Top five predictions for how autonomous vehicles will change the insurance industry and auto claims in the next 10 years

13 minute read
08 August 2016

Contributions to this article were also made by articling student Emma Dalziel.

In April 2016, the headlines read: "Tesla nearing 400,000 model 3 orders". This is very exciting news for proponents of all electric vehicles and, very likely, the world's first mass-market, semi-autonomous vehicle ("SAV"). Model 3s are scheduled to be delivered in 2018, so in the next few years we will have at least half a million SAVs on the road - and that's only from one car manufacturer. A recent report by the Business Insider estimated that there will be 10 million SAVs on the road by 2020.

Not only will SAVs and eventually fully autonomous vehicles ("FAV") - which should become available by 20251 - bring significant changes to the way society travels and lives, these vehicles will also have an impact on the insurance industry and the way that all auto claims will be litigated.

Gowling WLG has compiled a "Top 5" list of predictions for how the insurance industry and motor vehicle accident litigation may change as a result of these vehicles being introduced to our roads. Not surprisingly, because SAVs and FAVs are a part of a nascent industry, these predictions give rise to many important questions that a few stakeholders have only begun to tackle.

1. Fewer Tort and AB Claims Leading to Less Loss Overall

Currently, driver error can account for up to 90% of motor-vehicle accidents each year.2 As automated driving technology becomes increasingly common, human error associated with driving will be partially removed from the streets.3 Automated driving systems are able to react much more quickly than a human, with reaction times varying between one tenth of a second and one second respectively.4 For an insurance company, this split second difference will be the difference between paying out on a claim and not having to spend at all.5 Already research has shown that vehicles with current safety technology, such as front crash prevention, have a 7-15 percent lower claim frequency under property damage liability than vehicles without this feature.6 Ultimately, less claims will translate into much lower total losses for carriers.

However, we also know that accidents involving SAVs will still occur, especially in the short run when the technology is still in "Beta," and as we saw recently the results can be deadly. On June 30, 2016, Joshua Brown became the first person to die in a SAV accident when the autopilot sensors on his Model S failed to distinguish a white tractor-trailer crossing the highway against a bright sky. When accidents involving SAVs do occur, litigation will most likely be more costly. Each SAV accident claim will give rise to a liability dispute involving many parties. Will the industry's cost savings due to lower total losses be offset by higher costs of litigating the remaining claims?

2. More Product Liability Litigation

There are several questions about how insurance will change with automated vehicles. Are we going to insure the person? The car? The technology company? With self-automated cars it is likely the future will be less about personal liability and instead will move towards finding liability for the 'glitch' that caused the accident. This will increase liability on software developers and vehicle manufacturers for the technology underpinning the vehicle.7 Do insurers have the right training programs to assist their auto adjusters in identifying product liability issues related to SAVs and eventually FAVs?

3. Increased Length/Expense Associated with Auto Trials Leading to Many New Questions That Remain Unanswered

Increased complexity of the vehicles and their technology will mean trials to ensure these vehicles are safe for the road will be longer and consequently more expensive. Many new questions will have to be answered on a case-by-case basis, including:

  1. If a driver of a non-autonomous vehicle crashes with a semi-autonomous vehicle, who shall bear responsibility? Does the manufacturer still bear some responsibility for allowing the crash? Are there existing cases in Canada or the US that can we look to today that have the necessary legal framework to resolve these claims?
  2. Will the insurance industry need to develop guidelines similar to the Fault Determination Rules to deal with accidents involving FAVs and/or SAVs?
  3. What existing regulations or conventions can law makers or regulators look to for guidance?
  4. What is the right choice if a FAV or SAV is faced with two bad choices? Who gets to make those decisions when writing the code?

In terms of question (a), unlike in the United States, Canadian courts have shied away from imposing strict liability upon manufacturers and distributors in the absence of legislation. Instead, a plaintiff may need to prove that any damage or injury resulting from a "decision" of a FAV or SAV was the result of negligent design.

A manufacturer may be liable for negligent design where it failed to design a product in a safer manner.8 In Rentway Canada Ltd v. Laidlaw Transport Ltd,9 the court engaged in a risk-utility analysis in order to determine whether the design of a headlight electrical circuit in a transport truck was negligent. This analysis involves determining whether the foreseeable utility of the chosen design outweighs foreseeable risks associated with that design.10 In Rentway, Granger J borrowed from American jurisprudence the following 7 factors, which may be included in this analysis:

(1) utility of the product to the public as a whole and to the individual user;
(2) the nature of the product - that is, the likelihood that it will cause injury;
(3) the availability of a safer design;
(4) the potential for designing and manufacturing the product so that it is safer but remains functional and reasonably priced;
(5) the ability of the plaintiff to have avoided injury by careful use of the product;
(6) the degree of awareness of the potential danger of the product which reasonably can be attributed to the plaintiff; and
(7) the manufacturer's ability to spread any costs related to improving the safety of the design."11

When the software onboard a FAV or SAV makes a choice that results in damage or injury, a court may undertake a similar risk-utility analysis to determine whether the underlying software was negligently designed. The outcome of this analysis may determine the liability, if any, of the manufacturer. Will Canadian courts turn to the risk-utility analysis when determining liability for a manufacturer in an accident involving a SAV? Only time will tell but it seems that Rentway is a good starting point.

Before being able to answer question (b), it is helpful to take a brief look at the legislative intent behind Fault Determination Rules.

In State Farm Mutual Automobile Insurance Company v. Aviva Canada Inc., the Court of Appeal found as follows:

The legislation which creates the loss transfer scheme consists of the relevant provisions of the Insurance Act together with the FDRs. The purpose of the loss transfer scheme is to provide for an expedient and summary method of spreading the cost of statutory accident benefits among insurers, in a gross and somewhat arbitrary fashion, favouring expediency and economy over finite exactitude.12

Thus, whether the insurance industry will need to develop guidelines similar to the Fault Determination Rules (e.g. if a SAV crashes into a non-autonomous vehicle, do they split 50/50 liability) will depend on how expensive it will be to litigate questions of liability involving a SAV or FAV. If even minor crashes lead to a very costly investigation then perhaps Fault Determination Rules for minor accidents involving SAVs or FAVs will be adopted.

As for question (c), for guidance, Canadian courts will have a plethora of legislation to look to. Many states in the US have already enacted legislation related to autonomous vehicles, including Washington D.C., Nevada, California, Florida, Michigan, North Dakota, and Tennessee.13 By way of example, Washington, D.C. passed bill 2012 DC B 19-0931 which:

Defines "autonomous vehicle" as "a vehicle capable of navigating District roadways and interpreting traffic-control devices without a driver actively operating any of the vehicle's control systems." Requires a human driver "prepared to take control of the autonomous vehicle at any moment." Restricts conversion to recent vehicles, and addresses liability of the original manufacturer of a converted vehicle.14

Enacted and effective from April 23, 2013

Finally, question (d) is a very important one that is outside of the scope of this article and one that can only be resolved after much debate between all stakeholders.

4. More Commercial Insurance vs. Personal Insurance

The marketplace will likely move away from personal vehicles and instead towards a marketplace where vehicle sharing structures are used.15 This could create a "mobility on demand" society.16 Already this is becoming more popular among young people in urban settings where they choose not to own their own vehicle. This will result in an increase in commercial auto insurance covering these urban fleets of vehicles.17 This will lead to a corresponding decrease in personal auto insurance as less vehicles are owned personally. What changes do insurers need to make to their workforce in anticipation of this change?

5. New Players

With this new reality bringing fundamental changes to the insurance industry, the door has been opened for new players to enter into the industry. Google has already emerged and dipped their toes into the insurance industry with Google Compare Auto Insurance Services. However, this product only helps users compare car insurance in order to choose the right product, and as of March 23, 2016 was discontinued by Google. What new business models will emerge out of this changing industry?

As decisions on SAVs and eventually FAVs make their way through the court system, undoubtedly the insurance industry will be watching closely and adapting their products (i.e. providing and revising policy coverage) as these initial cases are decided.

SAVs are already here and FAVs are on the horizon. By the end of this decade SAVs will likely become a common sight on the road. The insurance industry, the role of auto insurance adjusters, and the way that motor vehicle accident cases will be litigated will certainly undergo significant changes. The insurers that work proactively to prepare for these changes will no doubt fare the best as we enter this new era.

1 KPMG, "Marketplace of change: Automobile insurance in the era of autonomous vehicles" (October 2015) at 26.

2 Ibid at 25.

3 Ibid.

4 Ibid.

5 Ibid.

6 Ibid at 26.

7 Ibid at 28.

8 O'Brien v Bard Canada Inc, 2015 ONSC 2470, 2015 CarswellOnt 5377, at para 14.

9 [1989] OJ No 786, 1989 CarswellOnt 23 [Rentway].

10 Andersen v St. Jude Medical Inc, 2012 ONSC 3660, 2012 CarswellOnt 896, at para 61.

11 Supra note 9 at para 55.

12 State Farm Mutual Automobile Insurance Company v Aviva Canada, 2015 ONCA 920 at para 56.

13 "Autonomous | Self-Driving Vehicles Legislation" (6 June 2016), online: National Conference of State Legislatures.

14 Ibid.

15 Supra note 1 at 28.

16 Ibid at 28.

17 Ibid.

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