Mary K. Shadd v. Liberty Mutual Insurance Company, 2003 ONFSCDRS 85

Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2003 ONFSCDRS 85

Appeal P02-00001

OFFICE OF THE DIRECTOR OF ARBITRATIONS

MARY K. SHADD Appellant/Respondent

and

LIBERTY MUTUAL INSURANCE COMPANY Respondent/Appellant

Before: David Draper, Director of Arbitrations

Representatives: Geoffrey D.E. Adair for Mrs. Shadd J.D. Tomlinson for Liberty Mutual

Hearing Date: By written submissions received February 3, 2003 and February 24, 2003

SUPPLEMENTARY APPEAL ORDER

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

1. Paragraph 1 of the arbitration order dated November 28, 2001, is revoked and replaced with the following:

2. Liberty shall pay Mrs. Shadd an LEC benefit under Part VI of the Schedule of:

(a) $253.63 per week from May 1, 1998 through December 31, 1998;

(b) $255.41 per week from January 1, 1999 through December 31, 1999;

(c) $262.05 per week from January 1, 2000 through December 31, 2000; and,

(d) $269.12 per week from January 1, 2001 through December 31, 2001.

2. The parties will bear their own expenses in respect of the supplementary appeal process.

May 27, 2003

David R. Draper Director of Arbitrations

Date

REASONS FOR DECISION

I. NATURE OF THE APPEAL

The dispute in this case is about the amount of Mary K. Shadd’s loss of earning capacity benefits (“LECBs”). According to Part VI of the SABS-1994,¹ LECBs are the difference between the insured person’s pre-accident earning capacity (“PEC”) and his or her residual earning capacity (“REC”). The Arbitrator ordered Liberty Mutual Insurance Company (“Liberty Mutual”) to pay LECBs based on a PEC of $334.25 and a REC of zero.

Both parties appealed. Liberty Mutual made two arguments. First, it claimed the Arbitrator erred in calculating the PEC based on gross, not net income. Second, it disputed the REC. In Liberty Mutual’s submission, the Arbitrator erred in focusing on Mrs. Shadd’s ability to return to work as a self-employed hairdresser, ignoring her capacity to work as a part-time employee. Mrs. Shadd challenged the PEC. She claimed the Arbitrator underestimated her PEC based on factual findings that did not have a proper evidentiary basis.

Before the appeal was heard, I held a telephone conference on April 15, 2002. Mr. J.D. Tomlinson represented Liberty Mutual. Mrs. Shadd was represented by Mr. James E.S. Allin, her lawyer during the arbitration process. Mr. Allin advised that Mr. Geoffrey Adair would be acting on the appeal, but he continued with the telephone conference. Based on what I understood to be an agreement by counsel, I put the appeal on hold and arranged for a resumption of the arbitration hearing to deal with two issues: arbitration expenses and the net/gross question raised by Liberty Mutual in its appeal.

The Arbitrator heard submissions by telephone on May 17, 2002. He awarded Mrs. Shadd her arbitration expenses, but accepted Liberty Mutual’s argument that he had mistakenly calculated the PEC based on a gross, not net income. As a result, he recalculated the LECBs, reducing them by about $100 per week.

Following the release of this decision, Mrs. Shadd expanded her appeal. She claimed the Arbitrator went beyond correcting a “typographical error, error of calculation or similar error,” as allowed by the Dispute Resolution Practice Code, and improperly amended his order while it was under appeal. Further, she claimed that the process was unfair. Relying on an affidavit from her previous lawyer, Mr. Allin, Mrs. Shadd argued that he only made submissions on the Arbitrator’s authority to amend the order and, as a result, never addressed the substantive issue.

In a decision dated December 24, 2002, I dismissed Liberty Mutual’s appeal and the main part of Mrs. Shadd’s appeal. However, I held that the matter went back to the Arbitrator based on a misunderstanding and, as a matter of fairness, Mrs. Shadd should be given an opportunity to make submissions on the net/gross issue. As the most efficient, cost-effective approach for resolving the remaining dispute, I asked for written submissions on the following questions:

(1) Did the Arbitrator err in failing to convert the amounts he used for Mrs. Shadd’s pre-accident earning capacity ($15,801, plus $1,580 for tips) from gross to net?

(2) In the event that he did, what is the correct amount of Mrs. Shadd’s loss of earning capacity benefits?

II. ANALYSIS

The Arbitrator correctly identified s. 29(2) of the SABS-1994 as the relevant provision. Because Mrs. Shadd was self-employed at the time of her accident, her PEC is deemed to be her net weekly income determined in accordance with s. 81 or 82, using the gross annual income she could reasonably have earned at the time of the accident. The approach dictated by this section is clear: determine the gross annual income Mrs. Shadd could reasonably have earned at the time of the accident and then convert it to net weekly income according to the formula in s. 81 or the tables described in s. 82. Liberty Mutual did not elect to use the tables and, therefore, the s. 81 equation applies:

A =

B – C – D – E

52

where,

A = the person’s net weekly income from employment,

B = the person’s gross annual income from employment,

C = the annual premium payable by the person under the Unemployment Insurance Act (Canada) on the gross annual income from employment,

D = the annual contribution payable by the person under the Canada Pension Plan (Canada) on the gross annual income from employment,

E = the income tax payable by the person under the Income Tax Act (Canada) and the Income Tax Act (Ontario) on the gross annual income from employment.

The focus at arbitration was on how much Mrs. Shadd could reasonably have earned at the time of the accident. She claimed an amount considerably higher than the income she had reported to Revenue Canada in previous years. As the Arbitrator correctly held, she was entitled to do so, but had to provide some reasonable basis for the amount she claimed. He was not persuaded that she actually earned $55 - $56,000 in 1993, as she claimed, but accepted that she could have earned more than shown in her tax returns. The question was, how much more?

As stated in my previous decision, there were no perfect measures in this case. The Arbitrator was faced with two competing approaches, presented by accounting experts retained by each party. While he could have accepted all, part or none of the calculations, he adopted the approach taken by Ms. Debra Chiasson, the expert retained by Liberty Mutual, with no apparent qualifications. His reasons follow:

Liberty’s accounting expert, Ms. Debra Chiasson, testified that $15,801 net income for full-time hairstylists in Windsor, Ontario is more accurate. She held that it is unlikely Mrs. Shadd would potentially be able to earn more money than the average for her specific geographic area given that her declared net earnings at the time of the accident were far less than this amount. Ms. Chiasson’s number is more consistent with Mrs. Shadd’s reported earnings, and I accept it. (p. 6, footnote eliminated)

To calculate Mrs. Shadd’s PEC, the Arbitrator simply divided $15,801, plus an amount for tips, by 52 weeks. In other words, he proceeded as if the deductions for income tax, UI and CPP had already been done. The problem is that Ms. Chiasson’s evidence, both written and oral, does not support this calculation. She presented $15,801 as a reasonable measure of Mrs. Shadd’s gross annual income – after expenses, but before reductions for income tax, UI and CPP. Referring to the s. 81 equation, it was intended to be variable “B.” The clearest illustration is found in Ms. Chiasson’s report, dated November 2, 2000.² The $15,801 figure is used to calculate Mrs. Shadd’s gross weekly income, an amount that is then reduced, using the 1994 income tax rates, to obtain her net weekly income.

The only possible confusion is found in the following exchange early in Ms. Chiasson’s cross-examination:

Q. And in your report you have assumed Mary’s PEC to be $15,801.40 a year. Is that right?

A. That’s one option, yes. Under 29.2, yes.

Q. Okay. So, the key here then is the sourcing of the 15,800 odd dollars.

A. Right.

Q. And is it a realistic figure for Mary’s, for Mary Shadd’s pre-accident capacity. So let’s just examine that. You have not been provided with any, what I call empirical data, of - - or I guess more of an acronym would be ground zero data of income of hairdressers in Chatham, Ontario for 1994 or 1996. Is that correct?

A. Correct.

Mrs. Shadd submits that this evidence supports the view that $15,801 was her PEC, with no need for further deductions. I do not agree. Read in context, Ms. Chiasson was defending the $15,801 figure as an appropriate measure for calculating Mrs. Shadd’s LECBs. As set out in her report, deductions still had to be made to convert this amount from gross to net.

The problem is the Arbitrator’s use of “net.” Although the term is given a specific meaning in the SABS-1994, he uses it at various points in the decision to mean after expenses, but before income tax, UI and CPP. For example, on page 4, he states that Mrs. Shadd’s 1993 income tax return shows “gross annual earnings” of just under $17,000 and “net income” of approximately $8,000. A review of the tax return shows, however, that the $8,000 was before income tax, UI or CPP. Similarly, the Arbitrator states that Mr. Wollach, the accountant called by Mrs. Shadd, testified that $26,859 was a reliable measure for “the national average net earnings for full-time hairdressers.”³ However, in cross-examination, Mr. Wollach confirmed that the $26,859 figure was gross income before tax.⁴

Read in this context, I find that the Arbitrator accepted Ms. Chiasson’s opinion that Mrs. Shadd’s PEC should be calculated based on a gross annual income (after expenses, but before income tax, UI and CPP) of $15,801. It follows that this amount, plus 10% for tips, must be reduced by income tax, UI and CPP, and then divided by 52 to determine Mrs. Shadd’s net weekly income, or PEC. Mrs. Shadd does not dispute the calculations presented by Liberty Mutual, which I accept as accurate. As a result, the LECBs payable are as follows:

(a) $253.63 per week from May 1, 1998 through December 31, 1998:

(b) $255.41 per week from January 1, 1999 through December 31, 1999;

(c) $262.05 per week from January 1, 2000 through December 31, 2000; and,

(d) $269.12 per week from January 1, 2001 through December 31, 2001.

III. APPEAL EXPENSES

Although Mrs. Shadd was unsuccessful in this stage of the appeal, little additional work was required and Liberty Mutual did not specifically ask for its expenses. In the circumstances, I conclude that the parties should bear their own expenses.

May 27, 2003

David R. Draper Director of Arbitrations

Date

Footnotes

1. 1Ontario Regulation 776/93, as amended, the Statutory Accident Benefits Schedule—Accidents after December 31, 1993 and before November 1, 1996.
2. 2Arbitration exhibit 15, Appendix V.
3. 3Arbitration decision, p. 6.
4. 4Arbitration transcript, Volume 3, p. 596.