Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2002 ONFSCDRS 193

Appeal P01-00056

ANDREW L. LUKACHKO Appellant

and

ALLIANZ INSURANCE COMPANY OF CANADA Respondent

Before: Stewart McMahon

Representatives: Andrew L. Lukachko in person Andrew T. Graham for Allianz

Hearing Date: January 25, 2002, written submissions received on June 28, 2002 and July 2, 2002.¹

APPEAL ORDER

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

The appeal with respect to the arbitration order dated November 30, 2001, is dismissed and the order is confirmed.
The appeal with respect to the arbitration order dated May 8, 2002, is allowed. Paragraph 1 of the order is rescinded and replaced with the following:

Mr. Lukachko shall pay Allianz's arbitration expenses, fixed at $4,796.00.

Each party shall bear their own appeal expenses.

December 9, 2002

Stewart McMahon Director's Delegate

Date

REASONS FOR DECISION

I. NATURE OF THE APPEAL

Mr. Lukachko was injured in a motor vehicle accident on December 7, 1998. He claimed income replacement benefits ("IRBs") pursuant to section 4 of the SABS-1996,² on the basis that he was self-employed at the time of the accident. Allianz Insurance Company of Canada ("Allianz") denied the claim. The Arbitrator released a decision on November 30, 2001, dismissing Mr. Lukachko's claim. The Arbitrator found that Mr. Lukachko was not self-employed at the time of the accident, or alternatively, did not earn any income in the year preceding the accident. Mr. Lukachko appeals from this ruling.

The Arbitrator also considered Mr. Lukachko's claim for housekeeping and home maintenance expenses, pursuant to s. 22 of the SABS-1996. He allowed the claim, subject to the statutory maximum of $100 per week. Mr. Lukachko appeals, claiming that he is entitled to all of his expenses, irrespective of whether or not they exceeded $100 in any given week.

The Arbitrator released a supplementary decision on May 8, 2002, ordering Mr. Lukachko to pay Allianz's arbitration expenses, fixed at $5,296.00. Mr. Lukachko appeals, arguing that he, not Allianz, should have been awarded expenses. The most significant aspect of the expenses order is the Arbitrator's treatment of the offers to settle filed by Allianz.

II. DISPOSITION

Mr. Lukachko's appeal from the first order is based on a misconception of the process. At its heart, Mr. Lukachko treated the appeal as an opportunity to retry the case. He disagreed with the Arbitrator's findings and conclusions, and wanted a fresh assessment of the evidence. However, that is not the nature of the exercise. The Director and his delegates do not have the authority to substitute their own findings of fact in place of the Arbitrator's findings. Section 283(1) of the Insurance Act provides for an appeal on questions of law alone. In addition, Mr. Lukachko treated the entire process, including the appeal, as a sort of ongoing dialogue. During the course of the appeal Mr. Lukachko sought to file a good deal of fresh evidence that was designed to rebut the findings made by the Arbitrator, or to fill the deficiencies in the evidence pointed out by the Arbitrator. I excluded most of this "fresh evidence" by way of a preliminary order. It is understandable how an unrepresented person could conceive of the process in this way. However, for many good reasons, including the need for finality, this is not the nature of the process.

Mr. Lukachko was not able to establish that the Arbitrator made any errors of law with respect to the claim for IRBs. This was not a close case. There were numerous reasons why Mr. Lukachko's claim for IRBs was unfounded. However, in recognition of the time spent by Mr. Lukachko preparing his appeal materials, I will briefly deal with some of his major concerns.

Similarly, Mr. Lukachko was not able to show that the Arbitrator made any errors of law with respect to the claim for housekeeping and home maintenance expenses, and the appeal on this issue is dismissed.

The appeal on the issue of arbitration expenses is allowed in part, and the award in favour of Allianz is reduced by $500 to $4,796.00

III. BACKGROUND

Mr. Lukachko was 71 at the time of the accident.

In the late '60s and early '70s, while Mr. Lukachko was working full-time as a graphic designer, he bought and sold several pieces of rural property. His last acquisition was a 100-acre parcel purchased in 1974. He subdivided the property into three parcels and sold two, but retained the third. Mr. Lukachko developed this property over the next 22 years. At the time of the accident there were two residences on the property, that Mr. Lukachko rented out at various points in time, a gazebo, and a partially constructed garage. Mr. Lukachko testified that he did not declare any rental income to Revenue Canada, because the revenue was less than the capital cost allowance he would have been entitled to deduct.

Mr. Lukachko testified that over the years he worked approximately 20 hours a week developing, maintaining and managing the property. The Arbitrator found that most of the construction work was completed in the late '70s and early '80s. However, he accepted Mr. Lukachko's evidence that he continued to maintain and improve the property, which involved a fair bit of physical work. He also found that, as a result of the accident, Mr. Lukachko was no longer capable of the heavier tasks involved in maintaining his principal residence and the country property.

The Arbitrator noted that Mr. Lukachko initially identified himself to Allianz as a retired person, and that his first claim was for a non-earner benefit. When Allianz denied this claim Mr. Lukachko filed for mediation and, when that did not resolve the matter, he filed an Application for Arbitration. Mr. Lukachko withdrew his claim for a non-earner benefit after the matter had been set down for a hearing, and substituted a claim for IRBs. He explained that while he was preparing for the arbitration hearing he had an opportunity to review the SABS-1996 more carefully, and realized that he could assert a claim for IRBs on the basis that he was self-employed in the business of developing and renting his country property.

The Arbitrator found that Mr. Lukachko was not self-employed at the time of the accident, and that his attempt to characterize himself in this light was "an after the fact attempt to match his activities in respect of the property with a remedy provided by the Schedule." He found that Mr. Lukachko's activities were principally aimed at increasing the value of his property, and that "Whatever limited revenue the property might have generated was as a consequence of the ownership of the property and not derived from employment."

IV. ARGUMENT AND ANALYSIS

A. Did the Arbitrator err in dismissing Mr. Lukachko's claim for IRBs?

Section 2(5) of the SABS-1996, states that a person is employed if:

for salary, wages, other remuneration or profit, the person is engaged in employment, including self-employment, or is the holder of an office, and " employment" has a corresponding meaning.

The Arbitrator correctly noted that the use of the term "other remuneration" suggests that the SABS-1996 recognizes a wide variety of types of income as income from employment. However, contrary to Mr. Lukachko's submissions, that is not the same as saying that every activity that generates income should be characterized as a business or employment. For present purposes, a distinction must be drawn between employment income and investment income. Mr. Lukachko's submissions suggest that he either fails, or refuses, to recognize this distinction.

During the arbitration hearing, Mr. Lukachko attempted to characterize himself as a carpenter engaged in developing and maintaining the property. In this regard, he argues that the Arbitrator erred in failing to consider a certificate which attests that he graduated from a 40-week carpentry course. The mere fact that the Arbitrator did not mention the certificate does not mean that he did not consider it. It is apparent from the decision that the Arbitrator was conscious of Mr. Lukachko's credentials and abilities. In addition, in my view, nothing turns on this certificate. The evidence suggests that Mr. Lukachko had a number of intrinsic interests that he nurtured through use and study. However, the issue is not whether he was a skilled carpenter. It is whether he was self-employed as a carpenter at the time of the accident.

Because there was no evidence that Mr. Lukachko ever paid himself a salary, he created a notional one based on what he called the "fair market value" of his services. He argued that it was immaterial that he had not received this salary before the accident, and that he could legitimately claim to be employed because he was entitled to a deferred salary that would be paid when the property was sold at some undetermined time in the future. In support of this argument he referred to a number of examples, including a salesman whose commissions are deferred until a sale is completed, or partners who agree to defer their salaries until after a project is brought to market.

Mr. Lukachko argued on appeal that the Arbitrator erred because he did not consider these examples. In my view, these examples do not assist Mr. Lukachko. They are premised on an agreement that the individuals will receive a salary for present services at some future date. However, in this case, there was no evidence that Mr. Lukachko had arranged his affairs to pay himself a salary, a wage, or any other form of employment income as compensation for his physical labour.

Mr. Lukachko also attempted to characterize himself as a property manager responsible for overseeing the rental of the residences. A person who generates revenue from renting property can arrange their affairs to characterize some of the income as employment income. The most direct way would be to pay himself a regular salary. Alternatively, he could formally declare the rental receipts as business income and thereby establish the basis for a claim that he was self-employed as the operator of the business. However, in this case, there is no evidence that Mr. Lukachko ever declared to anyone that he was operating a business. Even if Mr. Lukachko were successful in this regard, it would not help him because he conceded that whatever rent he collected was more than offset by the capital cost allowance he would be entitled to. Whatever actual cash the leases put in Mr. Lukachko's pocket, he had arranged his affairs in a way that meant there was no formal income that could be used to support a claim for IRBs.

Mr. Lukachko referred repeatedly to a letter that dealt with tax returns for the years 1997 and 1998. He accused Allianz's counsel of misstating this letter in a way that suggested he did not file these tax returns. Mr. Lukachko submits that his letter only states he did not have copies of the returns. He says that the letter does not state that he had not filed returns. Mr. Lukachko submits that the Arbitrator was influenced by this misstatement and that it negatively affected his credibility. I see no evidence of this. The Arbitrator was not concerned with whether Mr. Lukachko filed tax returns. The letter and the testimony were significant only because they contained an admission that the leases did not generate any net income.

In the further alternative, Mr. Lukachko attempted to characterize himself as a land developer. He argued that his "remuneration from employment" should be based on the expected capital gain he would enjoy on the sale of the property. The Arbitrator correctly noted that the evidence tendered by Mr. Lukachko was insufficient to establish the present value of the property, nor had any evidence been tendered with respect to the costs of developing the property. More fundamentally, the property had not been sold. Mr. Lukachko's theory is inconsistent with the notion that IRBs compensate for present lost income, not loss of potential. In addition, what little evidence there was suggested that the accident would not diminish the future value of the property.

In conclusion, I see no error in the Arbitrator's approach to this issue. Mr. Lukachko had no basis for claiming IRBs because he was not employed at the time of the accident. Even if he was employed, he would not be entitled to a benefit because he was not earning an income at the time of the accident.

B. Did the Arbitrator err in his consideration of Mr. Lukachko's claim for housekeeping and home maintenance expenses?

If the insured person suffers a substantial inability to perform his usual housekeeping and home maintenance obligations the insurer is obliged, pursuant to s. 22(1) of the SABS-1996, to pay for the reasonable and necessary expenses incurred to have someone else undertake the tasks. There are two important limits to this obligation. One, s. 22(2) states that the amount payable "shall not exceed $100 per week." Two, s. 22(3) states that the insurer is not required to pay for expenses incurred more than 104 weeks after the onset of disability. This case turns on the $100 per week limit.

Mr. Lukachko submitted claims in relation to work done at his principal residence and the country property. The bulk of these expenses related to work done by his son who undertook chores such as snow clearing, grass cutting and other yard work. The "bill" submitted by Mr. Lukachko's son was a sheet of paper on which he recorded the dates on which he performed the chores, the nature of the chores, and the amount charged. Most of the entries were for less than $100 per week, although there were a few exceptions. In addition to these expenses, there were three invoices from contractors. One was for a roof repair, one was for a small renovation, and the third was for a large spring clean-up of the country property. Each of these invoices exceeded $100. The Arbitrator found that Mr. Lukachko would have undertaken these tasks himself, at least in part, but he could not due to the injuries he sustained in the accident.

Mr. Lukachko argued at the arbitration that the expenses that exceeded the $100 weekly maximum could not be avoided, and that in the circumstances the Arbitrator had the discretion to simply ignore the limit imposed by s. 22(2), and award him the full amount. The Arbitrator rejected this submission, and limited the claims to $100 per week. I agree with the Arbitrator's conclusion that he does not have the authority to ignore the limit imposed by s. 22(2).

On appeal, Mr. Lukachko advanced a new argument. He noted that if an insurer paid the maximum allowance of $100 per week for the full 104 weeks, it would pay out $10,400. He argued that because his total claim for $6,297 was less than $10,400, it should not have been reduced. He submitted that if his expenses in any given week exceeded $100, Allianz should have applied the excess to those weeks in which no expenses were incurred.

There are two problems with this submission.

First, Mr. Lukachko did not ask Allianz to spread the larger invoices out over a series of weeks. Like with the claim for IRBs, Mr. Lukachko is attempting to reinvent his affairs to suit his present purposes.

Second, Mr. Lukachko's argument that the expenses can be allocated to any given week, irrespective of when they are incurred, ignores the structure of s. 22. In some cases, the legislature imposed only an aggregate cap on the insurer's liability for expenses. For example, the insurer is responsible for paying up to $100,000 with respect to medical and rehabilitation expenses incurred within 10 years of the accident. See ss. 18(1)(a) and 19(1)(a). These provisions contain no limit on the amount of any individual expense claim, nor any limits on when the expenses are incurred, other than the outside limit of 10 years. In contrast, the legislature imposed a weekly limit on the amounts the insured person can claim for housekeeping and home maintenance expenses. Mr. Lukachko's argument seeks to ignore this periodic limit, and replace it with a single aggregate limit. If this had been the drafters' intention, the provision would not have included a weekly limit.

Section 22 can respond quite well to the needs of an insured person who incurs regular expenses for routine chores such as house cleaning or grass cutting. Subject to the limit of $100, a person incurring such expenses will be reimbursed by the insurer on a periodic basis.

However, the section is not particularly well suited to respond to the needs of an insured person who can cope with their routine chores, but who is unable to take on some of the larger tasks they used to perform — such as painting, household repairs, or large seasonal clean-ups. The difficulty posed by these types of expenses is that work is usually done over one or two days, but the bills typically exceed $100. Mr. Lukachko's expenses for the roof repair, bathroom renovation and spring clean-up would appear to fit into this category.

One would hope that a responsible insurer would respond positively to a reasonable proposal to spread this kind of expense out over the course of a number of weeks, if it were coupled with some form of agreement to forego other claims. To my mind, this kind of co-operative approach is quite different from the approach advocated by Mr. Lukachko, which is premised on the right of the insured person to unilaterally allocate the expenses prospectively and retrospectively.

Mr. Lukachko's appeal of the Arbitrator's order in relation to housekeeping and home maintenance expenses is dismissed.

C. Did the Arbitrator err in awarding Allianz arbitration expenses fixed at $5,296?

As noted at the start of these reasons, the Arbitrator released a supplementary decision on May 8, 2002, ordering Mr. Lukachko to pay Allianz's arbitration expenses, fixed at $5,296.00. Mr. Lukchko argues that he, not Allianz, should have been awarded expenses. In the alternative, he argues that the Arbitrator erred in awarding expenses to Allianz.

Section 282(11) of the Insurance Act authorizes an arbitrator to award either party some, or all, of the expenses incurred in the arbitration process. The criteria to be considered when deciding to whom expenses should be awarded, and the amount, are set out in s. 12(2) of Regulation 464/96. The criteria are:

Each party's degree of success in the outcome of the proceeding.
Conduct of the insurer or the insured person that tended to shorten or facilitate the proceeding or that tended to prolong, obstruct or hinder the proceeding, including failure to comply with undertakings or orders.
Whether the proceeding or any position taken by the insurer or the insured person during the proceeding was manifestly unfounded, frivolous, vexatious, fraudulent or an abuse of process.
The degree of complexity, novelty or significance of the factual or legal issues raised in the proceeding.
If the insurer or the insured person requests, any written offers to settle made after the conclusion of mediation and before the conclusion of the arbitration in accordance with the rules of practice and procedure applicable to the proceeding, including the terms of the offers, the timing of the offers and the responses to the offers, having regard to the result of the proceeding.
Any other matter related to the proceeding that the arbitrator considers relevant to the issue of whether an award of expenses is justified. O. Reg. 464/96, s. 4.

In this case, the Arbitrator focused on four of these criteria.

The Arbitrator rejected Allianz's submission that Mr. Lukachko's case was manifestly unfounded. However, he noted that parts of Mr. Lukachko's claim failed entirely, and he enjoyed only limited success on the remainder. In this regard, I note that Mr. Lukachko's claim for IRBs, which was the main issue at the arbitration, was dismissed. The Arbitrator also noted that Mr. Lukachko's conduct tended to lengthen the proceeding.

Despite the fact that Mr. Lukachko was ultimately successful, in the sense that Allianz was ordered to pay him benefits, these factors would call for a reduction in the expenses awarded to Mr. Lukachko, and could easily have justified a credit in favour of Allianz for some portions of the proceeding. However, Allianz refused to pay for any housekeeping or home maintenance expenses, and Mr. Lukachko enjoyed a good deal of success on this issue. In addition, Allianz initially refused to pay for an outstanding medical examination, pursuant to s. 24, and only agreed to pay the expense after Mr. Lukachko had initiated this proceeding. Given these factors, I would have expected, all else being equal, that in the final accounting, Mr. Lukachko would have been awarded some amount to reflect the expenses associated with bringing this proceeding.

In this case, there was one additional factor that the Arbitrator clearly thought was the most significant — Allianz's repeated attempts to settle the matter before it reached a hearing.

Allianz's efforts to settle the matter started when it made an offer on the eve of a hearing that was ultimately rescheduled. This offer was initially accepted, but later rescinded. Thereafter, Allianz made a number of offers over the course of the months preceding the rescheduled hearing. The Arbitrator found that some of these offers were for "full and final releases," but others dealt only with the issues to be arbitrated. He also found that these offers were "invariably for an amount significantly in excess of the amounts" Mr. Lukachko was ultimately awarded.

Offers to settle are a powerful tool that can be used to encourage parties to act responsibly. In Putrus and Allstate Insurance Company of Canada, (FSCO P99-00048, February 12, 2001), Director's Delegate Naylor stated that offers to settle made in the course of an arbitration proceeding do not trigger the presumptive consequences set out the in Rules of Civil Procedure. However, she added that, "if settlement is to be encouraged...there must be some measure of confidence that making a serious offer will tip the balance."

Offers to settle are only one of five enumerated factors that must be considered by the arbitrator. Consequently, offers to settle must be weighed together with all the other factors, not in isolation. However, I agree with Director's Delegate Naylor that the purpose behind including offers to settle in the Expense Regulation – encouraging responsible settlements, can only be achieved if there is a reasonable expectation that making an offer will make a difference when expenses are considered.

When considering the effect to be given to the offer it is important to keep in mind that it should generally affect the disposition of expenses prospectively rather than retrospectively. The fact that an insured person rejects an offer does not cast doubt on his decision to initiate the proceeding, or reflect on the steps taken in advance of the offer. It merely brings into question the reasonableness of continuing on to a hearing. In light of this, the penalty should attach to the expenses incurred after the offer, not before it. In addition, limiting the impact of an offer in this fashion provides a consequence that is sufficient to bring about the desired result, but is not so severe that it creates a disincentive to proceed with legitimate disputes. Finally, it encourages parties to make offers to settle earlier, rather than later.

Arbitration expenses are a matter of discretion that cannot be interfered with unless the arbitrator exercises his discretion improperly, such as a decision based on the wrong principles, irrelevant considerations, or in the absence of supporting evidence. See Allison and Markel Insurance Company of Canada, (FSCO P-001231, August 21, 1996).

In this case, the Arbitrator weighed all of the relevant factors, including the offers to settle, and decided that they justified a decision to award Allianz all of its expenses, post-dating the offer made in April 2001. This option was open to the Arbitrator. He dealt with the relevant facts and considerations, and applied the appropriate law. I see no basis for interfering with this part of his discretion.

However, in my view, in an effort to give real meaning to Allianz's efforts to settle the matter, the Arbitrator failed to give sufficient consideration to the initial stages of the proceeding, that pre-dated Allianz's attempts to settle the matter. As noted above, I would have expected that Mr. Lukachko should have been awarded some amount in respect to initiating the proceeding. Because Mr. Lukachko was unrepresented, the amounts are quite modest. In addition, keeping in mind the Arbitrator's comments about the limited nature of Mr. Lukachko's success and that he unnecessarily prolonged the process, these expenses should be discounted. In the circumstances, rather than returning the matter to the Arbitrator, I have exercised my discretion to vary the expenses order by crediting Mr. Lukachko with $500, thereby reducing the award in favour of Allianz to $4,796.00.

V. EXPENSES OF THE APPEAL

On appeal, Mr. Lukachko was unsuccessful with respect to the IRB issue and the housekeeping and home maintenance issue. In addition, the appeal on the IRB issue was principally an attack on the Arbitrator's findings of fact, that did not raise questions that are the proper subject matter of an appeal. The housekeeping and home maintenance issue did not challenge the Arbitrator's ruling in any real fashion. Instead, Mr. Lukachko attempted to re-cast what had taken place in an attempt to avoid the Arbitrator's ruling.

Mr. Lukachko did enjoy a small measure of success in relation to the expenses of the arbitration, but his appeal materials on this issue were sparse and had no bearing on the ultimate disposition of the issue.

Weighing these factors, and the nature and length of the proceeding, each party shall bear their own expenses associated with the appeal.