Insurance, Human Rights, and Equality Rights in Canada: When Is Discrimination "Reasonable?"

Société québécoise de science politique

Insurance, Human Rights, and Equality Rights in Canada: When Is Discrimination"Reasonable?"Author(s): Thomas FlanaganSource: Canadian Journal of Political Science / Revue canadienne de science politique, Vol. 18,No. 4 (Dec., 1985), pp. 715-737Published by: Canadian Political Science Association and the Société québécoise de science politiqueStable URL: http://www.jstor.org/stable/3228060 .

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Insurance, Human Rights, and Equality Rights in Canada: When is Discrimination "Reasonable?"*

THOMAS FLANAGAN University of Calgary

It has long been common for insurance companies to use certain kinds of personal information, such as age, sex, marital status and health, in rating their customers. The information is used both in establishing premiums and in deciding whether to issue policies to particular customers. In recent years, these well-established practices have come under increasing attack as discriminatory violations of'"human rights." The conflict is heightened by implementation of section 15 of the Canadian Charter of Rights and Freedoms, a process which began on April 17, 1985. This article explores the current state of the law in Canada as well as the likely impact of the Charter. It will argue that the reasons for using otherwise proscribed criteria in insurance rating are so strong that existing practices may fall within the concept of' reasonable limits" to rights, as set forth in section I of the Charter.

Even before the Charter came into effect, Peter Russell predicted it would "expand the policy-making role of the Canadian courts.''I In the first three years of the Charter's life, its greatest impact was on the enforcement of the criminal law. By far the largest number of cases presented to the courts raised issues such as search and seizure or detention (especially breathalyzer cases)." There will, however, be a flood of cases on equality rights now that section 15 has been proclaimed.3 Even before proclamation, the Canadian Advisory Council on the Status of Women had begun preparing a strategy of systematic litigation on feminist issues, particularly, though not exclusively, cases which can be brought under section 15.1 Another area of early concern * The research reported in this article was financially supported by the Social Sciences

and Humanities Research Council of Canada in a project jointly conducted with Rainer Knopff.

1 Peter H. Russell, "The Effect of a Charter of Rights on the Policy-Making Role of Canadian Courts," Canadian Public Administration 25 (1982), 2.

2 F. L. Morton, "Charting the Charter-Year One: A Statistical Analysis," paper presented at the annual meeting of the Canadian Political Science Association, Guelph, 1984.

3 See in general Anne Bayefsky and Mary Eberts (eds.), Equality Rights and the Canadian Charter of Rights and Freedoms (Toronto: Carswell [forthcoming]).

4 M. Elizabeth Atcheson, Mary Eberts, and Beth Symes, with Jennifer Stoddart,

Canadian Journal of Political Science / Revue canadienne de science politique, XVIII:4 (December/ decembre 1985). Printed in Canada / Imprime au Canada



716 THOMAS FLANAGAN

will be fixed-age retirement, which will probably be barred for the public sector by the prohibition of age discrimination in section 15.6 Although each area of policy has its unique factual context, the concepts of discrimination and reasonable limits will apply to all. Thus the arguments developed here about the special case of insurance will be relevant to the broader issue of which existing practices and policies should be considered discriminatory under the Charter.

Insurance and Human Rights Law in Canada

A synopsis of those features of Canadian human rights legislation bearing most directly on insurance is given in Table 1.

The private insurance market is potentially most affected in four provinces: Saskatchewan, Manitoba, Ontario and Quebec. These have passed legislation to prohibit discrimination in contracts, and insurance is a contractual relationship. Recognizing the possible impact of human rights legislation, three of these four provinces have legislated exemptions for the industry. However, in each case the exemption leaves the industry subject to governmental power to declare its practices discriminatory. In Manitoba this power is lodged in the Human Rights Commission, which can promulgate regulations and then decide on that basis whether particular insurance practices are discriminatory.6 The Quebec legislation gives a similar power to the "government," that is, to the Lieutenant-Governor-in-Council, unless there is further delegation.' The Ontario Code forbids the insurance industry to use criteria such as race and religion, and allows use of those of ' age, sex, marital status, family status, or handicap" only "on reasonable and bona fide grounds. "• If a complaint against an insurance rating or underwriting practice is lodged, it follows the same path as any human rights complaint-conciliation by the Human Rights Commission, adjudication by a ministerially appointed board of inquiry, and appeal to the courts.

The first major test of insurance under the Ontario procedure came in 1985. A board of inquiry consolidated two complaints dealing with automobile insurance rates charged to young male drivers into one hearing dealing with the age, sex, and marital status criteria.9 Regardless

Women and Legal Action: Precedents, Resources and Strategies firn the Future (Ottawa: Canadian Advisory Council on the Status of Women, 1984).

5 For background on this issue, see Thomas Flanagan, 'The Future of Retirement in Canadian Universities," Canadian Journal of'Higher Education 14 (1984), 19-34, and "Policy-Making by Exegesis: The Abolition of 'Mandatory Retirement' in Manitoba,' Canadian Public Policy 11 (1985), 40-53.

6 Manitoba Human Rights Act, s. 7(2), am. S.M. 1982, c. 23, s. 20. 7 Quebec Charter of Human Rights and Freedoms, s. 86(8), am. L.Q. 1982, c. 61, s. 21. 8 Ontario HIuman Rights Code, s. 21, S.O. 1981, c. 53, s. 21. For commentary, see Judith

Keene, Human Rights in Ontario (Toronto: Carswell, 1983), 176-79. 9 Brian Hope v. Royal Insurance Co. and Michael G. Bates v. Zurich Insurance Co., 5



Abstract. Insurance classifications that rely on demographic information are often accused of being discriminatory. There is a strong movement, based on human rights legislation as well as the Canadian Charter of Rights and Freedoms, to abolish them. However, analysis shows that the common criticisms of these classifications are self-contradictory and also apply in large measure to the behavioural criteria most commonly proposed as substitutes. Whether current practices are "reasonable" in the sense of the Charter will be an important question for determining the scope of the "equality rights' of section 15 of the Charter.

Resume. On reproche souvent aux classifications d'assurance fondees sur des renseignements A caractere demographique d'etre discriminatoires, et on assiste a l'amplification du mouvement en faveur de leur abolition, alors qu'on invoque la legislation relative aux droits de la personne et la Charte canadienne des droits et libertes. Toutefois, a l'analyse, de telles critiques sont souvent contradictoires puisque'elles peuvent s'appliquer tout aussi bien, dans une large mesure, aux criteres de comportement que l'on propose le plus frequemment en remplacement. Un facteur important pour d6finir l'etendue des << droits a l'egalite >> enonces a l'article 15 sera de d6terminer si la pratique courante est << raisonnable >> selon la Charte.

of outcome at the initial level, lengthy court appeals were likely, given the practical importance of the issue.

In the other six provinces and in federal jurisdiction, it is not clear whether or to what extent human rights legislation covers the private insurance market. In the absence of explicit mention of contracts, coverage might be inferred on the theory that insurance belongs to the class of("services ... customarily available to the public."10 The leading precedent in this direction is the Shandrowski Case, decided by an Alberta board of inquiry in 1978. The board held that the word "services," even though appearing in close conjunction with the words ''accommodation" and "facilities,'' should not be interpreted by the customary rules of eiusdem generis and noscitur a sociis, but should be given a liberal reading to include insurance."

The Shandrowski Case nearly produced a substantial impact on the industry in Alberta. The board found that differential rates for men and women in annuities and in automobile insurance were discriminatory, but declined to award damages or order another remedy. Instead, it recommended that "the appropriate department of government [ought] to hold a hearing before qualified persons that will enable interested parties to present sufficient information [to decide whether] an exemption ought to be inserted in the Alberta Insurance Act insofar as the application of the Individual's Rights Protection Act [IRPA] is concerned."12 When the cabinet proceeded to consider the matter, it was lobbied vigorously by the Alberta Human Rights Commission on

Canadian Human Rights Reporter, D/2248 (1984). (Interim decision on jurisdictional matters.) Hereafter cited as C.H.R.R.

10 Alberta Individual Rights Protection Act, s. 3(a), R.S.A. 1980, c. 1-2. All other provinces have similar wording.

11 Steve Shandrowski v. Alberta Motor Association Insurance Limited, etc., unreported (December 29, 1978), 19-22.

12 Shandrowski, p. 3 of attached "Recommendations."



TABLE 1

HUMAN RIGHTS LEGISLATION AND INSURANCE IN CANADA

Age exemption Ability

Discrimination Exemption Discrimination Discrimination for to in for in in employee regulate

contracts insurance services employment benefits benefits

British Columbia X X X Alberta * X X X Saskatchewan X X X X Manitoba X X X X X X Ontario X X X X X

Quebec X X X X X X New Brunswick X X X Nova Scotia X X X Prince Edward Island X X X Newfoundland X X X Canada X X X X

* Alberta does not have a specific exemption for insurance. However, s. 13(l)(a) of the Individual Rights Protection Act, which allows the Lieutenant-Governor-in-Council to exempt anyone or anything from the Act's application, has been used to protect the insurance industry.

8

0

z

z



Insurance, Human Rights, and Equality Rights in Canada 719

one side and the Insurance Bureau of Canada on the other.13 Unable to reach a definitive conclusion, the cabinet exempted the insurance industry by order-in-council for the period July 20, 1982, to December 31, 1983, using a clause found only in Alberta human rights legislation which allows the cabinet to exempt anyone and anything from the Act.'14 The Alberta Human Rights Commission reluctantly agreed to this first exemption but publicly criticized the government when it issued an extension to April 17, 1985.15

A parallel case from British Columbia, the Heerspink Case, was decided in the Supreme Court of Canada, though the court did not settle the question of whether insurance is a service customarily available to the public.'6 This case concerned the cancellation of property insurance after criminal charges were laid against the policyholder. The Supreme Court wrote three opinions, each supported by three justices. Only one opinion clearly espoused the theory that insurance is a service. Another group of justices skirted the issue, and the third held that, if insurance was a service, the service included all contractual rights, in this case the insurer's right to cancel the policy unilaterally on 15 days' notice. This suggestion was picked up by a British Columbia board of inquiry in the Vitcoe Case, a recent dispute involving a refusal to issue disability insurance because of the applicant's history of seeking medical treatment for depression.17 In Vitcoe, the board held that the insurance company's offer of service to the public included its rating and underwriting practices: " [The company] offered its policies of disability insurance to those who could show on the basis of their medical history that they came within a category determined, in accordance with their prevailing medical and statistical criteria, to be an acceptable risk ... "18 This view was powerfully influenced by a perceived analogy with the Gay Alliance Case. Here, the Supreme Court of Canada had ruled that a newspaper's offer to accept advertising from the public implicitly included the right to accept or reiect advertising at its discretion.19

Much insurance is not sold in the private market but is underwritten for groups, usually in the form of employment benefits. Discrimination in employment benefits is clearly forbidden by human rights legislation in all jurisdictions, but all legislation also contains an exemption authorizing at least the use of age in determining employee benefits. Some jurisdictions also authorize the use of selected other criteria, such

13 Alberta Human Rights Commission, Discrimination in the Insurance Indiustry in Alberta (Edmonton, 1981), 41.

14 The Individual's Rights Protection Act, R.S.A. 1980, c. 1-2, s. 13(1)(a). 15 The Herald (Calgary), December 23, 1983. 16 Insurance Corporation of British Columbia v. Robert C. Heerspink and Director,

Human Rights Code, 3 C.H.R.R. D/1163 (1982). 17 Constance Vitcoe v. Dominion Life Insurance Company, 5 C.H.R.R. D/2029 (1984). 18 Ibid., D/2034. 19 Gay Alliance Towi'ard Equality v. Vancouter Sun (1979), 2 S.C.R., 435.



720 THOMAS FLANAGAN

as marital status in Alberta and disability in Prince Edward Island. Finally, three human rights acts set up some form of regulatory authority over the human rights aspects of employee insurance benefits: in Canada and Manitoba, the human rights commissions may issue guidelines, and in Quebec the government may do so.20 The Saskatchewan Commission has also issued guidelines in this field,21 even though they are only advisory since the act confers no explicit regulatory authority.

One strong trend in this field is to compel insurers to ignore mortality differences between men and women. The Saskatchewan, Manitoba, and Canadian regulations all require either the use of "unisex" mortality tables or some other method to equalize the benefits paid out in pensions or annuities. The employer is required to make up for the ineluctable fact that women on average draw pension benefits longer than men do. "It will not be discriminatory for an employer to make a greater contribution for employees for one sex or the other in order to provide an equal benefit."22

Another trend is to erase any benefit privileges connected with marital or family status. Many pension or insurance plans have rules defining the family members to whom payouts are allowed. The impact of "human rights" in this area is to enlarge the definition of family to include common law marriages or other unconventional relationships. A limiting case was the unsuccessful attempt of a Manitoba civil servant to enrol his homosexual partner in his employer's dental insurance plan.23 The adjudicator ruled that sex, marital or family status were not involved, and that sexual orientation was not covered in the residual clause ("without limiting the generality of the foregoing") of the Human Rights Act.

A final tendency in the benefits field is to require insurers to provide strong justification for using mental or physical disabilities as barriers to coverage in insurance plans.24 Policies usually have health criteria for optional coverage and sometimes for basic coverage. A health requirement can also be a barrier to employment because large employers sometimes refuse to hire anyone who cannot enrol in the company's benefit plans. This should be a fertile field for disputes as more jurisdictions incorporate the intrinsically vague concepts of physical and mental disability into their anti-discrimination legislation. 20 Canadian regulations were first gazetted January 23, 1980, and have been several

times amended. Draft regulations for Manitoba were circulated by mail April 4, 1984. 21 Saskatchewan Human Rights Commission, Human Rights and Benefits in the 80's

(Regina, 1981). 22 Ibid., 25-26. 23 Chris Vogel v. Government of Manitoba, 4 C.H.R.R. D/1654 (1983). 24 For example, the Ontario Human Rights Commission intervened to help a cerebral

palsy victim obtain automobile insurance at standard premiums (Affirmation, June 1984).




The Impact of the Charter

On April 17, 1985, section 15(1) of the Canadian Charter of Rights and Freedom came into effect: 15.(1) Every individual is equal before and under the law and has the right to the equal protection and equal benefit of the law without discrimination and, in particular, without discrimination based on race, national or ethnic origin, colour, religion, sex, age or mental or physical disability. The potential impact of these "equality rights" on the insurance industry is very great, but many legal questions will have to be answered before the effect can be assessed.25

The first question is whether the Charter applies at all to insurance. According to section 32(1)

32.(1) This Charter applies (a) to the Parliament and government of Canada in respect to all matters

within the authority of Parliament including all matters relating to the Yukon Territory and Northwest Territories; and

(b) to the Legislature and government of each province in respect of all matters within the authority of the legislature of each province.

Judicial interpretation of this section is still in its early stages. It has been held that all forms of legislation are included, such as municipal bylaws, regulations, and delegated legislation;2" but there have not yet been decisions about Crown corporations or independent boards and agencies. Commentators regard this as a grey area. Peter Hogg and Katherine Swinton have suggested that Crown corporations may be exempt from section 32 to the extent that they are engaging in commercial activities rather than carrying out regulatory activities.27

Much insurance is sold by Crown corporations such as the Insurance Corporation of British Columbia. Another large body of insurance is offered in the form of fringe benefits by public sector employers such as government departments, school boards, police commissions, hospitals and Crown corporations. Only litigation will establish which of these situations are met by section 32(1). A more tenuous involvement of government in insurance is that the provinces all require automobile owners to carry public liability insurance. Does this legal requirement make the insurance a part of "government" in the sense of 32(1)? The question is bound to be raised sometime in the courts.

25 Claudia Losie, "Employee-Sponsored Pension Plans Under the Charter," Osgoode Hall Law Journal 22 (1984), 513-42, deals with some related issues but not with the points discussed here.

26 McCutcheon v. Corporation of the City of Toronto, 3 Charter of Rights Decisions 125.20-01 (1983). Hereafter cited as C.R.D.

27 Peter W. Hogg, Canada Act 1982 Annotated (Toronto: Carswell, 1982), 77; Katherine Swinton, "Application of the Canadian Charter of Rights and Freedoms (ss. 30, 31, 32)," in Walter S. Tarnopolsky and Gerald-A. Beaudoin (eds.), The Canadian Charter of Rights and Freedoms: Commentary (Toronto: Carswell, 1982), 54.



722 THOMAS FLANAGAN

Even if the Charter were found to apply in all the above cases, there would still be a considerable volume of insurance sold in the market by private sellers which might be beyond the Charter's reach. However, even this sphere of private activity would be swept into "government" by the theory that human rights codes must conform to the Charter. The argument is that such a code, as legislation, is clearly subject to the Charter under section 32(1). If the Charter prohibits discrimination based on, say, age, and a provincial statute only forbids discrimination between ages 45 and 65, the provincial statute would be ultra vires through conflict with the Charter. Since human rights legislation regulates the private sector, this theory indirectly extends Charter coverage to all social relationships, not just to "government."28

The upshot of all this is that the Charter will probably be held to apply to at least some forms of insurance in some situations. What then will be its effect? The first thing to note is that the wording of section 15(1) is extraordinarily sweeping. There are no qualifications on any of the nine criteria for which discrimination is explicitly proscribed: no age maxima or minima, for example, and no special exemptions for insurance, pensions, or benefits plans. Of the nine, four are routinely used in insurance rating schemes: sex, age, mental and physical disability. The wording, moreover, says that individuals are entitled to be treated by the law "without discrimination and, in particular without discrimination based on race [and so forth]." This means that other criteria may be held to be proscribed even though not mentioned in the text.29 Marital and family status are two that are of considerable importance for insurance purposes.

If the courts grant standing to Charter-based attacks on insurance rating practices, insurers will defend themselves under section 1:

1. The Canadian Charter of Rights and Freedoms guarantees the rights and freedoms set out in it subject only to such reasonable limits prescribed by law as can be demonstrably justified in a free and democratic society.

The Supreme Court of Canada has not yet authoritatively interpreted these words. In the only case before it where section 1 was a major issue, the Court held that the legislation in question (Quebec's Bill 101) entailed such an obvious denial of Charter rights that a consideration of "reasonable limits" was not required.30 However, lower court decisions give some guidance, for section 1 has been widely invoked, both successfully and unsuccessfully, in Charter cases.

28 Andrew Petter, "The Charter and Private Action: The Impact of Section 15 on Human Rights Codes," 5 C.H.R.R. C/84-1 to C/85-5 (1983).

29 Mark L. Berlin, New Proscribed Grounds of Discrimination and Emerging Human Rights in Canada (Ottawa: Department of the Secretary of State, 1983), 72.

30 A. G. Quebec v. Quebec Association of Protestant School Boards, [1984], 2 S.C.R., 66.



Insurance, HIlm1an Rights, and Equality Rights in Cianada 723

One issue is that the limitation on rights must be "prescribed by law." This could be a problem for insurers, whose rating systems, while allowed by present legislation, are not prescribed. An anallogy might be drawn with the Ontario Board of Censors Case, in which the Court of Appeal struck down the censors' powers because they were not explicitly delimited in the statute which created the Board, whereupon the Ontario legislature amended the Act to supply the deficiency."• A court might hold that, say, a Crown corporation using suspect criteria in its rating schedules is acting with too much discretion, and a legislature might then legislate to allow such "discrimination."

At the next level, battle would be joined over whether insurance rating schemes constitute 'reasonable limits" to "equality rights." The insurers would certainly have the burden of demonstrating reasonable justification; for once a prima facie showing of discrimination has been made, the onus shifts to the defendant.32 Insurers would not have to show that their rating practices were "demonstrably necessary," only that they were "demonstrably justified." The issue would raise at least the following three questions: (1) Is the objective a rational one to pursue? (2) Is the limitation of rights proportional to the objective? (3) Are similar limitations of rights commonly found in other constitutional democracies?33

Even though no one can foresee how the courts will answer these questions, it is clear that judicial consideration of the substantive rationality of insurance practices will be required, not only in Charter-based challenges to insurance but also in human rights challenges such as the one being heard in Ontario in 1985. After a brief look at the legal situation in the United States, this article examines the internal logic of insurance rating schemes. It will be seen that rating practices are rational in the economic sense of allowing more insurance to be sold at lower cost, and that the common criticisms of these practices are self-contradictory. Thus there is at least a plausible case that insurance rating schemes are "reasonable limits" on "equality rights" (Charter) or "reasonable and bona fide grounds" (Ontario) for using otherwise impermissible categories.

The United States

The same issues of insurance and human rights have been raised in the United States, but in a somewhat different legal setting. Whereas in Canada the Charter may make discrimination in insurance a

31 Ontario Board of Censors v. Ontario Film and Video Appreciation Society, 38 C.R. (3d) 271. 45 O.R. (2d), 80.

32 National Citizens Coalition v. A. G. Canada, 5. C.R.D. 325.20-01 (1984). 33 Black v. Law Society of Alberta, 5 C.R.D. 685-01 (1984).



724 THOMAS FLANAGAN

constitutional matter, the question has not been litigated in the United States under the equal protection clause of the Fourteenth Amendment. But judicial construction of Title VII of the Civil Rights Act has produced important results at the national level with respect to the "unisex" aspects of insurance.

The leading case is Los Angeles Department of Water and Power v. Manhart (1978). The Department had maintained its own pension fund, to which female employees, because of their longer life-expectancy, had to contribute about 14 per cent more than male employees in order to obtain the same annual pension benefits. After California legislatively forbade such arrangements, contributions were equalized on January 1, 1975. Manhart, however, sued to obtain repayment of excess contributions made before that date. The Supreme Court of the United States ultimately denied her claim for retroactive repayment, but ruled that the scheme had in fact violated Title VII. This makes it unlawful "to discriminate against any individual with respect to his compensation, terms, conditions, or privileges of employment, because of such individual's race, color, religion, sex, or national origin.''34 The majority held that "even a true generalization about the class is an insufficient reason for disqualifying an individual to whom the generalization does not apply.'"35

The Manhart Case applied only to employer-operated pension plans. Its narrow purview was extended somewhat in the Norris Case (1983), which concerned the pension arrangements made by the state of Arizona for its employees.36 The state did not have its own pension fund, but offered employees a choice of annuity arrangements operated by private insurers. The state made payments on the employees' behalf, thereby obtaining tax deductibility. The issue in question was that all private insurers involved in the scheme, using conventional sex-based mortality tables, offered lower annual payouts to women than to men after retirement. By a 5-4 majority, the Supreme Court held that participation of private insurers did not change the character of these pensions as employment benefits subject to Title VII.

The Norris Case has left the law in an unclear state. It applies only to employment benefits, not to similar annuities sold in the open market. It allows employers to get out of pensions altogether by making equivalent cash payments to employees as supplements to salary. In such a scheme, avoidance of discrimination means equal payments to men and women. But if the recipients then purchase their own annuities in the market, they will encounter the "sex discrimination" forbidden

34 42 U.S.C. 2000 e-2(a)(1). 35 Los Angeles Department of Water and Power v. Manhart 435 U.S. 702, at 708 (1978). 36 Arizona Governing Committee for Tax Deferred Annuity and Deferred Compensation

Plans v. Norris, 103 S. Ct. 3492 (1983).




by Manhart and Norris. They also will have lost the advantage of tax

deductibility. As the minority in Norris saw, the effect of the decision was to destabilize current pension arrangements without offering a feasible alternative.37

Matters are also stalemated in Congress. In 1983, Senator Robert Packwood, a Republican from Oregon, introduced the Fair Insurance Practices bill, which would have required unisex tables for all forms of insurance. The bill gathered wide support initially but was eventually defeated by strong lobbying from the life insurance industry. Sellers of life insurance were particularly opposed because the bill's retroactivity would have created large unfunded obligations for them. A study by the General Accounting Office estimated these at $32 billion, large enough to bankrupt many pension funds and insurance companies, and this was decisive in blocking the measure."3 However, feminist groups continue to lobby for unisex legislation.

Several states, such as California, Michigan, Massachusetts, and North Carolina, have legislated to prohibit use of gender and in some cases other demographic criteria in insurance rate-making. Over time, therefore, a body of data will accumulate to provide empirical evidence about the effects of such legislation upon insurance. Until such definitive studies are available, argument must remain primarily theoretical, as discussed in the rest of the article.

How Does Categorization Arise?

As late as 1950, automobiles in Ontario were rated in only two classes, business and pleasure use. Age-over and under 25-was then added as a factor, followed by sex in 1957 and marital status in 1964.39 Age has repeatedly been refined into smaller brackets, while aspects of claims experience and traffic convictions record have also been factored into the system. Similar schemes exist in other provinces, with minor variations of detail. In life insurance, it was at one time customary to charge nonwhites higher premiums than whites in recognition of their higher mortality rates, but that practice is now defunct.40 In all lines of insurance, even when companies tend to follow broadly similar (but not identical) rating schemes, the actual rates charged to different categories may vary from company to company.

37 Ibid., at 3506, n.4. 38 Journal of Commerce, April 9, 1984, 7A; ibid., April 25, 1984, 7A; Fortune, July 25,

1983, 21-22. 39 Insurance Bureau of Canada, Classification and Rating Criteria for Automobile

Insurance: An In-depth Study by an All-Industry Special Committee (Toronto, 1982), 3-4.

40 Spencer L. Kimball, "Reverse Sex Discrimination-Manhart," American Bar Foundation Research Journal (1979), 112.



726 THOMAS FLANAGAN

Critics point to facts like these to suggest that categorization is arbitrary and unjustifiable.41 However, that criticism would be persuasive only if human beings were endowed with perfect knowledge and did not need to learn from experience. Insurance rating schemes arise through an undirected process of social learning, and their variability across time and space only shows that conditions are not always and everywhere the same, and that experience brings improvement.

Insurance is a way of protecting oneself against an uncertain future by pooling risks with others in a group. One accepts the small, predictable loss of paying premiums in return for protection against large but uncertain losses caused by sickness, accident, premature death, or extended old age. Insurance is necessary and possible only because of the uncertainty of the future. If we all knew exactly when we would die or have a major accident, we could ourselves plan for and save against these contingencies.

We can make more or less educated guesses about future events even if we cannot predict them with certainty. This has an immediate bearing on insurance through the phenomenon of "adverse selection." Individuals are capable of making rough calculations about their future, using private information which insurers do not possess. If the rates are the same for all, those who calculate their chances of mishap as high will perceive insurance as an attractive option. Thus arise incentives for higher risks to be drawn to insurance plans and for lower risks to remain outside insurance and make their own provisions for the future. An insurer cannot go after this business by simply cutting premiums across the board, for the higher-risk policyholders would then not contribute enough to the pool to fund their expected pay-outs. A way must be found to identify lower-risk customers to bring them into the market.

This method is categorization based on actuarial data. By keeping claims statistics, an insurer can empirically discover which groups of customers present lower risks than others. Offering defined groups coverage at a reduced premium corresponding to their expected cost to the pool is a way of attracting new policyholders from among the uninsured or of winning over customers from competitors.42 Once started, categorization will proceed by its own momentum until an equilibrium is reached in which the market is divided into many classes of insurance purchasers, each group paying premiums which cover

41 "Companies are at liberty to choose arbitrarily which set of tables best suits the purpose of the company" (Alberta Human Rights Commission to Henry Kroeger, Minister of Transportation, September 18, 1980, 3, in Alberta Labour Library [Edmonton]).

42 Walter Block, "Economic Intervention, Discrimination and Unforeseen Consequences," in W. E. Block and M. A. Walker (eds.), Discrimination, Affirmative Action, and Equal Opportunity (Vancouver: Fraser Institute, 1982), 115-16.




expected claims for the group. The process will result in finer and finer categories until the marginal cost of further refinement does not yield a corresponding increase of business to the seller.43

There is no a priori limit on the number or type of categories which insurers will find expedient to integrate into their rating schemes. However, a useful category will have several desirable characteristics. It will be based on information which is inexpensively available and which is not readily falsified; it will be stable over time; it will reliably predict the claims record of groups; it will separate the population into groups which are internally homogeneous and externally distinct from one another in their claims behaviour; and finally, it will be

psychologically acceptable to the public so that it does not drive customers away or mobilize political pressure against the industry.44

The widespread use of demographic variables such as age, sex, and marital status in insurance is chiefly due to their accessibility, cheapness, verifiability, and stability. Sex can be determined at a glance and is invariant. Age and marital status are readily verified through use of public records. Age changes, but the changes are easily recorded. Marital status is also subject to change, but only through solemn legal procedures which are recorded for easy verification. Demographic variables are also reliably correlated with many aspects of behaviour important in insurance, such as mortality, sickness, and propensity for accidents.

Behavioural categories, in contrast, are usually expensive to construct and verify. The number of miles driven correlates well with automobile accidents, but no one knows how far one will drive in any future year. A system of checking odometers would be expensive and would be subject to fraud. Cigarette smoking correlates well with mortality, but it is an unstable variable. Smokers may repeatedly give up and reacquire their habit or may vary the degree of usage. Also, how is a seller to verify the information without obnoxious intrusions into privacy? Behavioural variables are often highly predictive and are used in many rating schedules, but the problems of cost, stability and privacy cannot be wished away.

The real issue in the current human rights debate about insurance is the public acceptability of demographic categories. Race, for example, was once widely used in life insurance but has now been abandoned, even though it remains for some groups an excellent predictor of mortality (for example, native Indians). But the continued use of race in insurance would seem anomalous in a society dedicated to racial equality. The current question is whether age, sex, marital status, and

43 George J. Benston, "The Economics of Gender Discrimination in Employee Fringe Benefits: Manhart Revisited," University of Chicago Law Review 49 (1982), 501.

44 Massachusetts Division of Insurance, Automobile Insurance Risk

Classification-Equity and Accuracy (1978), 2-6.



728 THOMAS FLANAGAN

perhaps other categories should be abandoned for analogous reasons; and if so, what will be the cost?

Arguments Against "Discriminatory" Rating Practices

Individual Treatment

Marlene Antonio, chairman of the Alberta Human Rights Commission since 1981, is quoted as saying, "People, no matter who they are, should be charged on individual characteristics, not clumped together."45 The Saskatchewan Commission says of the physically disabled seeking insurance, "in order to eliminate the detrimental effect of these assumptions and generalizations about persons with disabilities, individual assessments are required.... ."46

Such statements, if meant to be taken literally, are incoherent. Forecasts of future risk can only be made with reference to group characteristics. We do not know when a particular person will die, but we can forecast with a high degree of precision that next year a particular percentage of women now aged 40 will die, or that a certain percentage of male drivers aged 18-19 will be involved in an auto insurance claim. There is no escape from grouping. The only choice is whether to lump all policyholders into one undifferentiated pool-surely the opposite of treating people as individuals-or to devise a set of subordinate groups to distribute risk actuarially. If the latter path is taken, secondary questions arise about how many groups will be in the rating schedule and how they will be defined, but groups still remain.47

The demand for treating people as individuals in insurance matters is probably an imprecise way of demanding that people not be irrelevantly categorized, or that people be categorized according to behavioural criteria rather than by immutable demographic characteristics. But individuals will always be grouped, no matter what scheme is employed. To charge more to drivers who had an accident last year is to create a new statistical group. We can change group definitions but we cannot stop grouping as such.

Overlap

The Canadian Advisory Council on the Status of Women criticizes gender-based mortality tables in the following terms: "In reality, fully 80% of male and female pensioners of the same age have the exact same year of death. Solely responsible for the four-year gap in life expectancy

45 Alberta Motorist, 1 (July/August 1984), 9. 46 Saskatchewan Human Rights Commission, Human Rights and Benefits in the 80's,

36. 47 Ontario Legislative Assembly, Select Committee on Company Law, The Insurance

Industry.: First Report on Automobile Insurance (Toronto, 1977), 110.



Insurance, H-Linan Righits, and Equality Rights in Canada 729

are the 10% of the aged population made up of men who die relatively early, and the 10% composed of women who survive relatively late.''48 Critics of insurance often use a diagram similar to Figure 1 to illustrate their point. The average age at death of the two sexes is measurably different, but a relatively small number of individuals is alleged to account for the difference.

FIGURE 1

"OVERLAP" OF MALE AND FEMALE MORTALITY

males

4-4 females

overlap - 81%

65 75 85 95

Age at death

Source: Canadian Life Insurance Association, "Classification on the Basis of Sex in Life

Insurance," submission to the Alberta Human Rights Commission, 1979, 4.

A problem with this line of argument is that it confuses ex ante and ex post reasoning. At the beginning of the time period in question, we have no way to identify precisely when individuals will die or how many accidents they will have. At the end of the period we know who the high and low risks were as individuals, but at the outset we have only categorical information based on past experience.49

Also, a similar overlap will occur with any conceivable system of classification.50 In situations where we are able to make categorical

48 Quoted in Saskatchewan Human Rights Commission, Human Rights and Benefits in the 80's, 15.

49 Ibid., 4-5. 50 Ibid.



730 THOMAS FLANAGAN

predictions without uncertainty, that very fact precludes a desire for insurance. Insurance is desired precisely in situations of uncertainty, where overlaps inevitably occur, even with the behavioural classifications which are favoured by human rights activists. Data from North Carolina in the early 1970s, displayed in Table 2, illustrate the problem. Of those with no accidents in the previous three years, 97.7 per cent will remain accident-free in the fourth year. But at the other extreme, of those atrociously unskillful or unlucky drivers who had four accidents in three years, 69.6 per cent will also be accident-free in the fourth year.

TABLE 2

RELATIONSHIP OF PRIOR ACCIDENTS TO FUTURE ACCIDENTS

Number of accidents in Proportion Average number of preceding 3 years of drivers accidents in 4th year

0 84.4% .056 1 13.0 .099 2 2.1 .157 3 0.4 .230 4 0.1 .304

Source: Samuel A. Rae, Jr., and Michael J. Trebilcock, Rate Determination in the Automobile Insurance Industry in Ontario (Toronto: Insurance Bureau of Canada, 1982), 37.

Insurers would agree with their critics that the less overlap, the better for everyone, and rating plans can be refined so as to increase predictive accuracy and decrease overlap. But it is disingenuous for critics to condemn current practices because of overlap, with the implication that an overlap-free alternative exists. It does not.

Causality

"Does 'gender' really affect how long a person lives," asks the Alberta Human Rights Commission, "or do other factors determine a person's longevity?''5" A great debate has raged over whether men in advanced industrial societies die earlier than women because they are men, or because they smoke and drink more, work under greater stress, take less care of their health, and expose themselves more to risk of accident.52

51 Alberta Human Rights Commission, Discrimination in the Insurance Industry in Alberta, 21.

52 See Lea Brilmayer et al., "Sex Discrimination in Employer-sponsored Insurance Plans: A Legal and Demographic Analysis," University of Chicago Law Review 47 (1980), 505-60; and the critique by Benston, "The Economics of Gender Discrimination." Benston lists other literature on p. 491, n. 10.




Analogous questions have arisen over the undoubted fact that young male drivers have more accidents than female drivers of the same age. Research in California has shown that young men drive many more miles than young women and under worse conditions. The female accident rate per mile driven is actually higher at all ages for women than for men.53 The implication in such arguments is that insurance classifications should be based on the causal factors which "really" produce the undesired contingencies to be guarded against.

But the argument will not stand up to serious scrutiny. First, the purported causal links are fragile at best. Accidents are "caused" by complex interactions of driver error, vehicle failure, and unfavourable road or weather conditions. Mileage driven is merely a statistical indicator of exposure to risk. The same is true mutatis mutandis of health variables like smoking, drinking, and stress. The most that can be said is that behavioural variables intuitively seem to stand closer to the event than do demographic variables, but the difference is one of degree, not of kind.

Furthermore, even if a variable like mileage driven intuitively seems to stand closer to accidents than does gender, it is not necessarily a more fundamental "cause." That men consistently drive more miles than women is a logical outcome of sex roles, not just an arbitrary or random fact. To what extent the division of labour between the sexes is itself socially or genetically "caused" is an interesting and much debated question, but not directly relevant to insurance rating practices.

The notion of the "real cause" of accidents (or of anything else) has no determinate meaning: it could be anything from faulty brakes to the genetic code, depending on the frame of reference adopted. Modern social science has largely abandoned the search for causation in the study of social aggregates, relying instead upon statistical correlation. To insist that insurance rating schemes employ only "real causes" will plunge them into a morass, for no factor will ever be able to withstand rigorous scrutiny. The purposes of insurance demand premiums founded upon statistically reliable prediction, not upon the philosophically outmoded chimera of causation.

Efficiency

It is sometimes maintained that insurance rating schemes can be improved if they abandon demographic categories in favour of behavioural variables.54 Everyone on all sides of the question agrees that demographic categories like age or gender are proxies for the incidence of the behaviour in which insurers are actually interested. In principle, 53 Massachusetts Division of Insurance, Automobile Insurance Risk Classification, 11. 54 New Jersey Department of Insurance, In Re: Hearing on Automobile Insurance

Classifications and Related Methodologies: Final Determination-Analysis and

Report (1981), 52.



732 THOMAS FLANAGAN

more reliable predictions ought to be made possible by using behavioural factors standing closer to the event, say in the case of automobile accidents, mileage driven, previous claims, record of convictions, type of car owned, or level of driver's training undergone.

This approach, which is a refined version of the naive causal theory discussed above, is undoubtedly true in an abstract sense. Insurers have integrated many behavioural variables into their schemes and are always experimenting with new ones, such as life insurance discounts for nonsmokers or nondrinkers.

Beyond the quest for greater reliability of prediction, behavioural variables sometimes create an incentive effect.55 If insurance premiums strongly reflect mileage driven or foolish health habits, the policyholder has a financial incentive to behave in a way that, statistically at least, tends to reduce claims. There is even some incentive benefit in

demographic categories, albeit in a crude form. High rates for categorical poor risks may dissuade, say, young men from driving at all. But since behavioural variables relate to events which are at least

partially under individual control, their incentive potential is on the whole much higher than that of demographic variables.

This potential advantage, however, may not always be realizable because of cost. Behavioural variables are often expensive to develop, unstable in their application, and subject to fraud. Consider mileage driven. An individual often has little idea of how many miles he has driven in the past year, let alone how many he will drive in the coming year. It is also in his interest to underestimate his mileage to take advantage of lower premiums. If mileage is to become an insurance rating variable, there will have to arise a comprehensive system of odometer checks sophisticated enough to deal with such matters as multiple ownership and car sales and purchases. Whether the contribution of such a system to prediction is worth the cost is an empirical question answerable only through experience.

Insurers already make extensive use of behavioural variables where the necessary infrastructure of information exists. Automobile insurance, for example, uses claims record, convictions record, type and use of car, and completion of drivers' training courses.56 Human rights criticism amounts to a demand to rely more on these variables and less on proscribed demographic criteria. This is a paradoxical demand if, as assumed in this section, it is made in the name of economic efficiency. Insurance companies already recognize that their competitive position will be enhanced if they can develop more efficient rating plans. Identification of potential customers whose risk is not reliably measured by existing schemes (for example, those young males who are less likely

55 Massachusetts Division of Insurance, Automobile Insurance Risk Classification, 4-6. 56 Ontario Legislative Assembly, Select Committee on Company Law, The Insurance

Industry: First Report, 99-108.



Instiranc?e, Htuman Rigihts, and Equality Rights in Canada 733

to have claims) would lead to an increase in business for the underwriter. The insurance industry in Canada is highly competitive, with about 100 companies, many of which are actually groups of subordinate

companies.'51 Thus the logic of innovation in a competitive market should apply. If insurers are not relying on behavioural variables as much as their critics would like, the obvious explanation is that they have not yet found cost-efficient ways of doing so.58

The real question is whether human rights critics, without practical experience or investment in the industry, can make judgments about efficiency better than those who are actually engaged in the business. The plausibility of such criticism rests upon unexamined and untenable premises about the superior wisdom of intellectuals who deal in ab- stractions as opposed to businessmen who deal in concrete details.59

Intrinsic Fairness

A general principle of human rights is that people ought not to be treated differently on the basis of "immutable characteristics""0 which are not directly related to the situation at hand. Gender, for example, should not affect insurance rates because being male or female is not an intrinsic part of dying, falling sick, or having an accident. This is seen by human rights advocates as an extension of the ethos of a liberal society in which we ought to treat people according to what they do, not who they are.6' It is a moral imperative transcending technical considerations of overlap, causality, or economic efficiency.

This view cannot be logically disproved, but one can indicate some problems attendant upon it. The first difficulty is that, of the variables relevant to insurance-gender, age, marital or family status, and mental or physical handicap-only gender is truly an immutable characteristic. Age is not within the power of the person to alter, but it does not permanently divide society into distinct groups; it is a series of stages through which we all pass. A young man pays more for auto insurance and less for life insurance, while the situation is reversed for a middle-aged man. But each man is treated the same during his lifetime, so that seeming inequities in any year are eventually balanced out. Marital or family status are not immutable in any sense since they result from conscious decisions to marry, bear or adopt children, cohabit, or divorce; they are actually behavioural criteria. However, because they 57 Insurance Bureau of Canada, Facts of the General Life Insurance Industry in Canada

(Toronto, 1983), 40-43. 58 Samuel A. Rae, Jr. and Michael J. Trebilcock, Rate Determination in the Automobile

Insurance Industry in Ontario (Toronto: Insurance Bureau of Canada, 1982), 86-87. 59 Thomas Sowell, Knowledge and Decisions (New York: Basic Books, 1980), 331-67. 60 Alberta Human Rights Commission, to Henry Kroeger, Minister of Transportation,

September 10, 1980, in Alberta Labour Library (Edmonton). 61 New Jersey Department of Insurance, Hearing on Automobile Insurance

Classifications, 82.



734 THOMAS FLANAGAN

create long-lasting conditions, they have some analogy with immutable characteristics. Finally, physical and mental handicaps are also somewhat unlike truly immutable characteristics. Although often having genetic roots, they can also be self-inflicted, or at least self-aggravated (obesity may contribute to the harm done by diabetes or arthritis). Their effects can often be ameliorated by medical intervention (surgery), prosthetic appliances (artificial limbs, hearing aids), social inventions (seeing eye dogs, sign language), systematic instruction ("special education"), and so on. Moreover, at least some handicaps will be directly relevant to insurable perils, such as poor eyesight in driving, or diabetes in life insurance.

Second, it is not self-evident that the individual's dignity is any more harmed by being categorized as, say, a young, unmarried male than as a driver with two claims and a conviction in the past three years. It may be objected that a person has no role in choosing one's sex and age, whereas claims and convictions result from personal actions. But this is only partly persuasive. Accident claims often arise from situations like bad weather or heavy traffic for which the individual is minimally responsible. It is instructive to note that while insurance critics have proffered claims and convictions as substitutes for demographic variables, several jurisdictions, at the instigation of human rights activists, have now prohibited using criminal record as a factor in employment situations.62 How long will criticism of insurance practices be directed solely at "immutable" or quasi-immutable characteristics like sex, age, marital status, or handicap? The underlying problem is the unknowability of the future. Any prediction, whether based on demographic or behavioural criteria, is only a statistical extrapolation of past evidence. If predictions based on demographic evidence rob the individual of dignity by emphasizing factors over which he has no control, predictions based on behavioural data also detract from his dignity by assuming that he must behave in the future as he has in the past.

It may be that ultimately only insurance based on an undifferentiated pool will be able to withstand human rights criticisms, for only then will all individuals be treated identically according to arithmetic equality. This extreme result is not visible in particular reform proposals because they are always tied to the limited wording of individual statues. The benefits guidelines of the Saskatchewan Human Rights Commission emphasize that age is a legitimate criterion in benefit plans and that "Canadian legislators have dealt with the question of age and benefits differently from the question of sex and benefits."63 But it

62 British Columbia, Ontario, Northwest Territories, Canada (the latter two only in respect of pardoned offences).

63 Saskatchewan Human Rights Commission, Human Rights and Benefits in the 80's, 22.



Insirainee, HlItiuma RighKts, htand Equality Rights in Canada 735

would be naive to place too much trust in the limitations of current legislation. Human rights is a dynamic movement which continually gives rise to legislative innovations and amendments. It is more realistic tojudge the movement by extrapolation of its axioms than by reliance on current limitations."4

Consequences: Intended and Unintended

Before forcing changes upon anything so complex and well-established as insurance practices, prudence demands an attempt be made to assess the general direction of the consequences, even if they cannot be measured precisely.

Transitional costs will be involved in any large-scale reform of insurance practices. If demographic variables are proscribed, new information systems will have to be devised, actuarial data collected, manuals printed; meanwhile staff will have to be trained in the new systems. Such costs will have a significant but not devastating impact. Rating practices are changed frequently anyway; this would just be a period of accelerated change.

A more serious difficulty is the chain of redistributive effects which will be caused by a major modification of rating practices. Proscription of demographic variables is bound to mean premium increases for some and decreases for others. There cannot be only decreases without increases, for changing the rating system does not reduce the expected claims, which must still be funded through premiums as before.

The size of these increases and decreases has been much debated. While the magnitude of the redistributions may be in doubt, the direction is clear. Young, unmarried male drivers will pay less for automobile insurance while everyone else will pay more if all demographic categories are purged from the system. If only gender is deleted, young women may be the big losers, depending on how age is treated."5 Men will have to pay more for annuities but less for life insurance than they now do, while for women the situation will be exactly reversed.

These redistributions are only first-order effects, and other consequences will quickly begin to make themselves visible. To take automobile insurance as an example, any rating plan which cannot use demographic variables will have to put even more stress on the behavioural variables of claims and convictions. Young male drivers may have an initial premium much lower than they do now, but those

64 Thomas Flanagan, "The Manufacture of Minorities," in Neil Nevitte and Allan Kornberg (eds.), Minorities and the Canadian State (Oakville, Ont.: Mosaic Press, 1985), 107-23.

65 B. G. Dahlby, "Adverse Selection and Statistical Discrimination: An Analysis of Canadian Automobile insurance," University of Alberta, Department of Economics Research Paper No. 81-3 (1981).



736 THOMAS FLANAGAN

who have a typical number of accidents and traffic tickets may face draconian increases leaving them with higher premiums than under the current system. Even though there will be some young male drivers whose rates will be lower, it is possible that the new regime will produce a higher average premium in oractice for young male drivers as a group.

This unintended consequence of reform is rather speculative, but others are plainly foreseeable. To reform insurance rating schemes does not remove existing knowledge from the minds of either insurers of policyholders, and these gaps between knowledge and law will produce predictable incentives for adverse selection.

In auto insurance, underwriters will still know that young male drivers are high risks. They may, for example, underwrite young males only if they receive substantial other business from the family. Many young men, particularly those who are self-supporting, may find themselves thrown into "the Facility," as Ontario calls the pool of high-risk drivers who are distributed among all insurers on a pro rata basis.66 Enlarging this group will produce a general upward pressure on the premium structure.

In the field of pensions, even if reformers succeed in requiring the use of unisex mortality tables, employers will still know that women live longer than men on average. Employers have the choice of providing pensions by creating a special fund or by purchasing annuities from insurance companies on behalf of their employees. Small and medium-sized companies find that this "money purchase" approach saves them administrative expense. If insurers are required to offer blended annuity rates for men and women based on unisex tables, employers will have an incentive to purchase annuities for the women but to self-insure the men. Insurers, facing a changing market dominated by female annuitants, will have to revise their unisex mortality tables to something close to female only, reflecting their new clientele. When rates are adjusted accordingly, annuities for women will cost as much as they did before the reform, while annuities for men, costing the same as for women, will be higher than before.67 In the name of equality of opportunity, no one will be better off and some will be worse off.

Conclusion

It is clear that insurance rating practices are threatened by current legal trends, both in human rights legislation and in Charter of Rights litigation. However, analysis of these classifications suggests they are "reasonable" in several different respects. They arise from innovation

66 Rae and Trebilcock, Rate Determination in the Automobile Insurance Industry in Ontario, 84-85.

67 Canadian Life Insurance Association, "Classification on the Basis of Sex in Life Insurance," submission to the Alberta Human Rights Commission, 1979, 9.




in competitive markets, not from any intention to repress or discriminate against minority groups. They serve to make more insurance available to the public at a lower average cost, even though members of some categories may have to pay higher than average rates. The common criticisms of insurance rating will not withstand serious analysis; the assumption that demographic categories can be entirely replaced by behavioural variables is an article of faith, not a well-tested proposition. Analysis further suggests that reforms based on such a fragile intellectual foundation will have disruptive consequences for the industry resulting in higher average costs and difficulties for some categories of customers in obtaining coverage at any price. All of these considerations should be relevant to tribunals and courts when they weigh, as they will surely be required to do, whether insurance rating schemes are "reasonable limits" to our constitutionally guaranteed "equality rights."

Following the tests laid down in Black v. Law Society of Alberta, courts will have to ponder whether the objectives of insurance classification are rational, whether the means are proportional to the end, and whether similar practices are accepted in other constitutional democracies.68 The answers will have to be consistent with answers to many other questions that the Charter is bound to raise about common social classifications related to gender, age, or other variables. Is it a reasonable limitation on equality rights to prevent women from serving in combat units in the armed forces or to prevent children from entering school until they are 6 years old, from obtaining a driver's license until they are 16, or from voting until they are 18?69 Such questions have always been dealt with in the past in Canada by legislatures or administrative agencies; it will be an unprecedented challenge for the courts to confront them in judicial form.

68 5 C.R.D. 685-01 (1984). 69 Howard Cohen, Equal Rights Jor Children (Totowa, N.J.: Rowman and Littlefield,

1980).



Insurance, Human Rights, and Equality Rights in Canada: When Is Discrimination "Reasonable?"

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