Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2005 ONFSCDRS 115

FSCO A04-001256

BETWEEN:

JOSEPH GALATI

Applicant

and

AVIVA CANADA INC.

Insurer

DECISION ON A PRELIMINARY ISSUE

Before:

Richard Feldman

Heard:

July 11, 2005, at the offices of the Financial Services Commission of Ontario in Toronto

Appearances:

Joseph Galati Joseph Lo Greco, solicitor for Mr. Galati Ms. Thourla Moses-Moore William G. Scott, solicitor for Aviva Canada Inc.

Issues:

The Applicant, Joseph Galati, was injured in a motor vehicle accident on May 13, 1997. He applied for and received statutory accident benefits from Aviva Canada Inc. ("Aviva"), payable under the Schedule.¹ Aviva terminated weekly income replacement benefits on October 9, 1997. The parties were unable to resolve their disputes through mediation and Mr. Galati applied for arbitration at the Financial Services Commission of Ontario under the Insurance Act, R.S.O. 1990, c.I.8, as amended.

The preliminary issues, as identified in the Notice of Hearing of Preliminary Issue, are:

1. Should Mr. Galati's arbitration proceed on an uncontested basis, on the grounds of Aviva's delay in filing its Response to the Application for Arbitration, pursuant to Rules 27.2 and 27.3 of the Dispute Resolution Practice Code?

2. Are the issues raised by Mr. Galati in these proceedings statute-barred, pursuant to section 281.1 of the Insurance Act, on the basis that Mr. Galati did not commence the proceeding within 2 years of Aviva's refusal of the benefits claimed?

3. Are issues 2 (non-earner benefits), 3 (caregiver benefits), 9 (loss on sale of home) and 10 (living expenses while staying with parents) for the main hearing (as identified in the pre-hearing reporting letter of November 9, 2004) statute-barred, pursuant to s. 281(2) of the Insurance Act, on the basis that Mr. Galati has not mediated those issues?

4. Is Mr. Galati entitled to interim benefits and expenses pursuant to sections 279(4.1) and 282(11) of the Insurance Act?

At the preliminary issue hearing, the parties were able to resolve issues 1 and 3 above. With respect to item 1, Mr. Galati waived his objection to the late filing of the Response by Aviva and, on consent, withdrew this issue. With respect to issue 3 above, Mr. Galati has elected to claim income replacement benefits; accordingly, he acknowledges that he has no right to claim non-earner benefits or caregiver benefits and, on consent, withdraws from this application his claims for such benefits (identified as issues 2 and 3 in the pre-hearing letter of November 9, 2004). Furthermore, on consent, the items identified in the pre-hearing letter of November 9, 2004 as issues 9 (loss on sale of home) and 10 (living expenses while staying with parents) for the main hearing are hereby withdrawn by Mr. Galati from this application, without prejudice to the right of Mr. Galati to seek to have these disputes mediated by the Commission and, should mediation not resolve these issues, to have these disputes arbitrated before the Commission (either as part of this application if Aviva consents and time permits or as a separate application for arbitration).

With respect to the last preliminary issue (interim benefits and expenses) identified in the Notice of Hearing, the applicant ultimately advised me that he was no longer seeking interim benefits in the usual sense. Instead, the applicant is seeking a determination that Aviva has failed to comply with the provisions of sections 37 and 49 of the Schedule (i.e. a determination that the notice of stoppage was invalid because Aviva did not provide to Mr. Galati the requisite information about the dispute resolution process) and an order that Aviva must therefore pay to Mr. Galati income replacement benefits from October 9, 1997 (the date of the notice of stoppage) to the present and ongoing until Aviva does comply with the said provisions of the Schedule. It is the position of Mr. Galati that this obligation to pay the benefits until "proper notice of termination" is given arises solely from the breach of sections 37 and 49 and that there is no obligation upon Mr. Galati to adduce any evidence of entitlement, need or urgency. Mr. Galati therefore chose not to adduce any evidence at this hearing or to make any submissions with respect to the merits of his application. Counsel for Mr. Galati indicated that if Mr. Galati were unsuccessful on this issue, Mr. Galati would not be seeking an order for interim benefits or expenses as Mr. Galati does not wish to risk having to further postpone the "main" hearing. Aviva did not object to the applicant adding this issue to this preliminary issue hearing.

The two issues that I am therefore being asked to decide are as follows:

1. Are the issues raised by Mr. Galati in these proceedings statute-barred, pursuant to section 281.1 of the Insurance Act, on the basis that Mr. Galati did not commence the proceeding within 2 years of Aviva's refusal of the benefits claimed?

2. (a) Did Aviva breach the provisions of sections 37 and 49 of the Schedule?

(b) If so, as a result of failing to provide a proper notice of stoppage, is Aviva required to pay to Mr. Galati income replacement benefits in the amount of $400.00 per week from October 9, 1997 to the present (plus interest thereon) and ongoing until such time as Aviva does comply with the said provisions of the Schedule?

Result:

1. The issues raised by Mr. Galati in these proceedings are not statute-barred, pursuant to section 281.1 of the Insurance Act. Mr. Galati may therefore proceed to have his application arbitrated upon its merits.

2. (a) Aviva did not comply with the provisions of sections 37 and 49 of the Schedule?

(b) Aviva is not, however, required to pay to Mr. Galati income replacement benefits solely as a result of its failure to comply with the said provisions of the Schedule?

EVIDENCE AND ANALYSIS:

The following facts are not in dispute:

1. Joseph Galati, was injured in a motor vehicle accident on May 13, 1997.

2. Mr. Galati promptly reported the accident to his insurer.

3. He applied for and received statutory accident benefits from the insurer (including medical and rehabilitation benefits, housekeeping and home maintenance benefits and income replacement benefits in the amount of $400.00 per week).

4. The insurer arranged for Mr. Galati to undergo an assessment at a designated assessment centre (a "disability DAC") and continued to pay income replacement benefits pending the report from the disability DAC.

5. The opinion of this DAC was that Mr. Galati was not disabled, as a result of the accident, from carrying out his pre-accident occupational activities or from performing the activities of normal living.

6. In October 1997, in reliance upon the disability DAC report, the insurer stopped paying income replacement benefits to Mr. Galati.

7. The insurer continued to adjust the file and process claims by Mr. Galati for other benefits.

8. Some time between 1998 and 2001, the insurer lost its file. To date, Aviva has still not been able to locate its file.

9. Since Aviva could not locate its file, in late 2001 it asked Mr. Galati's solicitors for copies of all relevant documents. Aviva received some documents from Mr. Galati's solicitors in or about January 2002.

10. Disputes arose between Mr. Galati and Aviva concerning his entitlement to benefits under the Schedule. Ultimately, he filed with the Commission on November 5, 2003 an application for mediation. The report of the mediator was issued on March 24, 2004. The mediation had not been successful in resolving the dispute between the parties. Mr. Galati then filed this application for arbitration on June 18, 2004.

Ms. Thourla Moses-Moore, accident benefit field advisor, testified on behalf of Aviva. Since, however, she did not become involved in this matter until late 2003 or early 2004 and since she was relying on Aviva's records (which, it has been admitted, may be incomplete), I found her evidence to be of very limited value.

Limitation Period

Aviva raised the following preliminary issue with respect to this application: "Are the issues raised by Mr. Galati in these proceedings statute-barred, pursuant to section 281.1 of the Insurance Act, on the basis that Mr. Galati did not commence the proceeding within 2 years of Aviva's refusal of the benefits claimed?" In other words, Aviva is asking me to determine whether Mr. Galati is prevented from proceeding with his application because he allowed the relevant limitation period to expire before filing his application for mediation and his application for arbitration. Section 281.1 of the Insurance Act provides that the mediation proceeding or arbitration must be commenced "within two years after the insurer's refusal to pay the benefit claimed".

Aviva takes the position that on October 9, 1997, the insurer sent to Mr. Galati's solicitors (Banks & Starkman) written notice of stoppage of payment of income replacement benefits and that, since Mr. Galati did not file an application for mediation (or arbitration) until 2004 (more than 2 years later), Mr. Galati is out of time and that this application ought to be dismissed. In support of this argument, Aviva has filed a copy of and Explanation of Benefits Payable form (OCF-9/59) and letter from Paul Moss (accident benefits examiner) to Alvin Starkman of Banks & Starkman, both dated October 9, 1997 (Ex. 2, Tab 17).

Mr. Galati takes the position that, for Aviva to rely upon the defence of the expiration of a limitation period, Aviva must prove (on a balance of probabilities) that it has complied with all relevant notice provisions and has delivered to Mr. Galati all requisite documents and information; if Aviva cannot demonstrate that a valid written refusal was delivered to Mr. Galati then, pursuant to the principles enunciated by the Supreme Court of Canada in the case of Smith v. Co-operators General Insurance Co.², the limitation period did not begin to run, Mr. Galati is not out of time and he is not barred from proceeding with this application. Mr. Galati argues that the insurer's motion should be dismissed for two alternative reasons. First, it is submitted that Aviva has failed to prove that any written notice of stoppage was ever delivered to Mr. Galati. Second, if I am satisfied that the notice dated October 9, 1997 was actually delivered, it is submitted that it is deficient as there is no evidence that Aviva ever complied with the requirements of section 49 of the Schedule, which read (at the relevant time) as follows:

49. If an insurer refuses to pay a benefit under this Regulation or reduces the amount of a benefit that a person is receiving under this Regulation, the insurer shall inform the person in writing of the procedure for resolving disputes relating to benefits under sections 279 to 283 of the Insurance Act.

Although Smith was decided under the previous version of the Schedule (Bill 164), the wording of the relevant sections (section 71 in Bill 164 and section 49 in the current Schedule, Bill 59) is identical. Furthermore, the guiding principles have not changed. The Supreme Court of Canada held in Smith that one of the main objectives of insurance law is consumer protection, particularly in the field of automobile insurance. The Court wrote:

True to that purpose of consumer protection, no refusal under s. 71 . . . can be said to have been given by an insurer if there has not been adequate compliance with that section . . . the insurer is required under s. 71 to inform the person of the dispute resolution process . . . in straightforward and clear language, directed towards an unsophisticated person . . . At a minimum, this should include a description of the most important points of the process, such as the right to seek mediation, the right to arbitrate or litigate if mediation fails, that mediation must be attempted before resorting to arbitration or litigation and the relevant time limits that govern the entire process.

At paragraph 15 of Smith, the Court concluded as follows:

Given that s. 71 of the SABS imposes a requirement to inform the claimant of the dispute resolution process as discussed above, and given that the respondent only informed the appellant of the first step of this process, a proper refusal cannot be said to have been given. Since a proper refusal was not given, and since the limitation period under s. 281(5) [now s. 281.1] of the Insurance Act only begins to run upon a refusal, that limitation period was not triggered by the notice sent on May 8, 1996.

In the absence of any evidence to the contrary, I am satisfied that it is probable that the refusal letter dated October 9, 1997 was delivered to Mr. Galati's solicitors around that date. I also find that service of this notice upon Mr. Galati's solicitors constituted valid service upon Mr. Galati.

The real issue is whether this was sufficient to start the running of the two-year limitation period referred to in section 281.1 of the Insurance Act. Aviva failed to adduce any evidence to demonstrate that it complied with s. 49 of the Schedule.

Counsel for Aviva argued that where a refusal (or stoppage) is based upon a DAC report, there is no longer a need to comply with s. 49 of the Schedule and the principles set out in the Smith case no longer apply. Mr. Scott argued that the Commission has only applied Smith to cases where the refusal is made before a DAC assessment. He argued that since the DAC is part of the dispute resolution process, once the DAC assessment has occurred there is no need to inform an insured about other parts of the dispute resolution process.

I reject these arguments. First, not all cases in which Smith has been followed are "pre-DAC" cases; in Ross and TTC Insurance Company Limited³, for instance, the Commission found that the Smith decision applies equally to cases where the refusal is based upon a DAC report (i.e. where the refusal follows a DAC assessment). Second, while I am not bound by the approach taken in Ross, I agree with it. There is no meaningful distinction to be made between refusals that are made without a DAC being done and refusals that are made in reliance upon a DAC report. Whenever an insurer refuses to pay a claim or terminates payments, the insured is entitled to be advised about his or her right to dispute the decision of the insurer and about all of the important steps involved in the dispute resolution process. Nothing in the Schedule indicates that referring an insured to a DAC relieves an insurer from the obligations imposed by section 49 (as interpreted by the Supreme Court of Canada).

Upon the evidence presented, I find that Aviva failed to comply with sections 37 and 49 of the Schedule by failing to advise Mr. Galati about the dispute resolution process and that, as a consequence, the two-year limitation period did not begin to run. Mr. Galati was not barred from filing his application for mediation on November 5, 2003 (or subsequently filing this application for arbitration) and he may therefore proceed to have this application arbitrated upon its merits.

Other Consequences from a Breach of Sections 37 and 49

Mr. Lo Greco argues, on behalf of Mr. Galati, that if an insurer fails to provide a valid notice of stoppage, payment of accident benefits should continue (at least until a valid notice is provided to the insured). While such an interpretation may be appealing from a consumer-protection standpoint, I find that it is not supported by the wording of the relevant sections of the Schedule or by the case law.

Many of the cases that have explored this issue (i.e. the consequences of an insurer failing to provide proper notice of stoppage) arose under Bill 164. Under s. 64 of Bill 164, the wording was quite a bit stronger than under the current version of the Schedule. Section 64 stated, "An insurer shall not stop payment of weekly benefits . . . except in accordance with this section." Section 37 of the current Schedule merely states that, "If the insurer determines that a person is not entitled or is no longer entitled to receive certain benefits, the insurer shall give the person notice of its determination, with reasons . . ." Mr. Galati's argument might, therefore, have had greater force under the former regime.

In any event, there appear to be no cases (under either Bill 164 or Bill 59) where failing to receive a proper notice of stoppage was found to entitle an insured person to continued payments, except where the insured was deprived of his or her rights to be informed of and be assessed by a proper DAC. Under both Bill 164 and Bill 59, where an insurer intends to terminate benefits on the basis that the insurer has determined that the insured is not impaired (or is not impaired to the extent required to be eligible for the benefit or is not impaired as a result of the accident), the insurer is required to inform the insured about his or her right to be assessed at a DAC and, if the insured person elects to have a DAC assessment done, the insurer is obliged to continue paying benefits at least until receipt of the DAC report. There are different types of DACs and the insurer must ensure that the insured person is assessed at the correct type of DAC. The insurer is also not entitled to rely upon a DAC report that is obviously flawed (such as where the DAC used the wrong "test" to determine impairment or causation). The obligation of the insurer to continue paying the benefits is clearly and explicitly enunciated in the Schedule (s. 64 of Bill 164 and s. 37 of Bill 59).

In the case of Mr. Galati, he was advised of his right to a DAC and underwent a disability DAC assessment. The insurer correctly continued to make payments until it received the DAC report. To this extent, Aviva complied with the provisions of section 37 of the Schedule. Where Aviva fell short was in failing to comply with section 49 (by not providing Mr. Galati with information about the dispute resolution process). There is no express right in the Schedule to have the payments continue solely as a result of a breach of section 49.

In interpreting legislation, courts and tribunals generally avoid interpretations that confirm the existence of legal rights without finding corresponding remedies for a breach of those rights. What are the remedies for a breach of section 49? First, according to Smith, the insurer loses the right to rely upon a limitation period defence. Second, it is a factor that can be taken into account in determining both entitlement to and quantum of interim benefits. Third, it is also a factor that can be considered in determining the entitlement to and the quantum of a special award. Fourth, the insurer will be liable to pay to the insured person interest at the rate of 2% per month, compounded monthly on any payments (i.e. benefits) that were improperly delayed or denied. There are, therefore, remedies available to an insured for a breach by the insurer of the provisions of section 49.

Mr. Galati has argued that a further remedy ought to be the continuation of the disputed accident benefits, without any regard to the merits of the claim. Aviva has argued that such a novel interpretation is not a reasonable one and that it would have serious consequences for insurers. It is submitted that to award to an applicant what amounts to essentially 100% of his claim at a preliminary stage, without any evidence as to the merits of his claim, would not be fair. Aviva raises a number of interesting questions about what would happen if the Commission were to accept the interpretation urged by Mr. Galati. For instance, what would happen if, after receiving this money, the applicant then discontinued the application? Would the insurer be able to recover the money? What proceedings would the insurer commence? Would the onus shift to the insurer to prove that the insured was not entitled to the benefits and is not the onus supposed to be upon the insured to prove entitlement to the accident benefits? As a practical matter, would the insurer be able to collect on any judgment it might receive against the insured?

Mr. Lo Greco argues that the interpretation urged by the applicant is merely an extension of the principles enunciated in Smith. While I acknowledge that the principles in Smith have been extended in a few instances beyond cases involving limitation periods, no case (including the ones provided to me by Mr. Lo Greco) has yet gone as far as I am being urged to go. In my view, it would require my reading into the Schedule a remedy for a breach of section 49 that is not expressly granted therein. The purpose of the Commission (and, in fact, of any quasi-judicial tribunal) is to interpret the relevant legislation, not to write new provisions into that legislation. In the absence of clear wording in the Schedule stating that the payment of benefits must continue if an insurer fails to provide a valid notice of stoppage (i.e. a notice that contains adequate information about the dispute resolution process), I do not find that such a remedy automatically flows from a breach of section 49.

For the foregoing reasons, Mr. Galati's request for an interim order that Aviva pay income replacement benefits in the amount of $400.00 per week from October 9, 1997 to the present (plus interest thereon) and ongoing is denied. This order is made without prejudice to the right of Mr. Galati to seek an order for income replacement benefits from October 9, 1997 onwards if he can prove, on a balance of probabilities, that he is entitled to such benefits on grounds other than those raised in this preliminary hearing.

EXPENSES:

The parties made no submissions with respect to the expenses of this preliminary issue hearing. Since the success of the parties was mixed, they may wish to consider bearing their own expenses (other than the expenses that Aviva has already agreed to pay to Mr. Galati for his cost of attending this hearing in Toronto). If, however, the parties cannot agree on the issue of entitlement or amount of the expenses of this Arbitration proceeding, they may request a determination of these issues in accordance with Rule 79 of the Dispute Resolution Practice Code.

August 19, 2005

Richard Feldman Arbitrator

Date

Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2005 ONFSCDRS 115

FSCO A04-001256

BETWEEN:

JOSEPH GALATI

Applicant

and

AVIVA CANADA INC.

Insurer

ARBITRATION ORDER

Under section 282 of the Insurance Act, R.S.O. 1990, c.I.8, as amended, it is ordered that:

1. The issues raised by Mr. Galati in these proceedings are not statute-barred, pursuant to section 281.1 of the Insurance Act. Mr. Galati may therefore proceed to have his application arbitrated upon its merits.

2. Aviva is not required to pay to Mr. Galati income replacement benefits solely as a result of its failure to comply with the provisions of sections 37 and 49 of the Schedule.

3. On consent, the items identified in the pre-hearing letter of November 9, 2004 as issues 2 (non-earner benefits) and 3 (caregiver benefits) are hereby withdrawn from this arbitration.

4. On consent, the items identified in the pre-hearing letter of November 9, 2004 as issues 9 (loss on sale of home) and 10 (living expenses while staying with parents) are hereby withdrawn from this application, without prejudice to the right of Mr. Galati to seek to have these disputes mediated by the Commission and, should mediation not resolve these issues, to have these disputes arbitrated before the Commission (either as part of this application if Aviva consents and time permits or as a separate application for arbitration).

5. If the parties cannot agree on the issue of entitlement or amount of the expenses of this Arbitration proceeding, they may request a determination of these issues in accordance with Rule 79 of the Dispute Resolution Practice Code.

August 19, 2005

Richard Feldman Arbitrator

Date

Footnotes

1. 1The Statutory Accident Benefits Schedule — Accidents on or after November 1, 1996, Ontario Regulation 403/96, as amended.
2. 22002 SCC 30, [2002] 2 S.C.R. 129
3. 3[2002] O.F.S.C.I.D. No. 49, (FSCO A01-000064, May 3, 2002).