurance policy for loss may sue, in the name of the insured, third parties against which the insured has a legally enforceable right to recover the loss. Insurers may be subrogated to claims in tort or in contract. The insurer steps into the insured’s shoes, which means that it can have no greater right against the third party than does the insured. The insurer may subrogate only once the insured has been fully indemnified for its loss; nevertheless, courts have permitted insurers that have been sued for coverage by their insureds to commence third-party claims against alleged tortfeasors which have caused loss to the insured. With respect to certain types of coverage, subrogation rules have been modified by statute. Policies may also contain waivers of rights of subrogation against certain types of persons, or courts may interpret policies as implicitly containing such waivers.

Intermediaries

Regulation How are the services of insurance intermediaries regulated in your jurisdiction?

Insurance intermediaries (eg, insurance agents, brokers and adjusters) are regulated by the provincial/territorial regulator in the jurisdiction within which they operate. Generally, in order for an individual to act as an insurance agent, broker or adjuster, he or she must obtain a licence. Different licensing requirements exist depending on whether the agent/broker is engaged in the distribution of property and casualty or life insurance products. While the requirements are generally similar across all Canadian jurisdictions, some variations exist, with respect to both the initial licensing process and the ongoing compliance requirements of each regulator. In many provinces, corporate insurance agencies, brokerages and adjusting firms are also required to obtain a separate licence.

Tax

Tax liability What tax liabilities arise in the conduct of (re)insurance business?

(Re)insurers are subject to tax on income, similarly to other businesses. However, a variety of insurance-specific provisions apply given the complexities in computing income from an insurance business. Among these are designated insurance property rules that generally subject multinational insurers to tax only on their Canadian insurance business. Life insurers are also subject to a federal capital tax as well as capital taxes in certain provinces.

A federal excise tax may apply to premiums paid to insurers not located in Canada and not licensed to sell insurance in Canada. An exception may be available to reinsurers in qualifying circumstances.

Supplies of insurance policies are generally exempted from Canadian value added tax (VAT) (ie, federal goods and services tax, harmonised sales tax where the goods and services tax is combined with provincial sales tax and Part I Quebec sales tax). However, as a result insurers are generally not entitled to input tax credits or refunds to recover VAT on their inputs and may be required to self-assess VAT on expenditures made outside Canada.

Canadian provinces often impose insurance premium taxes on gross premiums receivable by an insurer in regards to policies relating to persons or property located in the province. Further, certain insurance premiums are subject to provincial sales taxes. However, premiums for reinsurance are often exempt from such sales taxes.

Insolvency

Regulation What regime governs the insolvency of (re)insurers?

The Winding-Up and Restructuring Act is the Canadian federal legislation that governs the winding up and restructuring of financial institutions including (re)insurance companies and foreign branches. The act provides that a liquidator may be appointed to exercise a number of powers, including to liquidate the property and assets of the (re)insurer, administer a claims process and distribute the assets of the (re)insurer to, among others, creditors and policyholders, in accordance with statutory priorities.

Effect on insureds How does a (re)insurer’s insolvency affect insureds and the (re)insurer’s obligations to insureds?

All property and casualty insurers licensed in a province or territory are required to be members of the Property and Casualty Insurance Compensation Corporation (PACICC), unless they are covered by another authorised plan. PACICC provides protection to insureds against financial loss by paying outstanding claims and refunding premiums paid in advance up to certain established limits. PACICC protection is included in most, but not all, insurance policies.

All life insurers authorised to sell policies in a province or territory are required to be members of Assuris. Where a life insurer becomes insolvent, Assuris provides protection for insureds by minimising the loss of benefits and ensuring the quick transfer of policies to a solvent life insurer, where protected benefits will continue.

Reinsurers are not required to be members of PACICC or Assuris. If such a reinsurer becomes insolvent, any claim (and its relative priority) will be subject to the scheme of distribution under the Winding-Up and Restructuring Act.

Dispute resolution

Litigation Are there any compulsory or preferred venues for insurance litigation in your jurisdiction?

Canada has a federal system that comprises a federal government and 10 provincial governments (there are also three territories that do not have status as provinces). Powers are divided by the Constitution between the federal government on the one hand and the provincial governments on the other. The provincial governments have jurisdiction over property and civil rights in the province. This includes jurisdiction over the business of insurance within the province. Litigation over insurance disputes takes place in the superior court of the province which has jurisdiction over the subject matter of the dispute, and is determined according to the common and statutory law of the province that has the closest connection to the dispute. Therefore, insurance litigation takes place in every province and territory in Canada. 

How are insurance disputes with a cross-border element handled in your jurisdiction?

Cross-border insurance disputes may be either interprovincial, and thus domestic, or international. In either case, it is necessary to determine which law governs the policy. In many cases, legislation has removed ambiguity. In other situations, parties are forced to consult conflict of laws rules which find a basis in either statute, common law (for territories and provinces other than Quebec) or the Civil Code of Quebec.

A court will accept jurisdiction to hear a case if the contract contains a clause specifying that it is to do so. Otherwise, jurisdiction depends on whether there is a ‘natural’ or ‘real and substantial’ connection between the forum and the case. Even where a forum has jurisdiction, a defendant may seek to stay the case on the basis of forum non conveniens principles. However, a court will grant a stay only if the defendant satisfies it that there is another forum that is clearly more convenient. Subject to statute, the basic rule for determining which law governs any kind of contract, including insurance policies, is that which is intended by the parties to apply. This choice may be expressed in the contract or may be inferred from the circumstances. Where the parties have expressly stated their intention as to the applicable law, this will determine the issue unless the intention expressed is not bona fide and legal or if it is contrary to public policy. If an intention cannot be discerned, the rule is that “the system of law with which the transaction has its closest and most real connection” applies.

What issues are commonly the subject of insurance litigation?

It is difficult to generalise, but common subjects of insurance disputes may include:

  • in the area of liability insurance:
    • whether an insurer is under an obligation to defend its insured against a claim by a third party in circumstances where the insurer says the claim falls within a policy exclusion or that the insured has breached a condition of the policy;
    • whether there has been a breach of a condition of the policy and, if so, whether the insured should be granted relief from forfeiture; and
    • how to allocate liability and defence costs where an occurrence involves multiple years and multiple insurers and/or years where the insured had no coverage or cannot locate policies for certain years;
  • in the area of first-party insurance (eg, commercial property insurance):
    • whether there has been betterment; and
    • whether the insured is entitled to replacement costs or actual cash value; and
  • in any type of policy, how particular words in a policy or in an insurance statute should be interpreted.

Another frequently litigated area is whether an insurer has acted in bad faith in its handling of a claim.

What is the typical timeframe for insurance litigation?

This depends on a number of factors, including:

  • whether the case needs to go to trial or can be resolved short of trial (eg, by summary judgment or through a mediated settlement);
  • whether it is a straightforward dispute involving a single insured and a single insurer or whether there are multiple insureds and insurers;
  • the extent to which the plaintiff tries to move the matter along and the parties are cooperative in setting a reasonable schedule for the case; and
  • the state of the docket in the jurisdiction where the case is being heard.

It is not unusual for a case in some busy judicial centres to take as long as four years to get to trial. Any appeals from the trial judgment would add to the length of time it takes to get to a final decision.

Arbitration What regime governs the arbitrability of insurance disputes?

Insurance disputes can be arbitrated only if the insurance policy provides for arbitration or the parties agree after a dispute has emerged to arbitrate the dispute (which would be unusual). Most provinces have two statutes governing arbitration: a general Arbitration Act which applies to most arbitrations and an international arbitration statute which gives recognition and force to the United Nations Commission on International Trade Law Model Law on International Commercial Arbitration. It applies to international commercial arbitration. Insurance disputes in Canada are not often arbitrated, but it is common for reinsurance disputes to be arbitrated.