Court Case

Study guides: Exam 6C, Exam GI-201

A Court Case — a judicial decision interpreting an insurance policy, a statute, or the law of negligence — is a source of Canadian insurance law in its own right. Legislation sets the framework; courts decide what its words mean in a dispute, and that meaning binds insurers until a higher court or the legislature changes it. A single appellate decision can move an entire industry's reserves.

• Why decisions matter actuarially. A ruling that widens a coverage, extends a limitation period, admits a new head of damage, or relaxes a threshold applies to claims that have already occurred. The effect is therefore immediate on the reserve, not merely prospective on the rate — this is the single most important thing to say about case law on the exam.
• Precedent and hierarchy. A Supreme Court of Canada decision binds every court in the country; a provincial court of appeal binds courts in its province and is persuasive elsewhere. Quebec, as a civil law jurisdiction, works from the Civil Code of Québec rather than binding precedent, so a common-law decision is at most persuasive there.
• Recurring subject matter in Canadian insurance litigation: interpretation of coverage wordings (with ambiguity construed contra proferentem, against the drafter), the Duty to Defend, the scope of the Duty of Good Faith and availability of Bad Faith Damages and Punitive Damages, the minor injury and catastrophic impairment definitions, and the deductibility of Collateral Benefits.
• Reasonable expectations. Where a wording is ambiguous, Canadian courts construe it to meet the reasonable expectations of the insured, which systematically resolves genuine ambiguity in the policyholder's favour and is why drafting matters so much.
• The interaction with legislation runs both ways: a decision the legislature dislikes is answered with an amendment, and each reform is partly a response to accumulated judicial interpretation.

A Decision Lands Mid-Reserve-Cycle In November, a provincial court of appeal holds that a category of chronic pain claims previously treated as minor injuries falls outside the minor injury cap. The insurer has 4{,}200 open accident benefit claims; the actuary estimates 18\% involve the affected category. Average incurred on a capped claim is \$3{,}500; on an uncapped non-catastrophic claim, \$48{,}000.

What must the Appointed Actuary do at the December year end?

Answer Recognise the effect in the current valuation. The decision interprets the law as it always was — it is not a change in the law effective going forward — so the affected claims were always uncapped, and the liability existed at the valuation date. This is a subsequent event providing evidence of conditions that existed at the balance sheet date, which is precisely the category that requires adjustment rather than mere disclosure.

Order of magnitude:

\begin{align*}
\text{Affected claims} &= 0.18 \times 4{,}200 = 756 \\[4pt]
\text{Severity increase} &= \$48{,}000 - \$3{,}500 = \$44{,}500 \\[4pt]
\text{Indicated strengthening} &= 756 \times \$44{,}500 \\
&= \$33{,}642{,}000
\end{align*}

What the actuary must then also do:

• Test the 18\% and the \$48{,}000. Both are estimates made under pressure; the reserve is dominated by them, so the materiality of the assumption warrants a sensitivity range, not a point.
• Consider claims already closed. If the decision reopens settled files, the exposure is larger than the open inventory suggests.
• Reflect it in MCT and FCT: a \$34 million strengthening moves capital available, and the adverse scenarios should now include further judicial erosion.
• Reflect it in pricing. The next filing must be at the post-decision cost level, or the inadequacy repeats in the new business.
• Disclose it. This is a material change in circumstances, reportable under Duty to Report if it threatens financial condition.