Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2005 ONFSCDRS 105

Appeal P03-00021 and P04-00015

Appellant/ Respondent on Variation

and

Respondent/ Applicant on Variation

Before:

David Evans

Representatives:

Todd J. McCarthy for State Farm

Chris Caston for Mrs. Scott

Hearing Date:

October 7 and 8, 2004

APPEAL and VARIATION/REVOCATION ORDER

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

The appeal is denied, and the arbitration order, dated May 15, 2003, is confirmed.
Paragraph 1 of the order dated May 15, 2003 is varied by striking out the words “in the amount of $218.25.” The exact calculation of Mrs. Scott’s income replacement benefits is left to the determination of the arbitrator in the hearing scheduled in FSCO A04-001790 on September 21, 2005.

August 4, 2005

David Evans Director’s Delegate

Date

Mrs. Scott is receiving income replacement benefits (“IRBs”) payable under the SABS–1996¹ arising out of a March 20, 1999 accident. State Farm initially paid her weekly IRBs of $385.15 – before deductions – from March 27, 1999, but terminated them in May 2001. The issues herein relate to the deductions: in his May 15, 2003 order, the arbitrator set the quantum of the weekly IRBs at $218.25 and found that it should not be reduced by the disability retirement pension Mrs. Scott receives. State Farm appeals the arbitrator’s order on deductibility and Mrs. Scott seeks a variation of the quantum.

The arbitration hearing dealt with Mrs. Scott’s disability and the treatment of certain collateral benefits.

With respect to disability, Mrs. Scott started working at St. Joseph’s Health Centre in Hamilton in August 1984 in a full-time secretarial position. The arbitrator found that Mrs. Scott is not employable in any capacity at that position and remains entitled to IRBs beyond May 2001. This finding was not appealed.

With respect to collateral benefits, Manulife Financial began paying Mrs. Scott long-term disability benefits (LTDs) on May 21, 1999. These are deductible from her IRBs.² Mrs. Scott had also enrolled in the Hospitals of Ontario Pension Plan (“HOOPP”) on April 1, 1985.³ In 2000 she applied for a disability retirement pension available under HOOPP and has been receiving it since June 1, 2000. The HOOPP disability retirement pension is deductible from the LTDs: the issue before the arbitrator was whether it is also deductible from the IRBs. He found it is not, resulting in a greater IRB.⁴

Mrs. Scott also applied for a Canada Pension Plan disability pension. Her claim had been accepted at the time of the arbitration hearing, but she did not know the amount nor had she received any funds. In the result, her CPP disability pension is retroactive to July 1, 1999. The effect of the CPP disability pension on the quantum of the IRBs is one of the grounds on which Mrs. Scott seeks a variation of the order.⁵

Mrs. Scott seeks to vary the order with respect to quantum on three points. First, paragraph 1 of the Arbitration Order simply provides as follows: “State Farm shall pay Mrs. Scott income replacement benefits from May 10, 2001 to date and ongoing in the amount of $218.25, pursuant to section 4 of the Schedule.” However, Mrs. Scott had been receiving the HOOPP disability retirement pension since June 2000. She seeks a variation to retroactively increase the benefits for the period from June 1, 2000 to May 10, 2001 to account for the HOOPP disability retirement pension.

Second, the parties and the arbitrator were aware that Mrs. Scott had recently been awarded the CPP benefit. As discussed below, the CPP benefit is not deductible as a payment for loss of income in this case,⁶ but again it is deductible from the LTDs. The IRB awarded does not reflect this fact.

Third, the $218.25 the arbitrator set for the IRBs reflected discussions during the arbitration on whether the LTD benefit was net or gross of tax. Only the net of tax LTD amount is deductible, but Mrs. Scott’s then lawyer mistakenly used the gross when counsel for State Farm calculated the IRBs for the arbitrator. State Farm submits that Mrs. Scott is bound by that error.

I note that since March 2004, State Farm has been paying Mrs. Scott’s full IRBs, deducting only the small amount of LTDs that remain after the HOOPP and CPP deductions. This change resulted from the second mediation Mrs. Scott initiated in March 2004 as a preliminary step leading to the second Application for Arbitration.⁷

Finally, the parties agreed that the variation decision will (at least initially) only deal with which of any of the possible variations are allowed. Eventually, a detailed calculation will be required, as the fluctuating LTDs⁸ mean no single weekly amount for the outstanding benefits can be fixed.

I will deal first with the appeal and then the variation application.

A. Appeal

Section 7(1) of the SABS-1996 entitles an insurer to deduct from IRBs the amount of “net weekly payments for loss of income that are being received by the person as a result of the accident . . . under any income continuation plan.” The arbitrator found that the HOOPP payment is not deductible pursuant to s. 7 because it is a pension and not an income continuation plan. I agree. I will now set out in more detail why it is a pension and why that fact matters.⁹

Determining that a payment is a pension matters because, as discussed in Cugliari v. White (1998), 1998 CanLII 5505 (ON CA), 159 D.L.R. (4th) 254, 38 O.R. (3d) 641,¹⁰ and Wilcox and Economical Mutual Insurance Company, (FSCO P99-00015, March 2, 2000), the aim of deduction provisions such as s. 7 is to prevent double recovery. Double recovery occurs where a person is paid twice for her loss. Thus, a person cannot receive both income replacement benefits and their equivalent under some other plan of indemnification. However, non-indemnity payments are not considered to contribute towards double recovery. The Court of Appeal in Cugliari stated that, although the categorization of payments as either indemnity or non-indemnity is not the determinative test, the distinction is helpful since the words “payments . . . for loss of income” import a notion of indemnification. As the Director stated in Wilcox, while the words of the legislation govern, they must be interpreted in light of the common law rules they have replaced. In this respect, I note that at common law, pensions are considered to be non-indemnity payments: Canadian Pacific Ltd. v. Gill, 1973 CanLII 2 (SCC), [1973] S.C.R. 654, and Cunningham v. Wheeler (1994), 1994 CanLII 120 (SCC), 113 D.L.R. (4th) 1, 23 C.C.L.I. (2d) 205 (S.C.C.).

The issue of what is a non-indemnity payment is more difficult to determine where a payment is not clearly a pension.¹¹ In Cugliari, the issue was whether Canada Pension Plan disability benefit payments (discussed below) were deductible as “payments . . . for loss of income” under 267(1)(c) of the Insurance Act. The Court held the purpose of preventing double recovery under the statute would not be advanced “when the conditions for eligibility do not require that the recipient be employed at the time of the disability or that the recipient demonstrate a pecuniary loss.” Charron J.A. also held that the payments were not deductible under common law, notwithstanding the fact that contributions to the Plan are mandatory, because CPP disability benefits can be considered akin to a private policy of insurance, and by making contributions to the Plan, the plaintiff gave up consideration in return for the benefits.

The Court of Appeal thus drew a parallel with the kind of private policy of insurance considered in Wilcox. In that case, the Director considered the deductibility of payments made pursuant to a private disability plan arranged and paid for by an insured with no employer-funded disability coverage. He held that Cugliari applies in the accident benefit scheme because the issue still to be determined is whether the injured person’s losses, whether determined under common law principles or legislation, can be reduced by another type of compensation. He also held that Cugliari did not determine the outcome because it involved a CPP disability pension, not disability benefits. He then considered that although Ms. Wilcox’s disability policy provided financial protection, it did not “continue” her income nor depend on any demonstrated loss of income. He also noted that the insured’s employer was not involved in arranging or paying for her policy, and her benefits were not tied to her income. He concluded:

Ms. Wilcox had the foresight to arrange her own disability coverage. This has been viewed by the courts as a public good, leading to interpretations that have given such individuals full access to their benefits unless the legislation clearly provides otherwise.

In this case, the arbitrator first cited a description of the disability retirement pension contained in the HOOPP publication A Guide to Your Pension Plan, updated January 2002. He quoted this passage:

Disability Pensions

If you can’t return to any job due to a total and permanent disability, you have two options under HOOPP:

you can, at the end of your approved health leave, apply for an extended disability leave (see previous section); or
you can apply for a HOOPP disability pension.

To qualify for a disability pension, HOOPP must determine that you meet its definition of totally and permanently disabled. In addition, you must be under age 65 and:

have belonged to HOOPP for at least two years;
have contributed to the Plan before your date of disability; and
apply for the disability pension within four years of the last day that you worked.

A HOOPP disability pension is calculated based on the projected years of contributory service you would have built in HOOPP up to age 65 or 35 years of service, whichever would have come first had you not become disabled. However, projected disability pensions cannot exceed the year’s maximum pensionable earnings (YMPE) for the year in which the disability pension started.

Although this description is accurate as far as it goes, important contextual elements are missing, especially when compared to the actual Hospital of Ontario Pension Plan Text.¹² For instance, although the Guide refers to a “disability pension,” the benefit’s name in the Plan Text is disability retirement pension, and it is the only disability-related payment. Two forms of disability benefits are available under the plan – the disability retirement pension and contributory service that is credited to a disabled member.¹³ Thus, for example, an extended disability leave allows a disabled member to accrue contributory service and to be deemed to receive annualized earnings during the period of disability,¹³ but it does not pay her any money.

Crucial to my consideration of the nature and purpose of the disability retirement pension is the election to retire: the member claiming it has to elect to retire by selecting a disability retirement date. She then becomes a retired member on that date and any accrual of contributory service ceases.¹⁴ The contributory service used in the calculation of her pension includes contributory service projected from her disability retirement date to the earliest of her attaining age 65 and accruing 35 years of contributory service.¹⁵ Unless the retired member recovers from her total and permanent disability prior to age 65, the disability retirement pension continues until she dies, and even then her spouse or designated beneficiary is entitled to further benefits.¹⁶

To return to the decision under appeal, the arbitrator distinguished a decision of the Ontario Superior Court of Justice in De Frias v. Lumbermens Mutual Casualty Company, [2000] O.J. No. 603, upon which State Farm had relied. That case involved a disability insurance program under a collective agreement. He cited the following passage from the decision of Brokenshire J.:

The origin of the plans under the Collective Agreement, the direct relationship of the disability to the employment of the disabled person, the commencement date of payments being tied to the working schedule of the disabled person, the exemption out of holidays, the continuing involvement of the union and the employer in disability examinations, and the direct relationship of the amount of benefit to the amount of income of the disabled person all point to the payments as being payments for loss of income.

The arbitrator stated that the nature of the disability plan at issue is different than that described in the court’s reasons as it is not so clearly tied to Mrs. Scott’s employment. Indeed, the disability retirement pension is not tied at all to Mrs. Scott’s previous working schedule, nor is there any suspension of the benefit during holidays, unlike the scheme in De Frias. Neither unions or employers are involved in disability examinations: as set out in s. 11.¹⁷ of the Plan Text, entitled Medical Evidence, the Administrator¹⁸ finally and conclusively decides whether a member may retire with a disability retirement pension on a disability retirement date due to total and permanent disability and whether the member remains in that condition.

The arbitrator wrote that the disability retirement pension “is a pension. The benefit level is not directly related to Mrs. Scott’s income at the time that she went off work, but is a defined benefit plan based on years of membership in the plan.” As with many pension plans, a percentage of the member’s average annualized earnings is multiplied by her years of contributory service, so the relation to salary at the time of disability is indirect. Even more importantly, in my view, the calculation of the “Disability Retirement Pension Benefit” set out under s. 11.8 is identical to that for the “Normal Retirement Lifetime Pension Benefit” set out under s. 8.2, except for the references in the former to the disability retirement date (instead of the normal retirement date) and to the combined accrued and projected contributory service. Sections 8.2 (Normal) and 11.8 (Disability) both set out that the pension shall be equal to

(1). [1.5% of that portion of the Member’s Average Annualized Earnings which does not exceed the Average YMPE plus

2% of that portion of the Member’s Average Annualized Earnings which exceeds the Average YMPE]

multiplied by

her Contributory Service from January 1, 1966, that is integrated with Canada [Pension¹⁹] Plan Contributions;

plus

(2) 2% of the Member’s Average Annualized Earnings

multiplied by

her Contributory Service since the Effective Date that is not integrated with Canada Pension Plan Contributions.

I am less convinced by the arbitrator’s finding that the benefit is similar to the disability pension at issue in Wilcox, especially when he wrote that “Mrs. Scott voluntarily chose to enroll in the plan and was not required to do so.” However, Ms. Wilcox sought out her own disability plan, a plan that did not involve her employer. By way of contrast, Mrs. Scott did not need to seek out the HOOPP, as it is a major institution involving many employers, their workers and several unions and is closely integrated with hospital work.²⁰ Furthermore, Mrs. Scott was required to enrol in the Plan.²¹

That is why in my view the HOOPP disability retirement pension is more like the CPP disability pension considered in Cugliari than the disability plan in Wilcox. As noted in Cugliari, the CPP is described in its preamble as “An Act to establish a comprehensive program of old age pensions and supplementary benefits in Canada payable to and in respect of contributors.” Similarly, the first section of the Plan Text indicates that HOOPP’s primary purpose is to “provide periodic payments to Members of the Plan for their lifetime after retirement.” The CPP provides for six types of benefits: retirement pensions, disability pensions, death benefits, survivor’s pensions, disabled contributor’s child’s benefits and orphan benefits. HOOPP provides similar benefits: a pension, accrual of pension when a member is not working, the disability retirement pension, death benefits and survivor pensions. Both CPP and HOOPP benefits are funded by employers and employees through a system of mandatory contributions based upon the amount of wages and salaries paid by and to contributors. As with the CPP, membership in HOOPP is mandatory.²² Finally – and this is another of the valid grounds the arbitrator relied on – pension recipients are not required to show economic loss in order to qualify.

The court in Cugliari noted that a person does not have to be employed at the time the disability commences to receive a pension; indeed the recipient may have been unemployed for the five years preceding the disability. The HOOPP disability retirement pension is more work-related, as it is only available to active, inactive, pending or disabled members. A pending member, for instance, may be an unemployed member seeking employment with a participating employer or a member on leave while furthering her health-care education. Nonetheless, the principle is similar to that of the CPP.

With respect to the amount of the benefit, the court in Cugliari placed weight on the fact that the CPP benefit amount is not based solely on pensionable earnings earned during the course of employment, but includes a flat rate payable to all recipients. HOOPP contains no flat rate portion but only a maximum.²³ However, in my opinion, what makes the HOOPP disability pension benefit more similar to a regular pension – and thus non-deductible – is the fact already noted that it is calculated essentially in the same way as the regular pension. To reiterate: unlike the CPP, the HOOPP disability retirement pension does not cease when the beneficiary begins receiving a retirement pension or a pension under a provincial pension plan or reaches age 65. It ceases only when she no longer meets the criteria and is under age 65.²⁴

In conclusion, I find that the grounds for non-deductibility in this case are even stronger than in Cugliari. The disability retirement pension is calculated in essentially the same way as the normal retirement lifetime pension benefit, and it provides similar survivor and death benefits to the regular pension. As such, it is not a form of insurance and cannot be said to “continue” Mrs. Scott’s income. The HOOPP payments, quite simply, are her pension.

For these reasons, the appeal is dismissed.

B. Variation

Pursuant to Rule 61.1 of the Dispute Resolution Practice Code, an insured person may apply to vary or revoke an arbitration order if (a) there has been a material change in the circumstances of the insured, (b) evidence not available on the arbitration or appeal has become available, or (c) there is an error in the order.

With respect to the HOOPP pension for the period from June 1, 2000 to May 10, 2001 and its effect on the IRBs, I find there is an error in the order due to a conflation of the results set out by the arbitrator in his decision and the ultimate order. On page 2 of the decision, the arbitrator gave these results:

Mrs. Scott is entitled to income replacement benefits from May 10, 2001 to date and ongoing pursuant to section 4 of the Schedule.
The HOOPP disability pension is not deductible from the income replacement benefit and accordingly Mrs. Scott is entitled to a weekly benefit of $218.25.

On page 4 he wrote:

The parties are agreed that Mrs. Scott’s income replacement benefit, if she is entitled to it, is $218.25, if the HOOPP pension is not deductible. If the pension is deductible the income replacement benefit is reduced to zero.

Finally, in the order he wrote:

State Farm shall pay Mrs. Scott income replacement benefits from May 10, 2001 to date and ongoing in the amount of $218.25, pursuant to section 4 of the Schedule.

From the above, State Farm submits that it is not liable to increase the IRBs for the period before May 10, 2001 to take account of the HOOPP disability retirement pension. That is untenable. The agreement only applies to the amount of the IRBs. The arbitrator’s second result – that the HOOPP disability retirement pension is not deductible from the income replacement benefit – is not time-limited. That is, it is not specifically limited to the period from May 10, 2001. The result inherently applies to the HOOPP pension at all times and so includes the period before May 10, 2001. However, as set out below, I leave it to the arbitrator to make the relevant calculations.

Turning to the CPP disability pension, State Farm submits that the agreement regarding the amount of the IRBs included the CPP. However, the transcript shows that when the amount of the IRBs was discussed before the arbitrator, the parties were only considering whether or not the amount of the LTD was gross or net. The amount of the CPP benefit was unknown, as shown in this exchange in the cross-examination of Mrs. Scott:

Q. And when you mentioned the CPP, you have applied for that, and that was approved October 2nd of 2002?

A. Yes.

Q. But you haven’t received any money from CPP?

A. No.²⁵

Ms. Pamela Blaikie, the former counsel for Mrs. Scott, testified before me that, in agreeing to the $218 figure for the IRBs, she had not qualified it to take account of the CPP because it was not an issue in the hearing and it was not something she thought she had to qualify. Ms. Ruth Rawsthorne, claims handler for State Farm who was present at the arbitration hearing, testified before me that at the time of the arbitration hearing there had been no discussion of the CPP pension benefit and that the sole purpose of the discussions around the IRB quantum was to determine the proper amount of the net LTD benefit. She testified that once she got the information about the CPP at the mediation in March 2004, she reduced the LTD deduction to $11.53 a week,²⁶ but she is not paying the resulting increased IRB retroactively.

I find that the agreement did not include the CPP because it was not an issue at the hearing nor was it discussed between the parties.

This leads to the last point, namely the agreement about the amount of the IRBs. State Farm relies on Scherer v. Paletta, 1966 CanLII 286 (ON CA), [1966] 2 O.R. 524 (C.A.) and submits that Mrs. Scott is bound by Ms. Blaikie’s agreement. However, the Court of Appeal in Scherer stated that a solicitor may bind his or her client by a compromise of the proceedings. I find there was no compromise or deal-making here. Instead, Ms. Blaikie was trying to determine the net LTD. Through simple inadvertence she agreed that the gross amount of $1,693.89 for the LTD was the net amount.

I also note that State Farm had the information to show that the $1,693.89 was gross. In reviewing the documents State Farm possessed, Ms. Rawsthorne testified that the figure was mistakenly given as net when it was gross and that the IRB was adjusted in March of 2004 when she was informed of the mistake. Mr. Brad Mitchell, another claims representative for State Farm, testified that he handled the file until October 2001. He had received the letter from Mrs. Scott’s counsel of June 6, 2001, which included a letter from Manulife Financial, the LTD carrier, indicating that the $1,693.89 “was a taxable benefit, therefore, federal tax was deducted.”

The Manulife letter also included a printout of payments, all for less than $1,693.89. He testified that from that chart one could assume that those were the net amounts of the LTD going to Mrs. Scott, so the chart and the letter together indicate the $1,693.89 was gross. He testified that if State Farm had been paying IRBs it would have mattered if the LTD was net or gross, and he would then have appropriately adjusted the IRBs. Since State Farm was not paying IRBs, he saw no need to make the adjustment.

I find that in agreeing to the amount of the IRBs Ms. Blaikie was not engaging in any compromise or settlement with State Farm. I find that the parties erred in agreeing that the $1,693.89 was net and that the documents in State Farm’s possession showed the true nature of that amount as being gross. I find in these circumstances that Scherer v. Paletta does not apply. Accordingly, I find that the order should be varied to reflect the net and not the gross amount of the LTD on the basis that there was an error in the order.

As noted above, the actual amount of the net LTD fluctuated over time, depending on the deductions Manulife applied, and therefore a detailed calculation of the IRBs is required. In addition, there is a further arbitration hearing scheduled for September 2005 to deal with the CPP deduction as well as an alleged overpayment of interest,²⁷ interest on outstanding benefits and a special award. Although Mrs. Scott submits that it would be more efficient for me to deal with the matter, I find that the additional findings to be made in the upcoming hearing are required to determine accurately the quantum of the IRBs. Accordingly, the upcoming hearing should proceed, subject only to my finding that Mrs. Scott is not bound by the agreement on the IRB amount presented at the original arbitration hearing.

Accordingly, the arbitrator²⁸ will be free to make his decision regarding the calculation of the IRB amount in light of these findings: that the HOOPP pension is deductible from the LTDs from June 1, 2000; that the issue of the CPP disability benefit was not determined at the arbitration hearing; and that Mrs. Scott is not bound by the agreement on the quantum of the IRBs at the arbitration hearing.

In order to make it clear that the figure given in the order is not binding, therefore, the order is varied by striking out the words “in the amount of $218.25” from paragraph 1.

IV. EXPENSES

The appeal and variation expenses were not addressed at the hearing. The parties are encouraged to resolve the issue, but if they are unable to do so, the matter may be resolved in accordance with Rule 79 of the Dispute Resolution Practice Code.