Neutral Citation: 2002 ONFSCDRS 78

FSCO A01-000313

FINANCIAL SERVICES COMMISSION OF ONTARIO

BETWEEN:

KETHEESWARAN SELLATHAMBY

Applicant

and

ALLSTATE INSURANCE COMPANY OF CANADA

Insurer

SUPPLEMENTARY REASONS FOR DECISION

Before:

Eban Bayefsky

Heard:

By telephone conference call on May 14, 2002.

Appearances:

David S. Wilson for Mr. Sellathamby

Richard F.L. Rose for Allstate Insurance Company of Canada

Issues:

The Applicant, Ketheeswaran Sellathamby, was injured in a motor vehicle accident on June 29, 1999. He applied for and received statutory accident benefits from Allstate Insurance Company of Canada ("Allstate"), payable under the Schedule.¹ Allstate terminated weekly income replacement benefits on January 2, 2001. The parties were unable to resolve their disputes through mediation, and Mr. Sellathamby applied for arbitration at the Financial Services Commission of Ontario under the Insurance Act, R.S.O. 1990, c.I.8, as amended.

The arbitration hearing in this matter commenced on January 28, 2002 on the issues of the Applicant's entitlement to income replacement benefits ("IRBs") from January 3, 2001 onward, housekeeping benefits and a special award. On the first day of the hearing, the Applicant's counsel, Mr. Wilson, sought to raise an issue he had argued in an earlier motion for interim benefits, namely, that the Insurer had breached section 37(5) of the Schedule (concerning an insurer's obligations following a Designated Assessment Centre ("DAC") finding that an insured continues to be disabled) and that the Applicant was, therefore, entitled to ongoing IRBs pending resolution of the dispute. By reasons delivered on the second day of the hearing (and reproduced in my Reasons for Decision dated May 8, 2002), I found that I had the jurisdiction to consider this issue, in relation to the Applicant's claim for both ongoing IRBs and a special award.

The parties then agreed to have this issue determined first and then, if necessary, to proceed with the rest of the arbitration. The matter was argued on January 29, 2002, with supplementary written submissions being received by February 15, 2002. On March 21, 2002, due to the labour situation then affecting the Financial Services Commission, I was only able to issue my Order on the section 37(5) issue, with reasons to follow. My reasons were issued on May 8, 2002. Prior to my reasons being issued, the Insurer appealed my Order, seeking, in part, a stay of the Order pending a final appeal decision. The Director's Delegate indicated that initial submissions in the appeal would be accepted within two weeks of the date I issued reasons in the arbitration.

In my decision, I found that the Insurer had breached the terms of section 37(5) of the Schedule and that the Applicant was, therefore, entitled to weekly income replacement benefits from January 3, 2001, onward, pending the resolution of the dispute. While, in their earlier submissions, the parties briefly alluded to some of the consequences of such a finding, they did not fully address the question of how this result would affect the balance of the arbitration. I felt that the parties should be given the opportunity to properly address this matter and sought full submissions on the point, which were heard by telephone conference on May 14, 2002. In the meantime, at my request, the parties had sought the direction of the Director's Delegate concerning proceeding further with the arbitration given the evolving appeal, and the Director's Delegate indicated that there was no objection to taking this additional step. The issue at this point in the hearing is:

On what issues may this arbitration now proceed?

Result:

The arbitration concerning the Applicant's entitlement to income replacement benefits is concluded. The arbitration may continue with respect to the Applicant's claims for housekeeping benefits and a special award.

EVIDENCE AND ANALYSIS:

As set out in my May 2002 Reasons for Decision, despite a March 2000 DAC finding that the Applicant continued to be psychologically disabled from returning to his pre-accident employment, the Insurer set into motion a process that led to the termination of the Applicant's IRBs on January 2, 2001. I found that, contrary to section 37(5) of the Schedule, the Insurer had challenged the DAC's conclusions without initiating the dispute resolution ("DR") process. I found that, where, as here, an insurer disputes a DAC's finding that an insured continues to be disabled, it is required to proceed through the DR process. I found that the fact that section 37(6) of the Schedule allows an insured to dispute a termination of benefits does not relieve an insurer of its general obligation under section 37(5) to dispute the DAC's findings through the DR process. I found nothing in section 37(5) or the DR provisions in the Insurance Act referred to in section 37(5) (sections 279 to 283) limiting the Insurer's common-law right to commence an action following a DAC and failed mediation. Finally, since the Insurer improperly terminated the Applicant's income replacement benefits, and given that section 37(5) requires an insurer to pay benefits pending the resolution of the dispute, I found that the Insurer was required to pay the Applicant IRBs from January 3, 2001, onward, pending the resolution of this dispute.

The question at this point is whether this effectively puts an end to the arbitration as it pertains to the issue of the Applicant's entitlement to income replacement benefits. I find that it does.

Mr. Wilson submitted that, pursuant to section 37(5), the Insurer was required to commence a mediation in respect of the DAC's findings and, then, if the mediation failed, to commence an action in court. Mr. Wilson argued that the Insurer could neither take advantage of the fact that the Applicant had initiated the proceeding at the Commission, nor say that the current process must be allowed to run its course. Mr. Wilson maintained that, if the Insurer were not required to proceed to mediation and then, if necessary, to court, it would derive various procedural advantages not otherwise available to it, and that the Insurer would suffer no prejudice if it were required to commence a mediation followed by a court action. Finally, Mr. Wilson submitted that, if the arbitration were allowed to continue, the Applicant would be deprived of his right to proceed through the DAC assessment and mediation process in respect of post-104 week benefits (the Applicant's benefits having been terminated approximately 6 months prior to the 104-week mark).

Mr. Rose essentially agreed with Mr. Wilson that, pursuant to my decision, if, in fact, the Insurer breached section 37(5) of the Schedule, then the arbitration of the Applicant's IRBs is over and the Insurer must commence a mediation followed by a court action. Mr. Rose maintained that this process would be required in respect of both pre-104 week and post-104 week benefits. From a practical perspective, Mr. Rose submitted that the Insurer did not wish to proceed with the arbitration, since, even if it were successful on the merits, the Applicant might launch an appeal to argue that he was entitled to IRBs simply by virtue of the Insurer's procedural breach of section 37(5), and the Insurer would be required to pay the Applicant IRBs during this whole process. Similarly, Mr. Wilson indicated that the Applicant did not want to be forced to proceed with a costly arbitration, particularly where the parties were essentially ad idem on the question of how to proceed.

While I do not find the parties' concurrence determinative of the matter, in the particular circumstances of this case, I find that the Insurer's breach of section 37(5) requires it to proceed through the legislated dispute resolution process and to pay the Applicant IRBs pending the conclusion of that process.

In my view, section 37(5) is a significant provision designed to protect the flow of an insured's weekly income benefits following a "positive" DAC. It requires an insurer to dispute the DAC through the DR process and to continue paying benefits pending the conclusion of that process. On the other hand, section 37(6) simply permits an insured to dispute a stoppage of benefits, and provides that, if it is finally determined that the insurer should not have stopped paying benefits, then the insurer must resume payments and pay any benefits that ought to have been paid. Section 37(6) does not provide for continuing benefits pending the resolution of the dispute. Given the significant requirements imposed on the insurer under section 37(5), and the lesser protections afforded the insured under section 37(6), I find that the fact that an insured has already commenced a proceeding does not relieve the insurer of its obligation to follow the procedure set out in section 37(5) and does not require the existing arbitration to continue.

The appeal decision in Henry and Allstate Insurance Company of Canada (FSCO Appeal P96-00064, July 23, 1997) establishes that, while the DAC/DR process "protects the flow of benefits by controlling the insurer's right to cancel them," it is a matter of "process, not entitlement" and that the "pay pending" obligation "does not create an entitlement that is immune from later challenge."² Applied to the present case, my finding that the Insurer breached its obligations under section 37(5) does not create an entitlement for the Applicant to IRBs which is immune from later challenge. However, if the current arbitration were allowed to proceed, the Applicant would bear the onus of establishing that he was entitled to ongoing income replacement benefits, whereas if the Insurer had followed the procedure set out in section 37(5), it would have borne the onus of commencing the DR process and of proving that the DAC had incorrectly concluded that the Applicant continued to be disabled. I find that the fact that the Applicant commenced this arbitration should not result in the continuation of a process in which (among other procedural issues) the onus of proof is reversed.

Therefore, while the finding of a breach of section 37(5) may not create an entitlement, I find that it results in more than simply an order for interim benefits, pending the conclusion of the present arbitration. Given the significance of the DAC process (as discussed in my earlier decision) and given that section 37(5) seeks to protect this process, I find that an insurer must bear the consequences of breaching the provision and not be permitted to benefit from an insured who, quite understandably, has launched an arbitration to challenge the termination of benefits. The insurer must do what it ought to have done in the first instance, namely, initiate the DR process and pay the insured benefits pending the resolution of the dispute.

This approach would preserve the integrity of the DAC and DR process regarding the Applicant's entitlement to income replacement benefits beyond the 104-week mark. By requiring the Insurer to comply with the procedure set out in section 37(5), the Applicant's entitlement to pre-104 week IRBs would be properly determined. As both counsel submitted, and consistent with the principle set out in Henry, the Applicant's entitlement to post-104 week benefits would then also be determined in accordance with the DAC and DR process. Allowing the current arbitration to proceed would undermine the mechanisms specifically designed for properly determining entitlement to weekly income benefits.

Mr. Rose accepts that, if the Insurer has breached the terms of section 37(5) of the Schedule, then it must commence a mediation and court action, despite the fact that, at the initial hearing of this matter, Mr. Rose appeared to allude to the possibility that requiring the Insurer to challenge a 2-year old DAC would be an absurd result. In any event, other than the issue of an insurer's common-law right to commence an action (dealt with in the first set of reasons), I heard nothing to suggest that the Insurer would be prejudiced by being required to proceed through the DR process in the normal course. I also agree with Mr. Wilson that he put the Insurer on notice that its approach to section 37(5) was improper and that it should, therefore, not be permitted to take advantage of the fact that the Applicant subsequently commenced an arbitration proceeding.

I, therefore, find that the Insurer must comply with the procedure set out in section 37(5), and the current arbitration regarding the Applicant's income replacement benefits is at an end.

The arbitration can proceed in respect of the Applicant's claims for housekeeping benefits and a special award.

EXPENSES:

As previously indicated, the matter of expenses will be addressed at the conclusion of these proceedings.

May 17, 2002

Eban Bayefsky Arbitrator

Date