State Farm Mutual Automobile Insurance Company v. Savithiri Sivananthan, 2005 ONFSCDRS 144

Financial Services Commission of Ontario

Commission des services financiers de l’Ontario

Neutral Citation: 2005 ONFSCDRS 144

Appeal P05-00001

OFFICE OF THE DIRECTOR OF ARBITRATIONS

STATE FARM MUTUAL AUTOMOBILE INSURANCE COMPANY

Appellant

and

SAVITHIRI SIVANANTHAN

Respondent

Before:

David Evans

Representatives:

Christopher J. Schnarr for State Farm

Joseph Campisi Jr. for Ms. Sivananthan

Hearing Date:

May 24, 2005

APPEAL ORDER

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

1. The appeal is denied, and the arbitration order, dated December 31, 2004, is confirmed.

2. The parties may contact me within 30 days of this decision if they are unable to agree on appeal expenses.

October 14, 2005

David Evans Director's Delegate

Date

REASONS FOR DECISION

I. NATURE OF THE APPEAL

This is State Farm's second appeal of an arbitration decision in this matter. It now appeals the arbitration decision dated December 31, 2004, in which the arbitrator found that State Farm owes Ms. Sivananthan interest on outstanding income replacement benefits ("IRBs") from June 16, 2000. State Farm submits that it owes interest only on outstanding IRBs from the date of the arbitrator's first decision — February 16, 2004.¹

II. BACKGROUND

Ms. Sivananthan was injured in a motor vehicle accident on October 21, 1999. State Farm initially paid IRBs. In the spring of 2000, a disability assessment at a designated assessment centre concluded that Ms. Sivananthan no longer met the IRB disability test (a "negative DAC"). Subsection 37(4) of the SABS-1996² provides that, after a negative DAC, the insurer "may stop paying the benefit."³ Accordingly, State Farm stopped paying IRBs as of June 16, 2000.

Ms. Sivananthan disputed the stoppage in benefits pursuant to s. 37(6): "Nothing in this section prevents a person from disputing a stoppage in the payment of a benefit in accordance with sections 279 to 283 of the Insurance Act and section 50 of this Regulation. . . ." In the first arbitration decision, the arbitrator ordered that Ms. Sivananthan is entitled to IRBs from June 16, 2000. Subsection 37(6) further provides that, at the conclusion of the dispute, "if it is finally determined that payment of the benefit should not have been stopped, the insurer shall, (a) resume payment of the benefit; and (b) pay any amounts under the benefit that were not paid."

State Farm appeals the arbitrator's second order of December 31, 2004 that the requirement under s. 37(6)(b) to "pay any amounts under the benefit that were not paid" includes interest.

III. ANALYSIS

Overdue payments attract interest pursuant to s. 46(1): "An amount payable in respect of a benefit is overdue if the insurer fails to pay the benefit within the time required under [Part X of the SABS-1996, Procedures for Claiming Benefits]." Interest is calculated "at the rate of 2 per cent per month compounded monthly": s. 46(2).

The issue is whether these interest provisions apply to IRBs that have been subject to the DAC process under s. 37 of the SABS-1996. State Farm submits that they do not, in that there was no "amount payable in respect of a benefit" because s. 37(4) provides that the insurer "may stop paying the benefit" after a negative DAC. State Farm relies heavily on the decisions of Director's Delegate McMahon in the so-called related appeals,⁴ which dealt with medical or rehabilitation benefits that had been refused or were subject to the DAC process under s. 38 of the SABS-1996. The Director's Delegate held that the medical or rehabilitation benefit is not overdue and no interest is payable until the arbitrator orders the benefit to be paid.⁵ In particular, he found that the sections relating to medical and rehabilitation benefits contain direct links between the DAC rules and the definition of overdue, thus distinguishing the IRB provisions considered in Attavar v. Allstate Insurance Co. of Canada, 2003 CanLII 7430 (C.A.), 63 O.R. (3d) 199, 168 O.A.C. 268, discussed below.

The arbitrator in this case found that the related appeals do not apply to a negative disability DAC for IRBs. She noted that the wording of s. 37 describing the disability DAC process differs significantly from the wording of s. 38 describing the medical and rehabilitation DAC process. She also held that, although Attavar and Mercier⁶ do not directly apply as they considered the somewhat different wording under the SABS-1994, their broader reasoning does apply. She held that "a finding that an applicant is entitled to weekly benefits is what is relevant to determining whether interest is payable." That is, such a finding means that there is an "amount payable in respect of a benefit." The latter part of the definition of "overdue," namely the duty to pay within the "time required," then applies:

In Part X, under subsection 35(4), an insurer is required to pay an income replacement benefit at least once every second week. . . . In effect, an arbitrator's decision means that the insurer should not have stopped payment under subsection 37(4), despite the permissive language there.⁷ Accordingly, since it should not have stopped payment, the insurer was obligated to pay under subsection 35(4) and, therefore, interest is owed on the overdue benefit under section 46.

I agree there are differences between the post-DAC provisions for IRBS under s. 37 and for medical and rehabilitation benefits under s. 38, although I hesitate to place a great deal of weight on these differences.⁸ I agree that the "time required" relates to the requirement to pay IRBs at least once every second week. However, the arbitrator's statement that "a finding that an applicant is entitled to weekly benefits is what is relevant to determining whether interest is payable" requires further discussion, especially in light of the reasoning in the Mercier and Attavar cases.

Both Mercier and Attavar concerned weekly benefits: a reduction in loss of earning capacity benefits ("LECBs") after a residual earning capacity DAC in Attavar, and termination of caregiver benefits after a disability DAC in Mercier. As in the SABS-1996, weekly benefits are overdue under the SABS-1994 if they are not paid every two weeks. The 1994 and 1996 provisions with respect to payment of weekly benefits use very similar language. Subsection 62(4) of the SABS-1994 provides that an amount payable for IRBs, LECBs or caregiver benefits "is overdue if the insurer fails to comply with subsection . . . [62] (2)" — that is, mail or deliver the IRBs "at least once every second week while the insured person remains entitled to receive the benefits. "Subsection 35(4) of the SABS-1996 provides that an "insurer that is required to pay an income replacement . . . benefit shall pay the benefit at least once every second week."⁹ The two SABS use identical language with respect to interest on overdue payments.¹⁰

However, as part of its reasoning in both Mercier and Attavar, the Court of Appeal specifically recognized that under the SABS-1994, an insured person may be deprived of interest on outstanding benefits, despite a finding that the person is entitled to the benefits, where the person fails to provide a disability certificate. That fact led it to the conclusion that, absent such a provision, interest is payable:

In Attavar, Laskin J.A. interpreted silence in respect of the interest to be paid to mean that the drafters intended the compound interest provisions in s. 68 to apply. As he said, at p. 211:

Had the drafters of the [SABS – 1994] intended that insurers avoid s. 68 by paying the amount recommended by the REC/DAC assessment, they could have said so. For example, by contrast, s. 62(5) of the [SABS – 1994] expressly states that a payment is not overdue where an insured person fails to furnish a health practitioner's certificate in response to a request for one from an insurer.¹¹ Section 62 does not contain a similar provision saying a payment is not overdue if the insurer pays the amount recommended in a REC/DAC. [Mercier, par. 36; emphasis added by the Court of Appeal.]

Considering the emphasis the Court of Appeal in Mercier placed on the express statement in s. 62(5) of the SABS-1994 defining when "a payment is not overdue," it is important to note the different phrase "no benefit is payable" in s. 34(4) of the SABS-1996, the equivalent provision where an insured person fails to furnish a certificate in response to an insurer's request for one:

If the person fails to comply with subsection (3) [furnish the certificate within 21 days after receiving the insurer's request], no benefit is payable for the period more than 21 days after the person received the insurer's request and before the person furnishes the certificate. [Emphasis added.]

Subsection 34(4) apparently uses the language of "no benefit is payable" to achieve the same goal as was achieved using the language of "not overdue" in s. 62(5), namely, to deprive a person otherwise entitled to benefits to interest on those benefits — in addition to suspending or forfeiting them.

Very similar language was considered by the Director's Delegate in Iankilevitch and CGU Insurance Company of Canada, (FSCO P03-00013, August 31, 2004), regarding the duty of an applicant to provide information. The duty is set out in s. 33(1), and the penalty is set out in s. 33(2):

Section 33(2) states: "The benefit is not payable for any period before the person complies with subsection (1)." Whether these words authorize delayed payment or forfeiture of benefits is the main question in this appeal. . . . In my view, the effect of s. 33(2) is to exempt an insurer from s. 35 [duty to pay promptly] until the insured person provides the information requested under s. 33(1). It likely delays the accrual of interest, since benefits are not "overdue," under s. 46, until the claimant complies with s. 33(1). . . . [Emphasis added; footnotes omitted.]

The first criterion for a payment to be overdue is that there be an "amount payable." Both s. 33(2) and s. 34(4) define when there is no amount payable: "[t]he benefit is not payable" in s. 33(2) and "no benefit is payable" in s. 34(4). By analogy, then, the phrase "no benefit is payable" under s. 34(4) achieves the same end and is equivalent to the phrase "a payment is not overdue" in s. 62(5) of the SABS-1994. The Court of Appeal specifically recognized that interest could be suspended under s. 62(5). It follows that, as the Director's Delegate stated in Iankilevitch, no interest accrues while the certificate is outstanding.

However, I do not believe the same can be said of payments not made after a negative DAC. That is, the phrase "it [the insurer] may stop paying the benefit" in s. 37(4) is not equivalent to saying that there is no amount payable and hence no interest accrues.

First, the context is different than under s. 33, which relates to an earlier stage in the process. As the Director's Delegate stated in Iankilevitch:

The placement of s. 33 also supports my interpretation. It is found in the first few sections of Part X of the SABS-1996, which is concerned with the parties' procedural obligations at the earliest stages of a claim. Furthermore, the information that can be required under s. 33(1) – address, proof of identity, "a statutory declaration as to the circumstances that gave rise to the application for a benefit," and "any information reasonably required to assist the insurer in determining the person's entitlement to a benefit" – is information insurers typically request at the outset of a claim. These requests are aimed at initial determination of entitlement. Though I do not suggest s. 33 is limited to initial disclosure requests, I am not persuaded it is intended to operate as a penalty provision that affects ultimate entitlement.

The insured person may suffer the penalty of not receiving interest on outstanding benefits at that early stage of the proceedings. The context is different after a negative DAC, where generally speaking there has been a finding of initial entitlement and the issue is whether or not the person remains entitled.

Policy reasons also support this finding. For instance, unlike the cases where an insured has failed to take some necessary step, such as provide a certificate within the time required, in the case of a negative disability DAC, the insured has taken the necessary steps but been found able to work. Although the insurer may have done everything it was required to do under the SABS, so had the insured. In that regard, interest is not imposed as a penalty on the insurer: as the arbitrator noted, the submission that interest is punitive has been dealt with and rejected on numerous occasions. I also agree with her statement that "a denial of benefits, by itself, provides an insured with incentive to pursue his or her rights in a timely way."

Finally, to return to the reasons in Mercier, there is a change in the language between the SABS-1994 and the SABS-1996 with respect to the duty, after a finding of entitlement, to pay benefits from the time of the negative DAC. Both the SABS-1994 and the SABS-1996 provide that an insurer may stop paying IRBs after a negative DAC. The equivalent to s. 37(6) of the SABS-1996 is s. 64(13). However, under s. 64(13), if it is finally determined that payment of the benefits should not have been stopped, s. 64(13)(b) simply states that the insurer shall "(b) pay the benefits that were not paid." By way of contrast, s. 37(6)(b) adds an additional phrase requiring the insurer to "pay any amounts under the benefit that were not paid." I believe "any amounts under the benefit" include compound interest on the payments that were not made after the negative DAC. Under the SABS-1994, the simple reference in s. 64(13)(b) to "the benefits" was sufficient, since the SABS made it clear when benefits were and were not overdue. The use of the phrase "any amounts under the benefit" achieves the same end by providing that the unpaid weekly benefits are overdue, and accordingly interest is owing from the date of the negative DAC.

Thus, both context, policy and language suggest that interest is owing on IRB payments not made after a negative DAC.

I will briefly deal with other arguments raised by State Farm.

State Farm submits that Attavar is distinguishable because there was no direct link between the payment provisions contained in the SABS-1994 and the rights of the insurer to stop payment during the DAC process. State Farm submits that the LECB payment provisions did not contain specific authorizations for the insurer to stop payment following a DAC result that held that no benefit was owing. However, the Court of Appeal in Mercier rejected these distinctions. First, it found Attavar equally applicable even where there had been an interruption of benefits:

The appellant argues that Attavar is distinguishable because in Attavar there was an ongoing obligation to pay (although the parties did not agree on the amount of the payment) whereas in the instant case, as a result of having received a negative DAC report, s. 64(11)¹² expressly permitted the appellant to cease making payments. Given that the appellant was empowered to stop making the benefits, so the argument runs, it cannot be said that the insured was "entitled to receive a benefit" and therefore payments could not have been overdue.

In my view, Attavar cannot be distinguished on this basis.

Second, the Court of Appeal specifically referred to Langdon and Pafco and found that it did not apply with respect to IRBs after a negative DAC.

Unlike the situation in Pafco¹³ and contrary to the appellant's claim, in the present case there was an ongoing requirement to pay. The ongoing obligation was established by operation of s. 62(2).¹⁴ As Laskin J.A. noted in Attavar, under s. 62(2) an insurer is required to mail or deliver weekly benefits at least once every second week while the insured person remains entitled to the benefit. Indeed, in Attavar, Laskin J.A. found that weekly benefits in the form of LECB in the amount set by the trial judge were payable prior to the date that the trial judge's decision was rendered. Unlike Pafco, where the medical benefits in question were a disputed expense, weekly benefits are benefits that an insurer is required to pay.

It is significant also that Director's Delegate McMahon expressly distinguished Pafco from Attavar on the basis that the provisions governing medical benefits contain explicit rules concerning whether such payments are overdue. This accords with Laskin J.A.'s comments set out above that absent express language that a payment is not overdue, s. 68 [interest on overdue benefits] applies.

To paraphrase the last sentence of the above citation in the context of the SABS-1996: in the presence of the express language that the insurer shall "pay any amounts under the benefit that were not paid," s. 46(2) — interest on overdue benefits — applies. Furthermore, the reasoning of the Court of Appeal in general supports the arbitrator's conclusion that "the wording about the effect of a negative DAC assessment for a medical or rehabilitation benefit differs significantly from the wording concerning the effect of a negative DAC assessment for a weekly benefit."

The appeal is dismissed.

IV. EXPENSES

Appeal 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.

October 14, 2005

David Evans Director's Delegate

Date

Footnotes

1. 1Upheld on appeal (FSCO P04-00009, November 18, 2004).
2. 2The Statutory Accident Benefits Schedule — Accidents on or after November 1, 1996, Ontario Regulation 403/96, as amended. The references to the SABS-1996 pre-date the amendments of 2003, since the parties acted according to the SABS in force at the time.
3. 3Subsection 37(4) as of O. Reg. 281/03 contains the same provision that "[t]he insurer may stop paying a benefit to a person" if the person undergoes a designated assessment and "the report from the designated assessment centre states that the person no longer has a disability that entitles the person to receive the benefit."
4. 4Langdon and Pafco Insurance Company Limited (FSCO P02-00017, July 17, 2003); Glinka and Dufferin Mutual Insurance Company (FSCO P01-00002, July 17, 2003); Khaledi and Allstate Insurance Company of Canada ( FSCO P01-00046, July 17, 2003); and Amoa-Williams and Allstate Insurance Company of Canada (FSCO P01-00052, July 17, 2003). The Court of Appeal in Mercier referred to Langdon as the Pafco case (see footnotes 6 and 13).
5. 5In a recent case, an arbitrator has not followed this case law: Hejnowicz and Coachman Insurance Company, (FSCO A03-000780, August 4, 2005), under appeal.
6. 6The arbitrator referred to the Ontario Superior Court decision of Mercier v. Royal & SunAlliance Insurance Co. of Canada, 2003 CanLII 21638, [2003] O.J. No. 1233. The Court of Appeal issued a decision after the hearing in this matter: Mercier v. Royal & SunAlliance Insurance Co. of Canada, 2004 CanLII 5551 (ON C.A.), 189 O.A.C. 1. Mercier and Attavar were decided under the SABS-1994: the Statutory Accident Benefits Schedule -Accidents after December 31, 1993 and before November 1, 1996, O. Reg. 776/93, as amended.
7. 7The arbitrator was referring to the word "may" in "it may stop paying the benefit."
8. 8For instance, the distinction between saying that, after a negative DAC, the insurer "may stop paying the benefit" [s. 37(4)] and "the insurer is not required to pay for the expense" [s. 38(14)(b)] is not immediately apparent.
9. 9The phrases are equivalent, since an insured person is entitled to receive the benefits from an insurer that is required to pay them, and an insurer is required to pay the benefits to an insured person who is entitled to receive them.
10. 10See s. 68 of the SABS-1994.
11. 11In full, s. 62(5) provides: “Despite subsection (4), [definition of overdue for IRBS, LECBs, caregiver benefits, etc.] a payment is not overdue if the insurer required that a certificate be furnished under section 60 in respect of the payment and more than six weeks have elapsed without the certificate being furnished.”
12. 12The equivalent of s. 37(4) of the SABS-1996.
13. 13See footnote 4.
14. 14The equivalent to s. 35(4) of the SABS-1996.```