When and how is interest payable on overdue benefits?

Summary

The interest rate on overdue benefits is now payable at a rate of 1% per month, compounded monthly, for accidents on or after Sept. 1, 2010.

Any accidents prior to Sept. 1, 2010, are still payable at the rate of 2% per month, compounded monthly.

What does this mean?

The current low interest rate environment might have helped insurers, as the New SABS (Ont. Reg. 34/10) dropped the interest rate on overdue payments from 2% to 1%.

Subsection 46(2) of the Old SABS (Ont. Reg. 403/96), which required interest on overdue amounts at 2% per month, compounded monthly, has been removed. The New SABS adds subsection 51(2), which requires interest at 1% per month, still compounded monthly, for overdue amounts.

Interest under the Schedule is recognized to be remedial, not punitive, according to Judge John Laskin in Attavar v. Allstate Insurance Company of Canada. It is intended to encourage insurers to pay benefits promptly, while compensating insureds for the time value of money. Without this provision in the SABS, “insurers would have an incentive to delay paying benefits properly owing, thus forcing insureds to litigate their claims,” he notes.

While the interest rate for overdue benefits might have decreased to 1%, it should be pointed out there has been no change, as yet, to subsection 282(10) of The Insurance Act. As such, interest payable for special awards under this section remains at 2% per month, compounded monthly, from the time the benefits first became payable.

How is the interest calculated?

When it comes to calculating the interest rate, it is set by the date of the MVA, not by the date the amount becomes overdue, according to Federico vs. State Farm Mutual Automobile Insurance Co. FSCO 1024 and Subramaniam and Wawanesa FSCO 3858.

Therefore, for any accidents prior to Sept. 1, 2010 interest is calculated for each day the amount is overdue at 2% per month, compounded monthly, no matter when a specific benefit becomes overdue.

For any accidents after Sept. 1, 2010, interest is calculated for each day the amount is overdue at 1% per month, compounded monthly.

The interest is calculated to an interest settlement date – the date the outstanding amounts plus interest will be paid by. If the entire outstanding amount plus interest is not paid by that date, additional interest would be owed. A late payment does not impact the benefit owing, only the interest owing.

It is important to note that if payments are unreasonably withheld, it may result in a special award being owed. For additional information on Special Awards, search the ADS blogs for this term.

An Income Replacement Benefit (IRB), Non-Earner Benefit (NEB), Caregiver Benefit (CG), payment for Housekeeping or Home Maintenance Services (HHS) and Attendant Care Benefit (ACB) are overdue if not paid within 10 business days of receipt of the required information (s.36 and 42). Interest is owing after this time if payments are not made.

Further, IRBs, NEBs, and CGs are to be paid at least once every other week. Consequently, interest is considered owing on these benefits on the last day of each bi-weekly period.

For lump sum amounts, which are usually benefits being calculated retroactively for an extended period of time, interest would be owing as of the date the amount became overdue. This would again usually be 10 days after the insurer was provided with the required information upon which to assess the amount owing.

Are you sure about the 2% for all pre-Sept 2010?

The Financial Services Commission of Ontario (FSCO) released a transitional bulletin on April 26, 2010 that suggested the date of the accident would not impact the interest rate. The rate would be based on the date the benefit amount became overdue.

Federico and Subramaniam found otherwise, however.

According to Arbitrator Maggie Murray (Federico), not only are the sections in the bulletin relating to interest “confusing,” but also “bulletins by the Superintendent are not law. Interest is a matter of substantive law and is compensatory.”

She goes on to note, “the New Regulation does not state that the insured’s substantive right under subsection 46(2) of the Old Regulation is altered.” Further, “paragraph 3(1.4)(a) of O. Reg 35/10 supports the interpretation that after August 31, 2010, interest is payable under the New Regulation but in the amount determined under the Old Regulation.” Finally, “the reference in subparagraph 2(2)2.i. of the New Regulation does not authorize an interference with a vested right under subsection 46(2).  Rather, this paragraph is consistent with the interpretation that the Applicant’s vested right under the earlier interest section is not to be interfered with.”

She concluded that, “because the Old Regulation prescribed the rate of 2%, I find that the applicable rate of interest both before and after September 1, 2010 is 2% per month compounded monthly.”

A Judicial Review supported her decision on Jan 6, 2014.

What this means for you

ADS is pleased to offer an online interest calculator for situations such as those outlined above. Whether for pre or post-Sept 2010, our calculator will identify for you the benefits paid, outstanding, and a complete summary of the interest owing. For more information, sign-up for membership at www.adsblog.me/ADSmember

As always, if you have any other questions, don’t hesitate to contact an accountant directly at 1-800-380-7908 ext. ASK (275) or by email at answers@adsforensics.com.

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