Neutral Citation: 1997 ONICDRG 76

OIC A96-001499

BETWEEN:

DESMOND MCLENNON

Applicant

and

PILOT INSURANCE COMPANY

Insurer

DECISION ON A PRELIMINARY ISSUE

The Applicant, Desmond McLennon, received statutory accident benefits from Pilot Insurance Company ("Pilot"), payable under the Schedule¹ After Pilot terminated weekly income replacement benefits on August 21, 1995, Mr. McLennon applied for arbitration under the Insurance Act, R.S.O. 1990, c.I.8, as amended. Shortly after applying for arbitration, Mr. McLennon signed a full and final release. Two business days after signing the release he attempted to rescind the settlement agreement.

Mr. McLennon says he did not intend to fully settle his claims for benefits. He also relies on section 9.1 of the Settlement Regulation² which allows an insured to rescind a settlement. Pilot takes the position that Mr. McLennon cannot rescind the settlement because he waived the application of the Settlement Regulation by express agreement.

The issues in this hearing are:

Is Mr. McLennon precluded from proceeding to arbitration as a result of the settlement agreement he entered into with Pilot?
Is Mr. McLennon precluded from rescinding the settlement as a result of the agreement he made with Pilot to waive the provisions of the Settlement Regulation?
Does Mr. McLennon have to repay the settlement funds to Pilot before he can proceed with an arbitration on the merits of his claim?

Mr. McLennon also claims his expenses incurred in the hearing.

The settlement agreement which was entered into by the parties was rescinded. Accordingly, Mr. McLennon may continue with the arbitration, subject to conditions.
Mr. McLennon is denied his expenses of this hearing and must pay the Insurer's assessment fee.

The hearing was held at the offices of the Ontario Insurance Commission in North York, Ontario, on March 4, 1997, before me, John Friendly, Arbitrator. At the conclusion of the hearing I asked the parties to prepare written submissions which were received from David Muttart on March 12, 1997 and from Grace Pang on March 17, 1997.

Present at the Hearing:

Applicant:

Desmond McLennon

Mr. McLennon's Representative:

David Muttart Barrister and Solicitor

Pilot's Representative:

Grace Pang Barrister and Solicitor

Witnesses:

Desmond McLennon

Applicant

Brenda McKillen

former supervisor, Accident Benefits Unit, Pilot Insurance

Exhibits:

Exhibit 1

Full and Final Release dated September 13, 1996

Exhibit 2

Untitled "Waiver" dated September 13, 1996

Exhibit 3

Written Notice From Pilot Insurance Company (5 pages undated)

Exhibit 4

Written ("rescission") Notice dated September 16, 1996

Exhibit 5

Fax dated July 26, 1996 to Jeffrey Goldman from Pilot Insurance

Evidence and Findings:

Events leading up to the Settlement

Pilot paid income replacement benefits at the rate of $185 per week to Mr. McLennon following his motor vehicle accident of May 8, 1995. Mr. McLennon was involved in a second motor vehicle accident on July 14, 1995 for which he claimed caregiver benefits. Pilot, however, continued to pay income replacement benefits until August 21, 1995 when benefits were terminated altogether. Mr. McLennon was then involved in a further accident on November 10, 1995. Pilot has not paid weekly benefits to Mr. McLennon as a result of this third accident.

Some time in January 1996 Mr. McLennon and Brenda McKillen, who was then Supervisor of Accident Benefits at Pilot, discussed settling his claims for all three accidents. After some negotiation over the telephone they arrived at a figure of $5,000. Mr. McLennon went to pick up the funds at Pilot's Yorkdale branch office but refused to sign a full and final release.

In early March 1996 Mr. McLennon commenced a mediation. On May 6, 1996, the mediator issued three reports (one for each accident) indicating that all issues in dispute had failed to settle. Mr. McLennon was represented at the mediation by his lawyer, Jeffrey Goldman.

Following mediation, Mr. McLennon contacted Ray Stone of Pilot to discuss the mediation settlement offer of $10,000 for all three accidents. Mr. Stone rejected Mr. McLennon's counter proposal of $500,000 in a July 26, 1996 fax sent to Mr. McLennon's lawyer.³ On or about August 3, 1996, Mr. McLennon informed Pilot that Mr. Goldman no longer represented him. He spoke to Ms. McKillen again by telephone on August 16, 1996. At Mr. McLennon's request, Ms. McKillen agreed to send him Pilot's written settlement offer.

On September 3, 1996, the Commission received Mr. McLennon's Application for Arbitration dated August 15, 1996. On the application form, Mr. McLennon wrote:

The insurer has refused to pay benefits to which the insured is entitled having submitted an offer to settle for $10,000 for full and final release for all outstanding claims. To date there is an outstanding balance in the sum of $28,250.96 inclusive of medical and legal fees which the insurer refused to pay.

The Settlement negotiations

On Monday, September 9, 1996, Mr. McLennon telephoned Pilot to request an "advance" of funds to attend his sister's funeral in Jamaica which was to take place on Sunday, September 15, 1996. Mr. McLennon said he asked for $30,000, the amount he believed Pilot owed him. According to Mr. McLennon, the manager to whom he spoke, said that he "would make some money available, but wanted to talk about settlement, which would have to wait till [Mr. McLennon] returned from Jamaica." The manager told Mr. McLennon he or someone else would get back to him.

On Friday, September 13, 1996, Ms. McKillen called Mr. McLennon. According to Mr. McLennon she told him the manager spoke with her and Pilot was prepared to offer him $15,000. To receive the money he "would have to sign some papers." Mr. McLennon said he argued for more money but Ms. McKillen remained firm. Following their conversation, Mr. McLennon met with Ms. McKillen at Pilot's head office to sign the relevant documents and pick up his cheque.

Ms. McKillen remembered the conversation differently, but her testimony did not differ in any essential respect. She testified she was reluctant to enter into negotiations because her earlier attempt to settle with Mr. McLennon came to nought. She did want to settle, however, and reasoned that on an "economic" basis she could add $5,000 to Pilot's previous settlement offer. Ms. McKillen said Mr. McLennon told her he needed the cheque that day so she told him to go to her office between 3:00 and 4:00 p.m.

The witnesses were in substantial disagreement about what occurred at the Pilot office that afternoon. Mr. McLennon felt he was rushed by Ms. McKillen, and made to sign agreements which he did not have time to review. He said Ms. McKillen presented overlapping documents for his signature which obscured the content of the documents he was signing. He also testified that Ms. McKillen changed the release document⁴ after he signed it. He also said he was not provided with a copy of the "waiver"⁵ and doubted that it was his signature which appears on it.

Ms. McKillen testified that she met with Mr. McLennon in a private conference room and put the cheque for $15,000 in an envelope. She handed him the "waiver" and said they could not proceed unless he first signed it. She then went through the five-page Written Notice from Pilot Insurance⁶ and reviewed its terms. She presented the two-page release which Mr. McLennon reviewed. Mr. McLennon wanted to add two clauses to the release "for his protection." Ms. McKillen thought his proposed additions were already covered by the agreement. However, she added the two clauses according to his instructions and, after initialling the changes, he signed the agreement. She then made photocopies and handed him the documents and the cheque. She estimated this meeting took about 15 to 20 minutes.

The bank which cashed the cheque for Mr. McLennon was directly below Pilot's offices. The bank called Pilot shortly after Mr. McLennon had left his meeting with Ms. McKillen. Ms. McKillen took the call and confirmed the transaction for the bank.

Mr. McLennon testified that when he returned home he realized that what he had signed was not what he had intended. He attributed this to the deliberate actions of Ms. McKillen. He decided, in the circumstances, that he could not go to Jamaica and would have to stay in Toronto to rescind the agreement. There is no dispute Mr. McLennon delivered the recession notice⁷ to Pilot's head office Monday afternoon.

The "Waiver" Agreement

At his meeting with Brenda McKillen, Mr. McLennon apparently signed an untitled document containing these terms:

I, Desmond McLennon, understand and acknowledge that, in order to receive settlement funds from an insurance company, there is a forty-eight hour waiting period which applies. At my request, Pilot Insurance has agreed to waive the waiting period and provide me with the settlement cheque and Release documentation concurrently on this date.

The parties referred to this document as the 'waiver agreement."

Initially, Mr. McLennon asserted that it was not his signature on this document. He said he had not seen the waiver before. Later he acknowledged the signature might be his. He said he did not have time to read it and had not received a copy when he left Pilot's offices. He also said Ms. McKillen had identified it as 'the document you have to sign to get what you are going to get." I found Mr. McLennon's testimony concerning the waiver confusing and inconsistent. I preferred Ms. McKillen's testimony which was straightforward and credible. She said she had drafted the waiver herself following her conversation with Mr. McLennon on Friday morning. She told Mr. McLennon that she was obligated to hold the funds for 48 hours after a release was signed. In the normal course he would have to wait until Monday to receive funds. In the "extenuating" circumstances of his sister's funeral she was prepared to be "reasonable." If he insisted on getting the funds that day she would prepare a waiver for his signature.

In their testimony, both witnesses acknowledged the waiver was intended to facilitate early payment of settlement funds to Mr. McLennon.

Analysis:

Was there a settlement?

Mr. McLennon admits signing the release, accepting Pilot's cheque and cashing it. He did not use the money to go to Jamaica and, to date, Mr. McLennon has not attempted to return any funds received.

I do not accept Mr. McLennon's contention that the $15,000 he received was merely an "advance" of funds owed to him. The events leading up to the September 13, 1996 agreement clearly show Mr. McLennon was at all times quite aware that Pilot offered the monies on the condition that he provide a full and final release to Pilot. The first offer of $5,000 was ultimately rejected by Mr. McLennon because he would have to sign a release to obtain it. The $10,000 offer, as indicated in Mr. McLennon's Application for Arbitration, was understood to be for a full and final release of all claims. While Mr. McLennon may have been reluctant to settle his entire claim for $15,000, I find it unlikely that he was not aware Pilot would provide him that amount for anything less than a full and final release.

Although I believe Mr. McLennon when he says he felt rushed and the documents were presented to him in a way which obscured what he was signing, I also find that he was given a fair and reasonable opportunity to review the release, ask questions and make changes important to him before he signed it. If there was a sense of urgency, it stemmed from his own desire to obtain funds quickly, and not from anything Ms. McKillen did or did not do.

Mr. McLennon is an intelligent and articulate individual with substantial confidence in his own abilities to deal with legal matters. At the time of the accident he was running a paralegal business. Although he has at various times retained counsel to represent him, there was substantial evidence at the hearing to indicate he preferred to negotiate directly with Pilot. He entered into the final settlement discussions with Pilot without the assistance of counsel and after he had prepared his own application for arbitration. I find that changes made to the standard form release were at his insistence and in the terms he dictated to Ms. McKillen.

I find Mr. McLennon's view that Ms. McKillen added words to the handwritten clauses after he signed the release as highly improbable. I prefer her testimony on this particular point as it was more objective and credible. Although not argued strenuously, I find there was no fraud, mistake, misrepresentation, undue influence, unconscionability, duress or any other vitiating factor.

For all the reasons above, I find that Mr. McLennon entered into a full and final settlement of his accident benefit claims with Pilot on September 13, 1996.

I find the "waiver" was executed on September 13, 1996 and forms part of the full and final settlement entered into between the parties. Although the waiver is drafted in a peculiar fashion (more in the form of a mutual or bilateral agreement than a unilateral waiver) I think its intended meaning is clear. By its terms Mr. McLennon agreed to waive his right to have two days to reconsider and rescind the settlement, in exchange for Pilot's agreement to provide settlement funds to him before the end of the cooling off period. Pilot agreed to accommodate that request. What remains to be determined is whether, after having signed the "waiver," Mr. McLennon can rescind the settlement agreement in accordance with the Settlement Regulation.

Can the settlement be rescinded?

The relevant sections of the Settlement Regulation provide:

9.1 (1) . . .

(2) Before a settlement is entered into between an insurer and an insured person, the insurer shall give the insured person a written notice that contains the following:

A statement that the insured person may rescind the settlement within two business days after the settlement is entered into by delivering a written notice to the insurer.

(3) A settlement may be rescinded by the insured person, within two business days after the settlement is entered into, by delivering a written notice to the insurer.

(4) If the insurer did not comply with subsection (2), the insured person may rescind the settlement after the period mentioned in subsection (3) by delivering a written notice to the insurer.

In this case, pursuant to subsection 9.1(2) of the Settlement Regulation, Pilot provided Mr. McLennon with a written notice on September 13, 1996 before he signed the release. The notice contained the statement required by paragraph 3.

Mr. McLennon takes the position that subsection 9.1(3) cannot be waived. Mr. Muttart, counsel for Mr. McLennon argued that parties cannot "contract out" of the Settlement Regulation. To do so would contravene the intentions of the Legislature. According to Mr. Muttart, section 9.1 was enacted for just this type of situation: to prevent an insured from entering into an improvident agreement without giving him an opportunity to reconsider.

Mr. McLennon also argues that if the waiver is effective, the settlement package would not contain "a statement that the insured person may rescind..." as required by section 9.1 (2) 3. If this is the case, then Mr. McLennon can rely on subsection 9.1 (4) to rescind at any time.

Pilot submits the signed waiver constitutes a binding contract between the parties. Ms. Pang, counsel for Pilot, takes the position that the parties can waive a legislative requirement in the absence of a specific provision indicating otherwise.

Pilot also argues that Mr. McLennon took advantage of the Insurer. The waiver was at Mr. McLennon's request and the Insurer acted upon it to release the funds to him. According to Pilot, he neither went to Jamaica nor returned the funds and the evidence strongly suggests that he had intended to rescind the agreement as soon as he received the funds.

The Settlement Regulation has been considered in a number of arbitration decisions. Pilot referred to three decisions: Soodhar; Abdulbaki and Coto.⁸ While no previous decision has dealt with the effects of an agreement to waive the two-day cooling off period, some general principles discussed in these cases are applicable.

From my reading of these decisions, the essential purpose of the Settlement Regulation is to protect insureds at the time of negotiating full and final settlements of their statutory accident benefits. It does so in two ways. Firstly, it mandates a written notice from the insurer in the form required by section. 9.1 (2). Arbitrators have consistently held that the "disclosure" notice is a pre-condition to entering into a settlement. If insurers do not comply with the requisite protocol the insured can rescind the agreement at any time. Secondly, the Regulation protects insureds by providing a right to rescind the agreement within two business days. The apparent purpose of this is to provide, in the words of Arbitrator McMahon, "a period of contemplation."⁹ This provision is also generally referred to as the "cooling off" period.

In my view the Settlement Regulation is a form of consumer protection legislation intended to protect insureds by prescribing certain disclosure and rescission rights. Following proper disclosure by an insurer, an insured has two full days to review the settlement and consider, with sober second thought, whether the bargain struck in the heat of negotiation remains suitable. The disclosure requirement does not by itself protect the interests of insureds. To make this right valuable, there must also be time and space to adequately consider what has been disclosed. Disclosure without a period of contemplation and a real right to rescind defeats the intended purpose of the Regulation.

Pilot argued that there was nothing in the Insurance Act or Regulations preventing the waiver which was agreed to in this case. I agree there does not appear to be any express prohibition; however, Pilot could not provide me with any case law that would allow me to conclude that the absence of a specific prohibition necessarily means waiver is permissible. While there are express prohibitions in other statutes (for example, the Consumer Protection Act specifically states: "This Act applies despite any agreement or waiver to the contrary") this does not assist me.

In Coto, Arbitrator Baltman came to the following conclusions with which I agree. She said:

...Allstate suggests the parties have in effect "waived" the requirements set out in the Settlement Regulation. ... However, regardless of the position the parties now take, I do not agree that they can expressly or impliedly waive the requirements of the Settlement Regulation. The Settlement Regulation through the use of the word shall, mandates that the insurer provide the applicant with a written notice, with specified content. Moreover subsection 279(2) of the Insurance Act and subsection (5) of the Regulation, read together, strictly limit the circumstances under which parties can, through settlement, opt out of the arbitration process. ... In my view, these provisions, when combined, prescribe that any restriction on an applicant's right to arbitrate is void unless the Insurer complies with the Settlement Regulation."¹⁰

In Coto, the insurer had not attempted to provide the insured with the notice required by subsection 9.1 (2). As noted above, Mr. McLennon did receive a notice from Pilot before agreeing to the settlement terms. I do not consider this, however, to be an important distinction. The waiver agreement in the case before me effectively eliminated that part of the notice which set out the insured's right to rescind within two business days.

It is inconsistent with the structure of the Regulation and its clear intent, to read the disclosure obligations under subsection 9.1(2) as simple technical requirements which can be discharged by delivering a list of platitudes to the insured. If the obligation to provide notice of a right to rescind is not backed up in reality by a true opportunity to rescind the settlement, then what has been achieved is more akin to the delivery of an empty promise. Put another way, the disclosure requirements under section 9.1 cannot be separated from the further rights bestowed upon the insured: the right to a period of contemplation and the right to rescind. If by omission, action or agreement, the rights under the Regulation have been impaired or lessened, then it cannot be said that the insurer has fulfilled its responsibility to the insured to provide proper and adequate disclosure. In other words the disclosure requirement has both procedural and substantive dimensions.

I find for the reasons set out above and on a proper construction of the Regulation that there is an implied prohibition against any agreement to waive or contract out of its provisions.

The nature of the right to rescind

Both parties agreed that, but for the possible effect of the "waiver" signed by Mr. McLennon, Mr. McLennon has rescinded the settlement. I was not asked to deal with the question of whether a right to rescind under the Settlement Regulation is suspended in a case such as this where settlement funds have yet to be returned to the Insurer. This is an important question. If the settlement can not be considered rescinded until funds are returned and the parties restored to their pre-settlement positions, then the arbitrator would have no jurisdiction to deal with the merits of the claim until repayment is made.

The concept that there can be no rescission unless and until it is possible to effect a true resitutio in integrum is an equitable principle. Equitable rescission is a discretionary remedy available in situations where contracts are entered into because of fraud, innocent misrepresentation, or unconscionable conduct. If restitutio is not possible then the applicant may not be able to take advantage of this remedy. This has to be contrasted, however, with non-equitable (common law) rescission which "is possible wherever a party has entered into a contract which is voidable at his option, and only requires some conduct by that party with respect to the other, for example, informing him of his decision to rescind, that amounts to a clear election that he intends to avoid the contract." Interestingly, even in cases concerning equitable rescission, the courts have ordered restitution despite the inability to perfectly return the parties to their pre-contract situation.¹¹

In my view the right to rescind in this case is not a discretionary equitable remedy but a statutory common law right to rescind. Under the Regulation there need not be any fraud, innocent misrepresentation, or unconscionable conduct. The right to rescind is effected simply by giving notice to the insurer within two business days, or after a longer period of time where an insurer fails to comply with the subsection 9.1(2) of the Regulation. In my view, the return of settlement funds is not a precondition to the availability of the statutory remedy. It is a separate matter which may arise following the effective notice of rescission and is addressed by applying to a court of competent jurisdiction for relief under the laws governing unjust enrichment and restitution or by seeking repayment under the Schedule.

Repayment of the settlement funds

Having concluded that the settlement reached on September 13, 1995 was successfully rescinded by Mr. McLennon on September 16, 1995, a thorny issue remains: Is Mr. McLennon required to repay the $15,000 he received under the settlement prior to proceeding to the arbitration on the merits of his claims?

The repayment section of the Schedule reads:

70 (1) A person shall repay to the insurer any benefit received under this Regulation that is paid to the person through error, wilful misrepresentation or fraud.

70 (2) The obligation to repay a benefit received under this Regulation that was paid to a person through error does not apply unless notice is given under subsection (5) within twelve months after the payment was made to the person.

My jurisdiction to order repayment of the settlement funds is set out in section 70 of the Schedule. In light of this section, I cannot order repayment until the insurer has requested a return of these funds. I have not been shown that the circumstances giving rise to the payment of the settlement funds can be construed as willful misrepresentation or fraud. Significantly, Pilot has not yet asked the insured to repay the funds he has received. This is consistent with Pilot's position that it has negotiated a full and final settlement of Mr. McLennon's claims.

In the circumstances, I do not presently have jurisdiction to order the repayment of funds. It is important, however, that as the arbitration will now go forward, the amount that Mr. McLennon has already received should be set off against any amounts the hearing arbitrator determines he is entitled to. In the circumstances, I will add repayment of settlement funds as an issue to be considered by the hearing arbitrator so that Pilot is not without a remedy if Mr. McLennon's entitlement is less than the amounts already paid out.

Abuse of process:

Although I do not have jurisdiction at this time to order repayment of the settlement funds, I do have jurisdiction to consider appropriate conditions which may be imposed on the continuation of this hearing. This might include the power to make the continuation of the hearing conditional on the return of the settlement funds.¹²

Mr. McLennon has not taken the position that he can keep the funds, but I understand it would now be impossible for him to return the entire amount. In the circumstances this would be equivalent to barring Mr. McLennon from continuing with the arbitration on the merits of his claim. While I am extremely reluctant to place onerous conditions on the continuation, Mr. McLennon has had the benefit of funds to which he may not be entitled to. Mr. McLennon acknowledges a right to rescind implies an obligation to return the funds received but he has not made even a partial attempt to return them to Pilot. No matter how strongly he believes in the ultimate merits of his case against the Insurer, his failure to attempt to return the settlement funds cannot go unnoticed by this tribunal.

Pilot argued that the actions of Mr. McLennon can be construed as an abuse of process and asks for an order under section 282 (11.2) of the Insurance Act.

To paraphrase Arbitrator Baltman in Bilusack and Cooperators Insurance Company (February 13, 1996), OIC A-006369, my goal is to balance Mr. McLennon's right to a fair hearing with the necessary measures to discourage abuse. In this case the prejudice to Mr. McLennon that would result from a complete denial of a hearing outweighs the harm caused to Pilot in allowing him to proceed and to have the return of settlement funds dealt with by the hearing arbitrator. On the other hand, I agree with Pilot that in the unusual circumstances of this case, there is an abuse of process significant enough to allow me to exercise my discretion under section 282 (11.2). I conclude that Mr. McLennon must pay Pilot its assessment fee of $2,000. This amount must be paid by Mr. McLennon to Pilot before the hearing can continue.

Expenses:

I agree with Arbitrator Alves in Worthman and AXA Insurance Company (January 30, 1997), OIC A96-000486 and Arbitrator Renahan in Pinto and General Accident Insurance Company (April 10, 1997), OIC A96-001246, that the insurer is not able to claim its expenses in an arbitration proceeding commenced prior to November 1, 1996.

In the circumstances Mr. McLennon is denied the expenses he has claimed for this preliminary issue hearing.

Order:

The settlement agreement dated September 13, 1996 was properly rescinded by written notice dated September 16, 1996. The matters in dispute can proceed to arbitration.
The hearing arbitrator will consider the issue of whether Mr. McLennon must repay all or some of the $15,000 paid out to him as settlement funds.
Pursuant to section 282 (11.2) of the Insurance Act, Mr. McLennon must pay Pilot $2,000 before the date the arbitration hearing is scheduled to commence.
Mr. McLennon is not entitled to his expenses incurred in respect of this preliminary issues hearing.

May 2, 1997

John Friendly Arbitrator

Date

Footnotes

The Statutory Accident Benefits Schedule —Accidents after December 31, 1993, and before November 1, 1996, called "the Schedule" in this decision. The Schedule is Ontario Regulation 776/93, as amended by Ontario Regulation 635/94 and 781/94.
Regulation 664, R.R.O. 1990, as amended by Ontario Regulation 780/93
Exhibit 5
Exhibit 1
Exhibit 2
Exhibit 3
Exhibit 4
Soordhar and Citadel General Insurance Company (December 5, 1995), OIC A-006428; Abdulbaki and Royal Insurance Company of Canada (December 12, 1995), OIC A-010205; Coto and Royal Insurance Company of Canada (July 4, 1996), OIC A-951718.
Soodhar, cited above
Cited above; at pages 12 and 13 of the decision
The Law of Contract, Friedman, 3rd Edition, pp. 807-821]
Section 23(1) of the Statutory Powers Procedure Act, R.S.O. 1990, c. S. 22 provides: A tribunal may make such orders or give such directions in proceedings before it as it considers proper to prevent abuse of its processes.

Desmond McLennon v. Pilot Insurance Company, 1997 ONICDRG 76

Case Summary