Neutral Citation: 2004 ONFSCDRS 80

FSCO A02-001475

BETWEEN:

MARK SMITH

Applicant

and

WAWANESA MUTUAL INSURANCE COMPANY

Insurer

REASONS FOR DECISION

Before:

William J. Renahan

Heard:

December 15, 2003, January 29 and March 5, 2004, at the offices of the Financial Services Commission of Ontario in Toronto.

Appearances:

Charlia D. von Buchwald, Barrister and Solicitor, for Mr. Smith

Adam Moras, Barrister and Solicitor, for Wawanesa Mutual Insurance Company

The Applicant, Mark Smith, was injured as a result of a motor vehicle accident on August 10, 1999. He applied for and received statutory accident benefits from Wawanesa Mutual Insurance Company ("Wawanesa"), payable under the Schedule.¹ The parties were unable to resolve a number of disputes through mediation, and Mr. Smith applied for arbitration at the Financial Services Commission of Ontario under the Insurance Act, R.S.O. 1990, c.I.8, as amended.

When this hearing opened on December 15, 2003, the issues concerned entitlement to attendant care expenses under section 39 of the Schedule, housekeeping expenses under section 22, the amount of the income replacement benefit, interest and a special award. At the outset of the hearing, the parties resolved the attendant care and housekeeping issues. Between the first and second sitting, Wawanesa's accountant went to Mr. Smith's place of business and the parties resolved the amount of income replacement benefit.

The remaining issues in this hearing are:

Is Mr. Smith entitled to interest pursuant to section 46 of the Schedule on income replacements benefits?
Is Mr. Smith entitled to a special award pursuant to section 282(10) of the Insurance Act?
Is Mr. Smith entitled to expenses of the arbitration proceeding.

Mr. Smith is entitled to interest on outstanding income replacement benefits due on and after June 28, 2002 from the date they became due until the date they are paid at 2 per cent per month compounded monthly.
Mr. Smith is entitled to a special award. If the parties are unable to agree on the amount of a special award, I will make the calculation after I have the parties submissions on the amount of outstanding income replacement benefits and interest as set out in these reasons.
The issue of whether Mr. Smith is entitled to expenses is deferred.

Background:

On August 10, 1999, Mr. Smith was watching a worker use a hydraulic lift to lower a septic tank onto his property when a cap on a hydraulic cylinder exploded off and hit Mr. Smith on the side of his face. His injuries included broken facial and jaw bones on the left side of the face, a facial tear from the temple to jaw, nerve damage and a closed head injury. The nerve damage makes the side of Mr. Smith's face feel numb. It also affects his ability to eat and to close his left eye. Deficits from the brain injury include poor judgment, planning, organization, memory and problem solving skills. Mr. Smith has undergone three rounds of surgery to reconstruct his face.

Mr. Smith returned to work at his automobile garage in Spanish, Ontario in December 1999. Spanish is close to Elliot Lake. Wawanesa arranged for therapists to work with Mr. Smith at his business and home. The $100,000 medical and rehabilitation coverage was exhausted in August 2003. Mr. Smith's application to a Designated Assessment Centre for a determination that his impairments met the statutory definition of "catastrophic impairment" was declined.

Mr. Smith was 38 years old at the time of the accident. He was a heavy equipment mechanic in a mine up to its closing in 1996. In anticipation of the closing, he built and operated a automobile garage in his home town of Spanish and worked there full-time after the mine closed. He operated the business as a sole proprietorship. He had one helper who mostly repaired automobiles. Mr. Smith did small engine repairs and some auto repairs. He ordered parts and dealt with customers. His wife, Deena, is a registered nurse and at the time of the accident worked half-time at that occupation. She also worked about 16 hours a month on the bookkeeping for the garage. She took her accounts to a large accounting firm which prepared the garage financial records and Mr. Smith's income tax return.

Mr. Smith's initial entitlement to an income replacement benefit was calculated on the basis of his income in the 1998 taxation year, the last complete fiscal period before the accident.

Interest:

Section 46 provides that interest of 2 per cent per month compounded monthly is payable on overdue payments. An amount is overdue when the insurer fails to pay the benefit within the time required under Part X of the Schedule. Under section 35, if an insurer determines that an income replacement benefit is payable, the insurer shall pay the benefit within 14 days after receiving the application for the income replacement benefit. Under section 33, the benefit is not payable for any period before the insured complies with his duty to provide any information reasonably required to assist the insurer in determining the person's entitlement to a benefit.

In Bajic and Pafco Insurance Company and Zurich Insurance Company, (FSCO P00-00050, June 5, 2001), Director Draper wrote:

As Director's Delegate Naylor stated in Sebastian and Canadian Surety Company, (FSCO P96-00032, July 28, 1998), the interest provisions are remedial, not punitive. They are "designed not only to compensate applicants for the value of money withheld but to further the system's fundamental goal of ensuring prompt payment of benefits for an injured person's medical and vocational rehabilitation, their care or their day-to-day financial support."² I agree with this analysis, although as I held in Trendle and Economical Mutual Insurance Company, (OIC P96-000009), there are limits. If the insured person acts in a manner that effectively prevents the insurer from assessing his or her entitlement, interest may not run.

Normally, interest is payable on the applicant's benefit entitlement for the period the benefit is withheld, starting 14 days after the benefit was due.

Wawanesa argued that section 33 applied to suspend the payment of an increased income replacement benefit until the date of the hearing when Mr. Smith complied with his duty to provide financial information and that no interest was payable because the income replacement benefit was not overdue.

Special award:

Section 282(10) of the Insurance Act provides:

If the arbitrator finds that an insurer has unreasonably withheld or delayed payments, the arbitrator, in addition to awarding the benefits and interest to which an insured person is entitled under the Statutory Accident Benefits Schedule, shall award a lump sum of up to 50 per cent of the amount to which the person was entitled at the time of the award together with interest on all amounts then owing to the insured (including unpaid interest) at the rate of 2 per cent per month, compounded monthly, from the time the benefits first became payable under the Schedule. R.S.O. 1990, c. I.8, s. 282 (10); 1993, c. 10, s. 1.

The evidence concerning whether Mr. Smith failed to provide financial information and whether Wawanesa unreasonably withheld payments overlap. I therefore will consider the evidence on the issues of interest and special award together.

Evidence:

Wawanesa retained McCully & Associates Inc. ("McCully") to calculate Mr. Smith's income replacement. In November 1999, Mr. Smith's lawyer sent Mr. Smith's 1998 financial statements and tax return to McCully. The financial records for Mr. Smith's garage business showed that Mr. Smith had a net income of $4,329 on sales of about $140,000 for the fiscal year ending December 31, 1998. On the basis of this income, Wawanesa paid an income replacement benefit of $65.70 per week.

Mr. Smith was content to rely on his records and never claimed that he had a cash income that was not reflected in his financial statements. Rather, the only issue with respect to the calculation of his income replacement benefit was whether it should be larger than $65.70 per week to reflect losses he incurred as a result of his inability to work at his business.

Business losses from self-employment resulting from an accident are dealt with in sections 6(5) and (6) of the Schedule as follows:

(5) If the insured person was self-employed at the time of the accident and the person incurs losses from self-employment as a result of the accident, the insurer shall add to the amount of the income replacement benefit payable to the person 80 per cent of the losses from self-employment incurred as a result of the accident.

(6) For the purpose of subsection (5), losses from self-employment shall be determined in the same manner as losses from the business in which the person was self-employed would be determined under subsection 9 (2) of the Income Tax Act (Canada) and the Income Tax Act (Ontario), without making any deductions for,

(a) expenses that were not reasonable or necessary to prevent a loss of revenue;

(b) salary expenses that were paid to replace the person's active participation in the business, except to the extent that those expenses were reasonable for that purpose;

(c) non-salary expenses that were different in nature or greater than the non-salary expenses incurred before the accident, except to the extent that those expenses were necessary to prevent or reduce any losses resulting from the accident;

(d) expenses that are eligible for capital cost allowance or an allowance on eligible capital property; or

(e) losses deductible under section 111 of the Income Tax Act (Canada).

Shortly after Mr. Smith returned home, Wawanesa arranged for therapists to assist Mr. Smith and his family and retained an adjuster in Elliot Lake. On October 6, 1999, the adjuster reported to Wawanesa on the seriousness of the injury. The adjuster noted that Mr. Smith's father was answering calls for the business, but no one was performing the work. During a November 1999 telephone conversation between McCully and Mr. Smith's lawyer, the lawyer advised McCully that Mr. Smith had hired a helper and that Mr. Smith's father was also helping in the business. Half of the helper's wages were paid by a government grant. The parties also discussed how the benefit would be calculated if Mr. Smith hired a qualified replacement worker.

In July 2000, McCully replied to the adjuster's request about the effect of hiring a worker to replace Mr. Smith and explained section 6(4)(b) of the Schedule. In August 2000, Mr. Smith's lawyer advised McCully that Mr. Smith's father was working at the business without pay in order to keep it open. In August 2000, Mr. Smith's family doctor wrote to the adjuster that Mr. Smith had suffered a permanent brain injury and drastic change in personality. He wrote:

This man is unable to work, as he did before, in his shop anymore due to safety reasons. He is unable to accomplish the work that he used to do very well by himself in the past. His memory is poor, as is his concentration. His organizational skills as well as his accounting knowledge have greatly been diminished as a result of his brain damage. He requires an assistant to make the day productive enough in order to keep his business going. He enjoys his work and would rather keep working instead of going on some type of disability. I feel it is the insurance company's responsibility to see to it that his life continue as normal as possible by allowing him to continue with his work. As a result, we require that the Insurance Company pay for the full wages for an employee that he would not need if it were not for the accident. If the Insurance company would cover this wage, the assistant could be hired to assist Mark at the shop. I realize that the company tries to minimize every claim so that the overall premiums of the policyholders do not increase and the company makes a certain profit. That's business! But when a person takes an insurance policy, it is with the understanding that if something should happen then the Insurance will indemnify its holder for loss of life, loss of limb or loss of income. In this case, we are asking only that the patient be given all that he was insured for. I feel the insurance company is lacking in fulfilling their responsibilities in this case. I would hope that something be done soon to help this unfortunate victim of a head injury resume his life as best he can.

In July 2001, the occupational therapist reported to the adjuster that Mr. Smith still needed an additional employee because of his reduced ability to work. The therapist continued to support:

the need for an additional employee in the workplace which results in reducing the demands on Mr. Smith, thus allowing him to function at his slower pace. With the absence of an additional employee, this therapist predicts Mr. Smith would be overwhelmed resulting in increased errors and decreased productivity.

In November 2001, Mr. Smith's psychologist reported to the adjuster:

To be blunt, I think it is a miracle that Mark has been able to keep the garage business. Undoubtably, Kevin Reed, Occupational Therapist, has been invaluable in this. It needs to be pointed out, however, that the ongoing success of this business has rested a lot on the hiring of someone in the garage who can be fairly independent. It has also depended on his wife constantly monitoring the overall running of the business. If they were to lose this employee and more of the garage work were to fall to Mark, he would undoubtably fail because of his fatigue, poor memory and cognitive flexibility. I think there is a chronic risk of this family losing this business.

Marks' wife is extremely stressed in dealing with the challenges that Mark presents with, and without some ongoing support I have serious concerns for her own physical and mental health.

In July 2002, the psychologist reported to the adjuster:

Further, it appears that Mark's cognitive problems have certainly hindered the profitability of his business. He has lost accounts, not billed for services and not had products available, such as gas, due to his difficulties and it has taken him longer to do work as he has sometimes had to do a job over, or has forgotten to finish it.

Mr. Smith's financial statements for the business indicate that the wage expense increased about $10,000 for the year after the accident.

On May 2, 2002, Mr. Smith's lawyer invited McCully to go to Spanish and visit Mr. Smith's business and accountant. On June 28, 2002, Mr. Smith's accountant prepared a supplementary report on its calculation of Mr. Smith's income replacement benefit. After the accident Mrs. Smith increased her hours performing general clerical duties from 16 to 32 hours per month. This report of June 28, 2002 shows this expense for the first time. Mr. Smith seeks interest from June 28, 2002.

McCully continued to advise the parties that it could not calculate the amount of the income replacement benefit without source documentation. The only reason it advanced for not accepting the invitation to go to Spanish to examine the records is contained in a letter of November 13, 2003:

Although Mr. Smith's representative has indicated that we may review the detailed financial records in Spanish, Ontario, this may present some logistical problems, as we would hope to be able to obtain copies of detailed purchase and sales records in order to attempt to calculate the correct revenue and expense figures.

McCully went to Spanish between the first and second sittings of this hearing and the parties resolved the amount of income replacement benefit for the fiscal periods in dispute.

No representative from Wawanesa testified at this hearing.

I find that Wawanesa knew from the outset that Mr. Smith was self-employed, that he was seriously injured, that he wanted to continue to operate his business, that he could not function at his pre-accident capacity and that his income in the last fiscal year before the accident was $4,329. At the time of the accident, Mr. Smith was close to a net loss position and it is reasonable to conclude that as a result of the accident he would have increased expenses which would push his business into a loss position.

In the summer of 2000, Wawanesa had ample evidence to conclude that the cost of a replacement worker was a reasonable expense. As such, it was reasonable to conclude that the business would operate at a loss and that sections 6(4) and (5) of the Schedule would apply to increase the income replacement benefit to reflect that loss. The business loss was evident in the report of

Mr. Smith's accountant dated June 28, 2002. I accept Mr. Smith's contention that Wawanesa should have increased the income replacement benefit to reflect post-accident losses by June 28, 2002. Accordingly, I find that the increased income replacement benefits the parties agreed to, were overdue as of June 28, 2002, and interest is payable on overdue payments from that date.

As well, Wawanesa should have known by the summer of 2000 that Mr. Smith's brain injury, not only prevented him from keeping organized records, but also contributed to the disorganization of his business records. Mrs. Smith is qualified as a registered nurse. I heard no evidence that she had bookkeeping or accounting training. Despite her additional efforts to maintain proper business records, with her husband handling the daily activities of the business, it was difficult for her to compile accurate records. In these circumstances, I find that Wawanesa could not reasonably expect Mr. Smith to provide source documentation which would satisfy McCully.

Mr. Smith's lawyer first invited McCully to inspect the business records in Spanish on May 2, 2002. McCully went on January 20, 2004, after this hearing had opened. As a result of that meeting, the parties settled the amount of income replacement benefit for the various fiscal periods. The only evidence I heard on why McCully did not accept the invitation earlier was because attending in Spanish might present "logistical problems." I do not find this is a valid reason for Wawanesa not arranging for an accountant to inspect the records of its insured at his place of business in Ontario.

The parties agreed, that for some fiscal periods, Mr. Smith's income replacement benefit exceeds $400 per week. Wawanesa did not concede that the income replacement benefit can exceed $400 until after the hearing had concluded. In Welsh v. Economical Mutual Insurance Co.³ Director Draper found that reasonable post-accident expenses which increase the losses of a self-employed person are not capped at $400. This decision was issued on October 7, 2003. Before then, it was arguable that business losses could not increase an income replacement benefit to more than $400. However, after the Welsh decision, I find it was unreasonable to withhold weekly income replacement benefits which exceeded $400.

In summary, Wawanesa knew in the summer of 2000 that Mr. Smith was disabled from work and that he could not maintain proper business records because of his head injury. It knew that prior to the accident, his self-employment income was meagre and that he was close to a loss position. It knew that the business needed a worker to replace or assist Mr. Smith. It should have known that it was very likely that the business would suffer increased expenses and a resulting loss and that sections 6(5) and (6) of the Schedule would very likely apply to Mr. Smith to increase the amount of his income replacement benefit.

In these circumstances, I find that it was unreasonable for Wawanesa to wait until this hearing had started before sending an accountant to Spanish. Mr. and Mrs. Smith impressed me as honest people trying to do their best in very difficult circumstances. I find it likely that the parties would have resolved the amount of the income replacement benefit if Wawanesa had accepted Mr. Smith's invitation to view his business records and operations in Spanish in May 2002. It's failure to do so resulted in it unreasonably withholding and delaying the payment of the correct income replacement benefit. As a result, I am required to make a special award.

At the time of the accident, the Smiths' only debt was a $50,000 business loan from Mr. Smith's father. As a result of the accident, the Smiths have cashed in savings bonds and borrowed an additional $67,000. Mrs. Smith and Mr. Smith's father have put in extra time at the business. Mrs. Smith had to return to full-time work. The prompt payment of the correct income replacement benefit would have alleviated some of the suffering this family has endured as a result of this accident. In assessing the amount of the special award I will take into consideration that the stress surrounding Mr. Smith's injuries and personality change were compounded by Wawanesa's failure to comply with its statutory duty to promptly pay the correct income replacement benefits.

Director Draper described the formula for calculating the amount of a special award in Liberty Mutual Insurance Company and Persofsky and others⁴. I invite the parties to make written submissions on the following: (1) the amount of income replacement benefit withheld; (2) interest on that amount calculated in accordance with section 46 of the Schedule; (3) the additional interest component set out in section 282(10) of the Insurance Act - two per cent per month, compounded monthly; and, (4) the total amount I should consider in determining the amount of the special award. I am asking for mathematical calculations and submissions on how each party arrived at their calculations. The parties may also make further submissions on what percentage of the total amount I should award as a special award.

Mr. Smith shall have 30 days from the date of this decision to make written submissions, Wawanesa shall have a further 10 days to make a written response and Mr. Smith shall have a further 10 days to reply to Wawanesa's response.

EXPENSES:

If the parties cannot agree on whether Mr. Smith is entitled to expenses of the arbitration proceeding, they may make written submissions using the same time frame as set out above.

May 28, 2004

William J. Renahan Arbitrator

Date