Long Thanh Chau v. Guarantee Company of North America, 2003 ONFSCDRS 178

Neutral Citation: 2003 ONFSCDRS 178

FSCO A02-001650

BETWEEN:

LONG THANH CHAU

Applicant

and

GUARANTEE COMPANY OF NORTH AMERICA

Insurer

DECISION ON A PRELIMINARY ISSUE

Before:

Eban Bayefsky

Heard:

September 4, 2003, at the offices of the Financial Services Commission of Ontario in Toronto.

Written submissions were received by September 10, 2003.

Appearances:

Albert Conforzi for Mr. Chau

Gregory Van Berkel for Guarantee Company of North America

The Applicant, Long Thanh Chau, claims to have been injured in a motor vehicle accident on March 6, 2002. He applied for statutory accident benefits from Guarantee Company of North America ("Guarantee"), payable under the Schedule.¹ Guarantee denied Mr. Chau's claim for income replacement benefits and housekeeping expenses. The parties were unable to resolve their disputes through mediation, and Mr. Chau applied for arbitration at the Financial Services Commission of Ontario under the Insurance Act, R.S.O. 1990, c.I.8, as amended.

The substantive issues for arbitration are whether Mr. Chau is entitled to income replacement benefits, housekeeping expenses and a special award. Guarantee raised the preliminary issue of whether, pursuant to section 48(1) of the Schedule, Mr. Chau is disentitled to benefits on the basis that he wilfully misrepresented material facts with respect to his application for benefits. At the commencement of the preliminary issue hearing, Mr. Chau raised two objections to Guarantee's case, the first pertaining to the late service of expert reports and the second relating the Insurer's failure to notify Mr. Chau of the reasons for denying him benefits.

The issues at this stage of the preliminary issue hearing are:

Is Guarantee precluded from introducing three expert reports, and from calling an expert witness, because it failed to provide Mr. Chau with sufficient notice of this evidence, contrary to Rules 39-42 of the Dispute Resolution Practice Code?
Is Guarantee precluded from proceeding with its defence that Mr. Chau is disentitled to benefits under section 48(1) of the Schedule, because Guarantee failed to give Mr. Chau notice of the reasons for denying him benefits on this basis, contrary to section 48(2) of the Schedule?

Guarantee may introduce the three expert reports and call the expert as a witness.
Guarantee provided Mr. Chau notice under section 48(2) of the Schedule on December 19, 2002. The preliminary issue hearing may proceed to consider whether, as of that date, Mr. Chau was disentitled to benefits on the basis that he wilfully misrepresented material facts with respect to his application for benefits.

Late Service of Reports

Guarantee retained the services of TSI Solutions Inc. ("TSI" - an investigative agency) to investigate the circumstances of Mr. Chau's accident. Guarantee relies on four expert reports, the first authored by Mr. Stan Swann, an investigator with TSI, the other three by Mr. Rob Seaton, a collision reconstructionist with TSI. Mr. Swann's report essentially dealt with Mr. Chau's statements concerning the location of the accident. Mr. Seaton's reports essentially dealt with the mechanism of the accident as described by Mr. Chau. The date of Mr. Swann's report is July 18, 2002. The dates of Mr. Seaton's reports are July 30, 2002, May 28, 2003 and July 15, 2003. Guarantee received the four reports on July 19, 2002, August 1, 2002, June 3, 2003 and July 29, 2003, respectively.

Guarantee provided Mr. Chau with Mr. Swann's report on October 18, 2002, just after the mediation in this matter. However, Guarantee only served Mr. Chau with Mr. Seaton's reports on August 18, 2003, seventeen days prior to the preliminary issue hearing. Guarantee advised at the pre-hearing conference that it would likely be calling a representative of TSI Solutions Inc. at the preliminary issue hearing, and intends on calling Mr. Seaton as an expert witness for this purpose.

Rule 39 of the Practice Code states, in part, that a party must serve an expert's report on an opposing party at least 30 days before the hearing, except in extraordinary circumstances. Rule 40 states, in part, that if a party intends to rely on any portion of investigative evidence, it must provide copies of all investigative reports at least 30 days before the hearing. Rule 41 states, in part, that a party must provide an opposing party with the names of its witnesses at least 30 days before the hearing, unless an arbitrator orders otherwise. Rule 42 states, in part, that a party intending to call an expert witness must provide an opposing party with the name, qualifications and substance of the facts and opinions the expert will present at least 30 days before the hearing, unless an arbitrator orders otherwise. Rule 81 states, in part, that an arbitrator may, on such terms as he or she considers just, set aside any time limit in the Rules for doing any act, serving any notice or filing any document.

Guarantee concedes that it served Mr. Seaton's reports and qualifications within 30 days of the preliminary issue hearing. However, it submits that it did not intend to rely on his first two reports until it received the third, and what it considered to be final, report (the other two reports simply being interim reports). Guarantee submits that the delay from July 29, 2003 (the date it received the last report) to August 18, 2003 in serving Mr. Chau with the reports was due, in part, to Guarantee's counsel being out of the office until August 7, 2003 and to his having to deal with various matters upon his return. Guarantee maintains that, despite the late service of the reports, Mr. Chau has not suffered any prejudice, based, in part, on his not requesting an adjournment to review and to respond to the reports.

Mr. Chau submitted that, in light of the serious allegation of wilful misrepresentation in this case, Guarantee must be held to strict compliance with the timelines set out in the Practice Code, that the first two of Mr. Seaton's reports were not simply interim or preliminary reports and that he has suffered prejudice simply by the late service of these reports. Mr. Chau submitted that he was not seeking, and did not need, time to review and to respond to Mr. Seaton's reports. Mr. Chau stated that he was ready to proceed with the preliminary hearing, including the cross-examination of Mr. Seaton.

I am prepared to admit Mr. Seaton's reports into evidence and to allow him to testify. Parties ought to produce the materials upon which they intend to rely in a timely fashion. However, as Rule 81 of the Practice Code indicates, the time limits set out in the Code are not immutable. The Commission's jurisprudence establishes that the application of the "30 day rule" depends on the relevance and materiality of the disputed evidence, the reasons for the late disclosure and the potential prejudice to the opposing party.² I note, in particular, the decision of Tran and State Farm Mutual Automobile Insurance Company (FSCO A02-000418, March 20, 2003) in which the arbitrator admitted a late report despite the absence of "extraordinary circumstances" under Rule 39 of the Practice Code, on the basis that this would not have "resulted in any procedural unfairness or in an unfair hearing."

I find that Mr. Seaton's reports are relevant and material to the preliminary issue hearing of whether Mr. Chau wilfully misrepresented facts regarding his application for benefits. While the reports expand the scope of Guarantee's case against Mr. Chau, they do not, in my view, alter the essential nature of Guarantee's position that Mr. Chau wilfully misrepresented facts material to his claim.

Regarding the status of each of Mr. Seaton's reports, the first one could be considered to be an interim report in that it recommended further investigation by a physician experienced in the analysis of injuries suffered in motor vehicle accidents. However, the second report contains no recommendations for further investigation and can be said to be a final or "stand-alone" report. The third report contains new investigations of the accident scene and incorporates some of the previous findings. While the reports may or may not have been "interim" or "preliminary" reports, I find that they were part of Guarantee's ongoing investigation of the circumstances of the accident. In this regard, I note that the first of TSI's reports (by Mr. Swann) identified the need to obtain the police collision report, that Guarantee reiterated this need in its December 2003 Response to the Application for Arbitration, that each of Mr. Seaton's reports depended to a certain extent on this information and that Mr. Seaton did not receive this material until July 7, 2003 (although Guarantee appears to have received it on April 9, 2003).

I accept Guarantee's explanation that they awaited Mr. Seaton's final report (in which he incorporated new information arising from the police collision report) before determining whether to rely on all of his reports. Had Guarantee only disclosed Mr. Swann's report on the basis that they had decided not to rely on Mr. Seaton's reports, Guarantee would have been in breach of Rule 40 of the Practice Code regarding the disclosure of all investigative reports. However, I am not prepared to find (as Mr. Chau urged me to do) that Guarantee sought to "suppress" either of Mr. Seaton's first two reports. I accept that Guarantee legitimately wished to complete its investigation and review of the circumstances of the accident before determining whether to rely on and, therefore, to produce Mr. Seaton's reports.

Finally, and, in my view, most importantly, Mr. Chau has not indicated that he will suffer any tangible prejudice if Mr. Seaton's reports are admitted and Mr. Seaton is permitted to testify. In my view, whether an insurer is alleging wilful misrepresentation or an insured is claiming a special award, an arbitrator has the discretion to admit late documents where this would not result in any procedural unfairness, or to make such orders as would be required to avoid any procedural unfairness. In this case, Mr. Chau has not sought any relief in response to Mr. Seaton's reports, other than to exclude them altogether. I am not prepared to exclude these materials simply on the basis of their lateness (particularly in light of the fact that some of the delay at the 30-day mark was attributable to administrative issues involving counsel's work in and out of his office). Admitting the reports and allowing Mr. Seaton to testify will not cause Mr. Chau any prejudice. I need not make any changes to the hearing as it is currently constituted.

Notice of Termination for Wilful Misrepresentation

Guarantee maintains that Mr. Chau is disentitled to benefits on the basis that he wilfully misrepresented material facts with respect to his application for benefits, contrary to section 48(1) of the Schedule. Mr. Chau submits that Guarantee is precluded from raising this defence because it failed to notify him that this was the basis for denying him benefits. Section 48(1) of the Schedule states that "if an insured person has wilfully misrepresented material facts with respect to an application for a benefit, the insurer may terminate payment of the benefit." Section 48(2) states that "the insurer shall not terminate payment under subsection (1) unless the insurer provides the insured person with notice of the reasons for terminating payment."

Mr. Chau initially applied for benefits on March 25, 2002. By letter dated April 15, 2002, the independent adjuster retained by Guarantee advised Mr. Chau that Guarantee refused to pay for a treatment plan because it had not received a completed application for benefits. On April 15, 2002, Mr. Chau applied for housekeeping benefits. By an Explanation of Benefits Payable, dated May 8, 2002, Guarantee advised Mr. Chau that he was not eligible for income replacement benefits ("IRBs") because he had collateral benefits through a private disability carrier. On May 15, 2002, Mr. Chau submitted a further application for housekeeping benefits. By an Explanation of Benefits Payable, dated May 23, 2002, Guarantee advised Mr. Chau that the noted treatment plan would be paid, or had been paid, directly to the service provider, but that a small portion of the claim would not be honoured. At the preliminary issue hearing, the parties indicated that they were uncertain as to whether this account had, in fact, been paid. On June 5, 2002, Mr. Chau applied for mediation in respect of Guarantee's failure to pay IRBs and regarding his claim for housekeeping expenses.

In its Response to the Application for Mediation, dated October 9, 2002, Guarantee stated as follows:

Subsequent investigation of the circumstances of this accident suggest that the accident did not occur as alleged by the claimant. It is the position of the Guarantee Company that the claimant has willfully misrepresented the circumstances of the accident, which are facts material to his claim for statutory accident benefits. Therefore, the claimant is not entitled to statutory accident benefits as a result of this incident.

In the Document List section of its Response, where it was asked to list all available documents to which it intended to refer at the mediation, Guarantee listed the "Statement of the claimant dated May 2, 2002." Where it was asked to list the documents it intended to obtain, Guarantee listed "all police information in respect of the March 6, 2002 accident, including the motor vehicle collision report and police officer's notes."

The mediation occurred on October 11, 2002. The Report of Mediator, dated the day of the mediation, identified as the issues remaining in dispute, initial entitlement to IRBs, housekeeping expenses and interest. The mediator did not specify the issue of wilful misrepresentation.

On October 15, 2002, a paralegal at Mr. Conforzi's firm wrote Mr. Van Berkel, stating that the letter was "further [to] our mediation of October 11, 2002." The paralegal said that he "look[ed] forward to receiving the two statements that you have in your possession that have led the Guarantee Company of North America to an opinion that there is a willful misrepresentation of the circumstances on the part of our client."

On October 18, 2002, Mr. Van Berkel sent to Mr. Conforzi's office Mr. Chau's statement of May 2, 2002 and Mr. Swann's report of July 18, 2002.

On October 29, 2002, Mr. Chau again applied for housekeeping expenses. By an Explanation of Benefits Payable, dated November 11, 2002, Guarantee stated that it was not able to respond to Mr. Chau's claim for housekeeping expenses as its investigation was incomplete, that Mr. Chau had not performed the relevant housekeeping duties prior to the accident and that he did not suffer a substantial inability to perform the duties in question.

Mr. Chau applied for arbitration on November 15, 2002 in respect of IRBs, housekeeping, interest, expenses and a special award. By its Response, dated December 18, 2002, Guarantee disputed Mr. Chau's entitlement to these items and stated the following regarding the issue of wilful misrepresentation:

The claimant provided a statement to the Guarantee Company on May 2, 2002. He provided further information to TSI Solutions Inc., which had been retained by the Guarantee Company to conduct additional investigation into the circumstances of the alleged accident, a summary of which is contained in a report from TSI Solutions Inc. dated July 18, 2002. The two statements contain discrepancies relating to the location of the accident and the object struck by the claimant's vehicle. Based on the discrepancies, it is the Guarantee Company's position that the claimant has willfully misrepresented the circumstances of the alleged accident for the purpose of claiming statutory accident benefits from the Guarantee Company.

In Schedule "B" to its Response, Guarantee's list of documents to which it would refer at the arbitration included Mr. Chau's May 2002 statement and Mr. Swann's July 2002 report. In the list of documents it intended to obtain, Guarantee stated "all police information relating to the motor vehicle accidents of March 6 and 8, 2002."

By letter dated July 2, 2003, the pre-hearing arbitrator confirmed that a preliminary issue hearing would be held on September 4, 2003 on the issue of wilful misrepresentation, noting Guarantee's allegation that Mr. Chau "ha[d] given discrepant accounts of how and where the incident of March 6, 2002 occurred and had wilfully misrepresented the circumstances of the incident."

Mr. Chau submits that, under section 48(2) of the Schedule, Guarantee was required to give him notice of the reasons for denying him benefits under section 48(1) contemporaneously with the denial. Mr. Chau indicated that, prior to its Response to his Application for Arbitration, Guarantee had not notified him of the reasons for denying him benefits under section 48(1). Mr. Chau maintains that Guarantee cannot rely on anything said "on the mediation" to further its position against him.

Guarantee submits that it gave Mr. Chau actual and sufficient notice of its position under section 48 and that it did so well before the preliminary issue hearing. Guarantee submits that, even if it is found not to have complied with section 48(2), it is entitled to an adjournment of the preliminary hearing to rectify the breach, since the substantive issue of an insured's misrepresentation of facts under section 48(1) is a matter for determination at a hearing, distinct from an insurer's compliance with the notice requirements under section 48(2).

I find that, as of December 19, 2002 (the date it served its Response to the Application for Arbitration), Guarantee complied with section 48(2) of the Schedule and that the preliminary issue hearing can proceed to consider whether, as of that time, Mr. Chau was disentitled to benefits under section 48(1) of the Schedule.

Mr. Chau submitted that Guarantee could not rely on anything in the mediation to substantiate its position that it had given him actual and sufficient notice under section 48(2). I disagree. Section 48(2) provides no form in which the notice is to be given. In my view, the question is the adequacy of the content of the notice rather than its particular form. I, therefore, find that Guarantee could notify Mr. Chau of its position through the mediation. I do not find that the entire mediation process is privileged or beyond consideration in the course of an arbitration. Mediation documents, including the Application, Response and Report of Mediator, are routinely considered in the course of determining the scope of an arbitration. Given that one function of the mediation is to define the issues that are in dispute between the parties, the privilege that attaches to settlement positions within mediations ought not to apply to evidence of the issues that were formally documented in the mediation process. This is particularly the case since Mr. Chau included the mediation Application and Response in his arbitration materials to show the chronology of events in this process. Similarly, I find that Guarantee could notify Mr. Chau of its position through the documents it filed in the arbitration.

Section 48(1) entitles an insurer to terminate benefits if an insured has misrepresented material facts with respect to an application for a benefit. However, section 48(2) states that an insurer shall not terminate benefits under section 48(1) unless it gives the insured notice of the reasons for terminating benefits. In my view, section 48(2) establishes a condition precedent by which an insurer is only entitled to terminate benefits for wilful misrepresentation if it has provided the insured with notice of the reasons for terminating benefits on this basis. In a manner similar to section 8 of the Statutory Powers Procedure Act, R.S.O. 1990, c. S.22, as amended, which entitles a person to be furnished with reasonable information of alleged wrongdoing prior to a hearing, section 48(2) requires notice to be given so as to enable an insured to know and to respond to the case against him or her.

Section 48(2) presumes that an insurer is in the process of paying the insured benefits. In the present case, Guarantee had denied Mr. Chau IRBs from the outset of the claim on the basis that he had access to collateral benefits. Guarantee initially did not respond to Mr. Chau's claims for housekeeping benefits. Just prior to the mediation, Guarantee took the position that Mr. Chau was not entitled to any benefits on the basis that he had wilfully misrepresented the circumstances of the accident. In my view, where, as here, an insurer has not paid the insured benefits, and subsequently concludes that the insured is disentitled to benefits on the basis of wilful misrepresentation, it must provide the insured notice under section 48(2) in order to be able to maintain wilful misrepresentation as a basis for denial.

In the case of Smith v. Co-operators Insurance Co. (2002), 2002 SCC 30, 36 C.C.L.I. (3d) 1, the Supreme Court of Canada addressed the issue of whether the insurer had complied with its obligation to advise the insured of the dispute resolution process, so as to commence the running of the limitation period to bring an action. Speaking for the majority, Gonthier J. stated:

In my opinion, the insurer is required under s. 71 to inform the person of the dispute resolution process contained in ss. 279 to 283 of the Insurance Act in straightforward and clear language, directed towards an unsophisticated person.

As I have mentioned above, insurance law is, in many respects, geared towards protection of the consumer...[which obliges] the courts to impose bright-line boundaries between the permissible and the impermissible without undue solicitude for particular circumstances that might operate against claimants in certain cases.

While the present case does not deal with a limitation period, I nevertheless find that the general principles set out by the Supreme Court are applicable to an insurer's obligation to notify an insured of reasons under section 48(2) of the Schedule.

Guarantee has not paid Mr. Chau any IRBs or housekeeping expenses (the substantive issues for the arbitration). Guarantee denied Mr. Chau IRBs on the basis of his access to private disability insurance benefits. About a month later, Mr. Chau applied for mediation, and approximately six weeks after this, Guarantee received evidence which it subsequently concluded disentitled Mr. Chau to benefits on the basis of wilful misrepresentation. Guarantee advised Mr. Chau of this roughly three months later in its Response to his Application for Mediation. A few days after the mediation, Guarantee provided Mr. Chau with the two documents upon which it maintained that Mr. Chau had misrepresented the facts of his claim. Mr. Chau applied for arbitration about a month after this, and in its Response a month later, Guarantee elaborated the basis of its allegation of wilful misrepresentation.

In my view, Guarantee only complied with its obligation to provide Mr. Chau notice under section 48(2) of the Schedule when, on December 19, 2002, it provided Mr. Chau with its Response to an Application for Arbitration. I find that, as of that date, Guarantee was entitled to maintain its denial of benefits on the basis that Mr. Chau had wilfully misrepresented his claim for IRBs and housekeeping benefits.

I do not find that Guarantee provided sufficient notice in its Response to the Application for Mediation. Guarantee essentially restated section 48(1) of the Schedule without providing any details of the manner in which Mr. Chau may have misrepresented the circumstances of the accident. Consistent with Smith v. Co-operators, Guarantee ought to have provided a clear and detailed explanation, directed towards an unsophisticated person, of the reasons upon which it felt Mr. Chau had misrepresented his claim. Ideally, Guarantee also ought to have provided the documents on which it maintained that Mr. Chau had misrepresented his case. Guarantee only provided these materials following the mediation. I do not find that this remedied Guarantee's initial failure to provide Mr. Chau with reasons for its denial of benefits. Again, Guarantee ought to have provided Mr. Chau with a straightforward explanation of the basis for the denial, not through providing two lengthy documents, one of which was a technical report prepared by an investigative agency.

However, I find that Guarantee did provide a clear and detailed explanation of its reasons for invoking section 48(1) in its Response to the Application for Arbitration. It gave a full and straightforward explanation of the manner in which it felt Mr. Chau had misrepresented the circumstances of the accident. By that time, it had also provided the two documents on which it took this position and it referred to these items in its Response.

I acknowledge that Guarantee only recently disclosed the second of TSI's reports (and one of three upon which it further maintained that Mr. Chau had misrepresented his claim). However, I am satisfied that, as of the time it served its Response to the Application for Arbitration, Guarantee had complied with its obligation to provide the reasons required under section 48(2). I have already found that the three other TSI reports did not fundamentally alter Guarantee's position that Mr. Chau had misrepresented the circumstances of the accident. I also consider this to be more an issue of whether, despite their late disclosure, the reports are admissible at the preliminary issue hearing pursuant to the Dispute Resolution Practice Code. I have dealt with this in the first part of this decision. I am also prepared to acknowledge that despite an insurer's initial reasons for claiming that an insured misrepresented his or her case, the insurer might reasonably continue to investigate the circumstances of the accident and, as a result, develop further reasons for taking this position. As noted previously, I accept that this was the case here and I do not find that the late disclosure of the subsequent reports nullifies what was otherwise valid notice through the first two documents and Guarantee's Response to the Application for Arbitration.

I, therefore, find that, as of December 19, 2002, Guarantee complied with section 48(2) of the Schedule and that the preliminary issue hearing can proceed to consider whether, as of that time, Mr. Chau was disentitled to benefits on the basis that he wilfully misrepresented material facts with respect to his application for benefits.

December 17, 2003

Eban Bayefsky Arbitrator

Date