Why are auto insurance payout deductibles so high?

If you’re going to put the pedal to the metal in Ontario, auto insurance is absolutely mandatory. In Canada, you need to carry a minimum of $200,000 in third-party liability (TPL) coverage but in reality, most drivers carry at least $1 million. That means that should you get into an accident, you can be awarded a settlement and keep all of the money, minus the legal fees. Given that, you’d think you’re covered for injuries, rehabilitation and income replacement while you recover, right?

No, it doesn’t work that way. In fact, most of us don’t realize that deductibles in auto insurance settlements are very high. 

‘Lack of oversight’

Before we get into the details of what happens if you get into an accident, let’s look at the difference between a deductible in an auto insurance settlement versus the deductible you pay as part of your policy when you file a claim. A deductible that is part of your policy is what you’ll pay out of pocket before your insurance company pays. So if you have a $500 deductible, you’ll pay the first $500 before your insurance kicks in. 

The deductible in an auto insurance settlement claim is different. That is the amount that is taken away by the insurance laws as set by the Ontario government. In Ontario in 2019, the first $38,818.97 of any award that is less than $131,000 went to the insurance company.

And here you can see the 2020 indexation amounts. 

The deductible goes to the insurance industry as pure profit, says Nainesh Kotak of Kotak Personal Injury Law. 

“There has been a lack of oversight for the insurance industry,” says Kotak. “The process isn’t transparent until you’re in the system.” This issue is compounded, he says, because there are legal rules that forbid a jury from being told about the deductible. So, a jury could award you what they think is fair for pain, suffering and rehabilitation, but the bulk of that award — or sometimes the entire thing — could go to the insurance company. 

More onus on victims to prove pain and suffering

The auto insurance payout deductible was introduced in Ontario in 1993 to weed out minor claims and fraud, according to Kotak. No-fault collision law was introduced three years earlier, in 1990, which allowed insurance companies to provide benefits that would cover treatment, rehabilitation and replacement income, without needing to deal with the other insurance company. But, says Kotak, the right to sue was also limited as a result, and more onus was put on victims to prove pain and suffering when pursuing compensation. 

The first deductible was $10,000 for settlement awards up to $100,000, and was waived beyond that amount. Then it jumped to $15,000 in 1996, then in 2003 it doubled to $30,000. A new formula was introduced in 2015 by the provincial government, which shot the deductible up to $36,540. The increase is now pegged to the inflation rate, which has benefitted the insurance companies because the deductible will only increase. 

While this was happening, certain services that were once covered started being dropped, says Kotak. “Housekeeping was eliminated, for example,” he says, explaining that if you were injured and couldn’t clean, the insurance company would cover the costs of someone to come clean your home. 

Plus there’s another unpleasant part if you do go to trial. If an injured person loses at trial, they’re responsible for paying part of the defendant’s (in this case, the insurance company) legal bill, which could be very expensive. It’s a risk not a lot of people would take. 

Most cases tend to be settled, says Kotak, but he says that he has to turn people away because he knows that they won’t see any money due to the lack of transparency about the deductible and the prohibiting of telling juries.

Where does this leave people with claims? Nowhere pretty fast.