Wednesday, July 17, 2013

Compound interest is the norm

Zacharias v. Zurich Insurance Company, 2013 ONCA 482 is an insurance case with implications beyond the insurance field. The court considers whether under specific legislation interest payable is simple or compound (an easy decision on the specific legislation). In so doing the court makes general statements showing that compound interest is the norm even where there is some ambiguity; specifically for interest to be simple it needs to be expressly identified as such. This has implications  throughout commercial law. The Court writes:

[51]       The implications of this difference in terms of legislative intent of compensating insureds for the loss of the time value of money and encouraging the prompt payment of benefits, are significant.

[52]       Through the daily calculation of interest, s. 68 comes closer to providing full compensation for the insured's loss of the time value of money as interest is calculated on fluctuating overdue amounts.

[58]       It is important to note that compound interest does not penalize.  It compensates.  A penalty for conduct that goes beyond benign delay is provided for in s. 282(10) of the Insurance Act, set out above that requires an insurer to be sanctioned in circumstances where a finding is made that the insurer has demonstrated an unreasonable lack of regard toward its obligations to pay benefits on a timely basis.

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