Why are auto insurance payout deductibles so high?

This article has been updated from a previous version. 

Before stepping on the gas the next time you see a yellow light turning red, you should probably remember that auto insurance is mandatory in Canada for a reason. 

While the minimum third-party liability (TPL) coverage amount is $200,000, in reality, most drivers carry at least $1 million. In the event of an accident, drivers carrying a higher amount can be awarded a settlement in which they’ll get to keep all the money, minus the legal fees.  

In this scenario, one would think they would also be covered for injuries, rehabilitation, and income replacement while they recover, right? 

Sadly, it doesn’t work that way. There are deductibles in auto insurance settlements — and most of us don’t realize how high they are.  

‘Lack of oversight’ in the insurance industry 

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 an entirely different deductible altogether. It’s the amount that is claimed by the insurance company, in accordance with laws set by the Ontario government. In Ontario, the first $44,367.24 of any award that is less than $147,889.59 goes to the insurance company.  

Nainesh Kotak of Kotak Personal Injury Law explains that the deductible goes to the insurance industry as pure profit.   

“There has been a lack of oversight [in] the insurance industry,” says Kotak. “The process isn’t transparent until you’re in the system.”  

He further explains that the issue is compounded, because there are legal rules that forbid a jury from knowing the deductible amount. A jury could award you what they think is fair for pain, suffering, and rehabilitation, not knowing that 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. The no-fault collision law,  introduced in 1990, allowed insurance companies to provide benefits that would cover treatment, rehabilitation, and replacement income, without needing to deal with the other insurance company. It also prevented people from potentially ending up in court for minor collisions and other infractions. 

But this law also limited a victim’s right to sue as a result, says Kotak. Now there’s more onus 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. It jumped to $15,000 in 1996 and then doubled to $30,000 by 2003.  

The provincial government introduced a new formula that pegged deductibles to the inflation rate in 2015, which shot the deductible up to $36,540. The increase benefits insurance companies as the deductible can only go up.  

Meanwhile, certain services that were once covered started being dropped, says Kotak.  

“Housekeeping was eliminated, for example,” he says. He explained that if you were injured and couldn’t clean, the insurance company would cover the costs of someone to come clean your home.  

But what’s worse is if you don’t win a settlement. 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 many people would take.  

Most cases tend to be settled, says Kotak, but he often has to turn people away because it’s likely that they won’t see any money at the end of the settlement due to lack of transparency on the deductible amount and the prohibition on telling juries. 

Where does this leave people with claims? Perhaps, with less than what you anticipated.