Royal Insurance Company of Canada v. Sandra Clark, 1997 ONICDRG 174

Office of the Director of Arbitrations

Neutral Citation: 1997 ONICDRG 174

Appeal P97-00008

ROYAL INSURANCE COMPANY OF CANADA Appellant

and

SANDRA CLARK Respondent

Before: David R. Draper, Director's Delegate

Counsel: Stanley C. Tessis and Mark D. Isaacs (for Royal Insurance) John J. Cardill and John F. Bruce (for Sandra Clark)

APPEAL ORDER

Under section 283 of the Insurance Act, R.S.O. 1990, c.I.8, as amended, it is ordered that:

1. The appeal of the arbitration decision, dated January 21, 1997, is dismissed and the arbitration decision is confirmed.

2. The appeal of the arbitration decision, dated March 11, 1997, is allowed and the arbitration decision is revoked. I remained seized of this issue as set out in the Reasons for Decision, attached.

3. Sandra Clark is entitled to her reasonable appeal expenses, payable by Royal Insurance Company of Canada.

September 26, 1997

David R. Draper Director’s Delegate

Date

REASONS FOR DECISION

I. NATURE OF THE APPEALS

Royal Insurance Company of Canada ("Royal") appeals from two arbitration decisions, dated January 21, 1997 and March 11, 1997. The appeal issues are:

(i) Did the arbitrator err in refusing to allow Royal to set off the overpayment made to Sandra Clark against future weekly income benefits, arbitration expenses, or a special award payable to her?

(ii) Did the arbitrator err in refusing to allow Royal to deduct post-accident income, specifically, income of $8,750.00 per year from her husband's company that she reported on her 1993 and 1994 personal income tax returns?

(iii) Did the arbitrator err in ordering Royal to pay a special award of $7,500, plus interest, under section 282(10) of the Insurance Act?

II. BACKGROUND

Mrs. Clark was involved in an automobile accident on August 16, 1992, resulting in significant injuries. Royal paid her weekly income benefits of $600 under section 12 of Ontario Regulation 672, Statutory Accident Benefits Schedule - Accidents Before January 1, 1994 ("the Schedule"). She continued to receive benefits until August 23, 1995, when Royal stopped paying on the basis that she did not meet the stricter post-156 week test in section 12(5)(b) of the Schedule.

Following an unsuccessful mediation, the question of Mrs. Clark's entitlement to further weekly income benefits went to arbitration. Royal also raised questions about the proper amount of her benefits and claimed a repayment. Before the arbitration hearing finished, the parties agreed that although Mrs. Clark received $600 per week for 156 weeks, her entitlement was only $481.23 per week. Royal acknowledged that Mrs. Clark was not to blame for the overpayment and did not ask for an order requiring her to repay it out of her own pocket. It claimed, however, that if any additional amounts were found owing, the overpayment should be recovered from those payments.

The arbitration hearing took place over four days. Twenty-two exhibits were filed and six witnesses testified, including Mrs. Clark. Both parties also filed written submissions.

In her decision dated January 21, 1997 ("Decision No. 1"), the arbitrator found that Mrs. Clark's injuries continuously prevented her from engaging in any suitable occupation or employment. Therefore, she ordered Royal to pay weekly income benefits from August 24, 1995 at $481.23. She also ordered Royal to pay Mrs. Clark's arbitration expenses. Royal was allowed to reduce the amount payable by $5,385.99, being 80 per cent of the income Mrs. Clark earned from two post-accident jobs. However, the arbitrator rejected Royal's argument that it should be allowed to reduce it any further.

Royal appealed this decision. It does not challenge the arbitrator's conclusion that Mrs. Clark is entitled to post-156 week benefits. It submits, however, that she erred in refusing to allow it to set off the following amounts against its obligation to pay additional weekly income benefits, arbitration expenses, or a special award:

• the overpayment resulting from Royal paying $600 per week instead of $481.23 per week ($18,528.12); and

• 80% of the income that Mrs. Clark declared from her husband's business on her personal income tax returns ($8,750.00 in both 1993 and 1994).

In Decision No. 1, the arbitrator raised the possibility of a special award against Royal for unreasonably withholding or delaying the payment of benefits to Mrs. Clark. Because it had not been raised previously, she stated in her decision that she remained seized of this issue and invited the parties to make written submissions within 30 days of the decision.

Both parties gave the arbitrator written submissions on the issue of a special award. Royal argued that she had no jurisdiction to order a special award because the notice requirements of section 8 of the Statutory Powers Procedure Act, R.S.O. 1990, c. S.22, as amended, had not been met. Further, Royal submitted that it would be contrary to the principles of natural justice and fairness to order a special award because it had no notice of the issue until it received Decision No. 1. Finally, Royal argued that even if the arbitrator had authority to order a special award, it was not warranted because benefits had not been unreasonably withheld or delayed.

The arbitrator issued her second decision on March 11, 1997 ("Decision No. 2"). After concluding she had jurisdiction to order a special award, she went on to find that Royal "had no reliable medical evidence to support its view that Mrs. Clark could return to work full-time on August 23, 1995," and that its actions "amounted to bad faith." As a result, she ordered Royal to pay a special award fixed at $7,500 plus interest. Royal appealed this decision, making essentially the same arguments it made to the arbitrator - that she had no jurisdiction to make the order, but even if she did, the facts did not warrant a special award.

III. THE APPEALS

The appeals proceeded by way of written submissions and oral submissions by telephone conference call.

A. The Overpayment

The parties agree that as a result of receiving $600 per week instead of $481.23, Mrs. Clark was overpaid by $18,528.12. The question is whether the arbitrator should have allowed Royal to recover this overpayment from any further amounts it is obliged to pay her. Because the amounts ordered by the arbitrator have been paid, Royal now asks to recover the overpayment by reducing Mrs. Clark's future weekly income benefits.

The arbitrator held that Mrs. Clark was not required to repay the overpayment because it was not paid "though error or fraud," within the meaning of section 27 of the Schedule. Section 27(1) states as follows:

27. -(1) A person must repay to the insurer any benefit received under this Regulation that is paid to the person through error or fraud.

In reaching her decision, the arbitrator relied on the decision in Levenson and The General Accident Assurance Company of Canada, (February 18, 1992, OIC A-000260), which held that benefits are not paid "through error" unless the insured person contributed to the overpayment in some material way. Because Mrs. Clark was not responsible for the overpayment, the arbitrator concluded she was not required to make any repayment. She was not persuaded that it made any difference that Royal was asking to recover the overpayment by setting it off against other amounts owing, instead of demanding that she repay it directly.

On appeal, Royal submits that section 27(1) is not relevant because it is asking for set-off, not repayment. I am not persuaded this is a meaningful distinction. Whatever the means of recovery, the question is whether Mrs. Clark is required to reimburse Royal for the amount it paid above her entitlement under the Schedule. Arbitration and appeal decisions have held that overpayments can be recovered from other amounts owing, including weekly benefits for further periods of entitlement and expenses.¹ In each of these cases, however, there was an initial decision, explicit or implicit, that the overpayment was recoverable.

For example, in Bruno, the overpayment resulted from Mrs. Bruno's receipt of retroactive Canada Pension Plan benefits covering a period for which she had already been paid weekly benefits. Section 27(3) of the Schedule specifically makes this kind of overpayment recoverable. In Boodhai and Upper, I found that the insured person contributed to the overpayment by providing inconsistent information and documents. The question, therefore, was not whether the overpayment should be repaid, but how.

Royal's position is understandable. From its perspective, it was ordered to pay additional benefits without being given credit for the benefits it already paid above Mrs. Clark's entitlement. In my opinion, however, the insurer's view must be balanced with the insured person's need to rely on the benefits he or she receives. While insurers can look at claims in the long-term, individuals who must meet their ongoing expenses are likely to find that more difficult. In this case, the amount of Mrs. Clark's weekly income benefits was not questioned until after they were terminated, and Royal acknowledged she was not responsible for the overpayment. In the circumstances, I am not persuaded the arbitrator erred in refusing to allow Royal to recover the overpayment.

Royal argued in the alternative that the plain meaning of section 27(1) allows recovery of benefits paid in error, whether the error is the insured's or the insurer's. I recently dealt with this issue in Lunn and State Farm Mutual Automobile Insurance Company, (April 30, 1997, OIC P-013860). In that case, the insurer argued that the analysis in Levenson was flawed, and that section 27(1) should be given its plain meaning. Although I found merit in the insurer's argument, I concluded that it did not undermine the approach taken in Levenson:

I share the view underlying Levenson that an "innocent" insured person should be able to rely on the benefits he or she receives without being left vulnerable to a later claim for repayment based on new calculations or a different interpretation of the Schedule.

Accident benefits are meant to respond to the immediate financial consequences of automobile accidents, covering basic needs such as medical treatment, transportation, and income replacement for those who are unable to return to work. To achieve the purposes of the accident benefits scheme, both parties have obligations. The insured person must notify the insurer of the accident and provide medical and financial information. The insurer must promptly evaluate the claim and pay benefits if the person is eligible. In my view, the fact that a later reevaluation leads to a different conclusion does not necessarily mean that the benefits were paid "through error."

The determination of whether benefits were paid "through error" will depend on the particular facts of each case. The focus, however, should be on the situation at the time the benefits were paid. If the insured person materially contributed to the overpayment, it must be repaid. However, if the overpayment is based on information that legitimately was not available earlier, or on later arbitral or court decisions affecting the interpretation of the Schedule, repayment is not required, although the insured person's ongoing benefits could be affected. (Decision, p.8)

I find no reason to take a different approach in this case. Weekly income benefits are designed to replace income and, therefore, it can be assumed that insured persons generally rely on these payments to maintain their pre-accident standard of living. This is likely to be true even if it is determined later that the amount paid was somewhat more than the person's entitlement under the Schedule.

Royal also contends that Lunn is not fatal to its claim, relying on my statement that "ongoing benefits could be affected." It argues that Mrs. Clark is not being asked to repay the overpayment directly, but only that her ongoing benefits be reduced in recognition of the overpayment. Taking the advantage of authorship, I do not believe the quoted portion of Lunn supports Royal's position. It merely suggests that an insurer is not obliged to continue paying benefits at the wrong amount. In this case, Royal was ordered to pay additional benefits at the correct rate, not the rate paid for the first 156-weeks.

B. Income From Husband's Business

Mrs. Clark's husband, Richard Clark, is the proprietor of a business called Triple T Trainers.

This business involves the training of individuals and organizations in the handling of hazardous materials. Mrs. Clark declared business income of $8,750.00 from this business on her 1993 and 1994 income tax returns. At the arbitration hearing, Royal argued that it should be able to deduct 80 per cent of this income, including similar amounts for 1995 and 1996, as post-accident income. The arbitrator rejected this argument as follows:

Both Mr. and Mrs. Clark testified that Mrs. Clark did not work at her husband's business. The $8,750.00 reported in Mrs. Clark's income tax returns for 1993 and 1994 was at the advice of their accountant, for the purposes of splitting Mr. Clark's income to reduce his payable tax.

Mr. Clark testified that he owns a business called Tripple Trainers. His work requires him to be away from home for long periods of time. His business provides training on how to deal with hazardous materials for groups and organizations, such as firefighters. He also teaches first-aid. He stated that his work is very technical and that his wife does not understand it.

Mr. Clark ran his business from his home. He testified that the paperwork for his business could be done in less than an hour. Mrs. Clark testified any assistance that she gave her husband was of a very minor nature. She stated that, on occasion, she would answer the phone on her husband's behalf, and book a training. She would receive faxes and occasionally prepare a brief letter. She has not received any remuneration for this work. Her husband confirmed this in his testimony.

Royal did not present any concrete evidence that Mrs. Clark, in fact, worked in her husband's business after the accident, or that she received any money from her husband. I found both Mr. and Mrs. Clark credible witnesses. I accept their evidence that Mrs. Clark did not work for Tripple Trainers and that the income tax returns for Mrs. Clark in 1993 and 1994 were prepared for the purpose of income splitting.

On appeal, Royal argues that the income tax returns were prima facie evidence that Mrs. Clark earned post-accident income from her husband's business and, therefore, it was up to her to provide reliable evidence to prove otherwise. Royal submits that the arbitrator erred in requiring it to prove that Mrs. Clark worked for her husband.

I agree with Royal that income tax returns are prima facie proof of income. I also agree that the onus was on Mrs. Clark to show why her reported income should not be treated as post-accident income. However, the arbitrator accepted the testimony of Mr. and Mrs. Clark that this was an income splitting arrangement suggested by their accountant and did not reflect "income received or available from any occupation or employment subsequent to the accident." As I read the decision, it does not suggest that Royal had the primary burden of proof. It says that Mrs. Clark met her onus through the credible testimony of herself and her husband, and Royal did not present any evidence to cast doubt on her position.

Royal also submits that the evidence does not support the arbitrator's finding that Mrs. Clark had no post-accident income from her husband's business. It claims that Mrs. Clark acknowledged providing services to the business, she told Dr. Gillen that her typical day included helping her husband with his business, and she and her husband asked their accountant to value her services in preparing their income tax returns. In a family business situation where real work is done and given a value, Royal argues that an arbitrator should be slow to look behind the valuation. In support of this proposition, it refers to the arbitration decisions in James and Allstate Insurance Company of Canada, (May 17, 1996, OIC A-015580) and E.Z. and Royal Insurance Company of Canada, (November 14, 1995, OIC A-005237).

While I accept Royal's submissions about the general approach in this type of case, I conclude there was evidence to support the arbitrator's findings. Both Mr. and Mrs. Clark testified that her services were minimal and that she reported income to reduce Mr. Clark's tax liability. The transcript leaves me with the impression that Mrs. Clark did not have regular duties, but did what she could to help, particularly when he was away from the house. As her counsel argued in his appeal submissions, this was work without any commercial value.

Mrs. Clark's comments to Dr. Gillen also support the arbitrator's finding that this was an income splitting situation, not real income. She saw Dr. Gillen in late 1995 and told him that as part of a typical day, she helped her husband with his business. However, this was a year in which Mrs. Clarke did not declare any income from the business. She and her husband explained at the arbitration hearing this was because his income was sufficiently reduced that he did not need to split it with her. The arbitrator accepted this evidence, as she was entitled to do.

Finally, I find the James and E.Z. decisions readily distinguishable. In James, the insured person had an ownership interest in the family business and regular duties. The situation in E.Z. was the reverse of Mrs. Clark's. The insured person wanted to include income from her husband's business as pre-accident income. The insurer argued that she had no real income, only income reported for the purpose of income splitting. The arbitrator was satisfied, however, that the insured person "performed valuable work for the business for which she was entitled to be remunerated." She found that the insured person had a list of tasks and that her reported income was not an "unreasonable exchange for her services." The extent and scope of the tasks done by the insured person in E.Z. distinguish it from this case.

In summary, the treatment of income depends on the particular facts of the case. There was evidence to support the arbitrator's findings and, therefore, I am not prepared to interfere.

C. Special Award

In Decision No. 2, the arbitrator ordered Royal to pay a special award of $7,500 plus interest, under section 282(10) of the Insurance Act, which states:

282.- (10) If the arbitrator finds that an insurer has unreasonably withheld or delayed payments, the arbitrator, in addition to awarding the benefits and interest to which an insured person is entitled under the Statutory Accident Benefits Schedule, shall award a sum of up to 50 per cent of the amount to which the person was entitled at the time of the award together with interest on all amounts then owing to the insured (including unpaid interest) at the rate of 2 per cent per month, compounded monthly, from the time the benefits first became payable under the Schedule.

Royal makes a number of alternative arguments with respect to the special award. In its submission, the arbitrator had no authority to make the order because the notice requirements in section 8 of the Statutory Powers Procedure Act ("the SPPA") were not met, or because the lack of notice violated the principles of fundamental justice and fairness. In the alternative, Royal contends that even if the arbitrator had the authority to make the order, the facts do not support a finding that it unreasonably withheld or delayed the payment of benefits. Finally, Royal argues that even if a special award was warranted, it should not have been at the high end of the range, in part because the overpayment Mrs. Clark already received should have been considered.

(i) The Statutory Powers Procedure Act

Section 8 of the SPPA, which applies to arbitration hearings under the Insurance Act, provides as follows:

8. Where the good character, propriety of conduct or competence of a party is an issue in a proceeding, the party is entitled to be furnished prior to the hearing with reasonable information of any allegations with respect thereto.

[emphasis added]

Royal contends that because it did not receive notice before the hearing, the arbitrator could not order a special award based on the propriety of its conduct. In my opinion, however, section 282(10) gives arbitrators the authority to impose a special award based on the evidence presented at the hearing, whether or not notice was given before the hearing. In other words, a special award is always a possibility if the arbitrator finds that the insurer unreasonably withheld or delayed the payment of benefits. The specific notice requirements in section 8 of the SPPA do not apply, although the more general common law principles of natural justice and fairness must be met.

This interpretation is consistent with my decision in Leitgeb and Allstate Insurance Company of Canada, (November 16, 1995, OIC P-012407). Although that appeal dealt with the scope of pre-hearing productions, I held that the insured person's assertion that a special award should be ordered should not be treated as a separate claim. Director's Delegate Naylor recently followed Leitgeb in Tagarin and Simcoe & Erie General Insurance Company, (February 26, 1996, OIC P-004660), holding that she could consider a special award although it had not been an issue at the arbitration:

Subsection 283(7) of the Insurance Act makes subsection 282(10) applicable on an appeal. It confers a discrete authority on an appeals adjudicator to make a special award in his or her own right. Therefore, the adjudicator may consider making a special award even though it was not a subject at arbitration. This may be at the request of the insured or at the adjudicator's own initiative, provided always that the requirements of procedural fairness have been met. For this reason, I am prepared to consider Mr. Tagiran's claim for a special award.

As a result, I do not accept Royal's argument that the arbitrator's jurisdiction to order a special award depended on compliance with section 8 of the Statutory Powers Procedure Act.

(ii) Principles of Natural Justice and Fairness

I accept Royal's submission that the principles of natural justice and fairness required notice that it was facing a special award order and a reasonable opportunity to respond. The question is whether the process here was fair.

The arbitration hearing took place in November 1996, with written submissions filed by mid-December 1996. The issue of a special award was not raised until the arbitrator issued her decision on January 21, 1997. At page 43, it states as follows:

In this case, it may well be argued that by terminating Mrs. Clark's benefits, Royal might be found to have acted unreasonably. I therefore remain seized on the issue of special award. I am prepared to entertain written submissions on this issue, and the parties should exchange their submissions and forward them to the Commission within 30 days of the issue of this decision. If no submissions are received within 30 days of the issue of this decision, I shall render my decision on the issue of special award.

Mrs. Clark accepted the arbitrator's invitation and made written submissions, arguing that Royal should be ordered to pay a special award at the maximum rate of 50 per cent of the benefits owing. Royal also made written submissions, arguing essentially the same points as on appeal.

I am troubled by the process. The arbitrator had the authority to raise the issue of a special award on her own initiative, but had to give Royal a reasonable chance to respond. Parties to arbitration hearings are asked to present their cases concisely and rely on documentary evidence where possible. It cannot be assumed, therefore, that evidence relevant to a special award will be led. For example, an adjuster's testimony may be unnecessary unless a special award is in issue.

In the particular situation here, I accept Royal's contention that it would have presented its case differently if it had known a special award was being considered. It did not call the adjuster or any of its medical experts as witnesses. I am not persuaded, therefore, that allowing written submissions was sufficient. However, I do not agree with Royal's contention that even re-opening the hearing for further evidence would be unfair. In my opinion, that was the appropriate course. While Royal might have asked for a chance to submit evidence, Decision No. 1 specifically asks for written submissions, not further evidence.

As a result, I conclude that the requirements of natural justice and fairness were not met and, therefore, the special award cannot stand.

(iii) Was the Special Award Warranted?

Royal claims there was a genuine conflict in the medical evidence and, therefore, a special award was not warranted. Alternatively, it argues that the amount of the special award should not have been at the top end of the scale.

Following the release of Decision No. 1, the parties agreed that $13,585.77 was owing to Mrs. Clark, plus interest. The interest was calculated as $2,234.19, making a total of $15,819.96, which Royal paid. The arbitrator ordered a special award, but set it at $7,500 plus interest, nearly the 50 per cent maximum.

There was some suggestion that the arbitrator should not have used the post-interest amount ($15,819.96), but was limited to 50 per cent of $13,585.77. Given my other conclusions, I do not have to decide this issue.

After reviewing the record, I am not persuaded I should second-guess the arbitrator's strong findings about the medical evidence, particularly without a full transcript of the arbitration hearing. Therefore, the special award issue must remain open. However, I agree with Royal that the arbitrator should have considered the overpayment in exercising her discretion on the amount of the award.

In conclusion, the special award order is revoked due to the lack of procedural fairness. A partial rehearing will be scheduled before me to deal with the issue of whether Royal should be ordered to pay a special award and, if so, what amount.

IV. APPEAL EXPENSES

These appeals were legitimate, fairly presented and partially successful. Royal acted responsibly in promptly paying the amounts ordered by the arbitrator. In my opinion, however, Mrs. Clark should receive her reasonable appeal expenses.

September 26, 1997

David R. Draper Director’s Delegate

Date

¹ For example, Boodhai and Allstate Insurance Company, (November 21, 1994, OIC A-004002), affirmed on appeal, (September 18, 1996, OIC P-004002); Bruno and Liberty Mutual Insurance Company, (May 6, 1993, OIC A-002249), affirmed on other grounds on appeal, (March 8, 1996, P-002249); Upper and Canadian General Insurance Company, (June 3, 1994, OIC A-002855); Younathan and GAN Company of Canada, Ltd., (December 4, 1996, OIC A-012214), affirmed on other grounds on appeal, (July 29, 1997, OIC P96-00088).